Welcome again to the Environmental, Social and Governance (ESG) Wrap, where our team share the latest ESG issues in the media and their implications on investment.

This month the key ESG issues making headlines are:
 
  • Investment management: New investment tool shows growing focus on managing climate change risks
  • Utilities: Cyber security threat: Is Australia's power grid safe from hackers?
  • Gambling: Landmark report says key 'addictive' pokie feature should be banned
  • Energy: Bitcoin’s Energy Consumption Index

Investment management: New investment tool shows growing focus on managing climate change risks

  • Deutsche Bank has developed a tool to forecast where its investments across the globe may be impacted by natural disasters brought on by climate change.
  • Factors such as sea level rise, droughts, flooding and cyclones pose an immediate and measurable threat to investment portfolios.
  • The modelling also estimates that if carbon emissions aren't reduced throughout this century, per capita GDP will decrease by 23 per cent from what it otherwise would be.
  • Early research has pinpointed Asia as highly vulnerable, stating that 80 per cent of people occupying the most 'at risk' climate zones globally reside in Asia, with 145 million people in China alone living on land threatened by rising seas. 
  • So What? The assessment of physical climate change risk is one of the more challenging aspects to assess, especially for global asset managers. Deutsche Bank’s work will put pressure on other asset managers and asset owners to do similar analysis.
  • This analysis may also encourage more disclosure from companies on supply chain risks tied to climate change, in line with the Financial Stability Board’s Task Force on Climate-related Financial Disclosure (TCFD) guidelines released earlier this year.
  • AMP Capital recently released the carbon footprint of over 50 of its funds which is available on our website. 

Utilities: Cyber security threat: Is Australia's power grid safe from hackers?

  • More than 80 per cent of power and utility companies worldwide responding to EY's Risk Pulse Survey considered business interruption from cyber attacks as their top concern.
  • Over the last few years, we have seen distributed denial-of-service (DDoS) on critical infrastructure globally, including energy systems in the Ukraine, Ireland and Saudi Arabia and on nuclear plants in Iran and the US.
  • In 2016/17, the Australian Cyber Security Centre reported that 7283 cyber security incidents affected major Australian businesses, as well as 734 cyber incidents affecting private sector systems of national interest and critical infrastructure providers.
  • So What?   It is positive to see that within Australia, many companies have taken steps to secure their business against cyber threats.
    • AGL has created a cyber threat intelligence and incident manager role to recognise and protect against these kinds of intrusions.
    • Origin regularly commissions independent penetration tests and carries out other security reviews to test its security and improve controls.
  • The real damage of any attack will be in the changed perception of the company, which can have a flow-on effect to the company’s stock market valuation and profits.
  • The question for utilities is not only testing e.g. penetration tests but also having contingency plans on how to respond.  The response will be significantly different depending on whether the attack is on customer data, trading room data or systems and engineering controls of operations.
  • Another key challenge for companies is that the cyber security skill set of senior management and the Board is not at the level required. To give us as investors confidence, we need to see that companies are either hiring people with these skills or equipping management and board members with the tools to mitigate cyber risk. 

Gambling: Landmark report says key 'addictive' pokie feature should be banned 

  • A landmark report into the harm caused by gambling in NSW has recommended banning a controversial feature of poker machines known as "losses disguised as wins", blamed by experts for fuelling addiction.  Losses disguised as wins refers to a poker machine feature where music and celebratory graphics are played when a player wins an amount, despite it being less than what was gambled. 
  • Meanwhile, in a Federal Court case, Crown and Aristocrat are defending allegations that a poker machine called Dolphin Treasure is misleading, deceptive and in breach of consumer law. This is in addition to recent accusations that Crown have tampered with their pokies.
  • Also, earlier this week, the state Labor Opposition in Tasmania announced it would remove poker machines from pubs and clubs if Labor wins next year’s state election in that state. This follows the release of a report from the Australia Institute which reveals Australia is home to 76 per cent of the world's poker machines in pubs, clubs and non-casino venues.
  • So What?  It is understood that the "losses disguised as wins" feature – banned in Queensland and Tasmania - is common to most poker machines elsewhere in Australia and so any finding on this will have a significant impact on gambling revenue in Australia and also on poker machine makers.
  • As outlined in AMP Capital’s “Gambling Position Paper”, there have been numerous studies which have found that the sector’s profitability is obtained by a relatively small percentage of all gamblers but the social impact is much more significant. 

Energy: Bitcoin’s Energy Consumption Index

  • According to Digiconomist’s Bitcoin Energy Consumption Index, the energy consumption of Bitcoin mining continues to rise and currently takes 27 times more energy than the entire global Visa network.
  • Bitcoin mining consumes more energy than a number of countries as you can see from the chart below.

  • Mining took off recently in Venezuela, where bitcoins make an attractive alternative to the local currency, largely worthless now because of hyperinflation. The drain from mining caused a backlash amid the country’s severe electricity shortages.
  • So What?  So far the world’s power grids have been able to manage with the energy leeching Bitcoin due to all the energy efficiency gains of mining hardware over the last decade. However, these efficiency gains are unlikely to continue at the same pace as the adoption of Bitcoin and other cryptocurrencies.
  • The cryptocurrency world is currently largely unregulated but we will likely see this change. Governments around the world may need to intervene to ensure what happened in Venezuela doesn’t happen elsewhere. Bitcoin may also be directly affected by the likely increasing cost of carbon. As a result, cryptocurrencies may have a higher associated cost than many people currently assign to the digital currency.