A sector which has experienced an amazing boost of late is clean energy, as it is expected to be a major beneficiary of Biden Administration policy.
At Pathfinder, a key overweight investment theme across our funds is renewable energy, with most of our solar and wind power holdings in the US and Europe riding recent outperformance.
Closer to home, two of our renewable energy positions have hit new all-time highs this month – Meridian Energy (MEL) and Infratil (IFT).
Meridian, which is a 100% renewable power generator, has surged by more than 60% over the past three months. Meridian is a great case study illustrating our active management approach for NZX stock selection.
We backed Meridian as our top pick in the electricity sector this year as we believed that the uncertainty and negative impact around a Tiwai Point closure was overplayed.
Since November, the rally has been supported by inflows into clean energy ETF funds as well – don’t fight passive fund flows.
Meridian bats well above its global weight as a top holding in the iShares Global Clean Energy ETF, a US$3.8 billion exchange-traded fund which has surged +125% in 2020 so far.
The global wave of ESG money is starting to get serious about climate change. The circa US$30 trillion ESG community is at an early stage of a necessary shift from basic negative screening (such as excluding coal and fossil fuels) to a more scientific approach of combating climate change where alignment with Paris commitments is taking centre stage.
Australasian investors are no exception to this global trend. According to a major broker report, more than four out of five Australasian asset managers state they either already are, or are considering, setting a net-zero emissions target for 2050. The shift in focus is being facilitated by a combination of increased disclosure on total scope emissions and detailed climate modelling.
Over the last five years, the traditional carbon-based energy sector has diminished from 6% to 2% of the S&P 500 index. In New Zealand, valuations of Mercury and Meridian (who pride themselves on 100% renewable energy generation) have decoupled from that of peers Contact and Genesis, and are currently valued at a 60%+ premium, versus no premium five years ago.
New Zealand-based Infratil, which we own across several of our funds, received a takeover offer in December 2019 from Australia’s largest Super Fund at over a 20% premium to its last trade price.
The news wasn’t surprising as Infratil’s assets are premium, largely green, growth infrastructure assets which are currently one of the most sought-after asset classes on the globe, meaning they can demand eye watering valuations.
In summary, we are confident the trend towards renewables with a greater focus on ESG and the carbon footprint of stocks has only just begun. Having an over-weight towards the sector has paid dividends in recent times and ESG considerations are becoming a real risk factor to consider when investing in stock markets.