KiwiSaver, climate and asset values

OPINION: Over the last week, Covid-19 hit the UK hard with serious implications for communities and investors.

Trucks stuck in queues stretching miles at Dover and ferries trapped in ports. These assets are stranded, incurring costs without generating income.

For investors, the term ‘stranded assets’ isn’t a good thing. Yet over the decade ahead it’s an investment risk for your KiwiSaver that you’ll hear more often.

The current ‘stranding’ of assets in the UK should only be temporary. Yet with climate change ‘stranding’ could be permanent.

‘Stranded assets’ are business assets or operations that become irrelevant or valueless, which we’ll increasingly see as our climate changes and our economy goes lower carbon.

An obvious example is coal companies. Coal is key for steel manufacture and electricity generation in countries like Germany and China. Yet there’s considerable pressure to replace coal with renewables.

China has committed to carbon neutrality by 2060 meaning it must reduce coal dependence. Despite US President Trump’s promise to revive coal, the US produces less now than when he came to power. Coal producers, and those KiwiSavers invested in them, face an industry in decline.

This also impacts businesses dealing with coal companies, like banks. JP Morgan and Deutsche Bank have committed to cease lending to coal companies and closer to home Australia’s largest banks will limit new coal project financing. No one wants their KiwiSaver exposed to companies whose assets risk becoming ‘stranded’ and lose value.

While coal companies are an obvious example, there are plenty more.

Stranded assets may be caused by climatic changes, for example parts of the globe becoming drier. Think of agricultural areas facing sustained drought and limited access to water. NZ listed agricultural company Scales Corporation acknowledges in its most recent Sustainability Report that “climate change is a concern for Scales, as it is for all global businesses.”

Assets may become stranded because of changes to our oceans. Listed company NZ King Salmon has experienced much higher mortality rates at its Marlborough Sounds fish farms from warmer ocean temperatures. The value of ocean farm infrastructure is vulnerable if it can’t be shifted to cooler water.

Stranded assets might result from new technology and consumer choices.

Mike Bennetts, CEO of listed Z Energy, is a business leader around climate change yet Z’s assets risk being stranded over decades ahead. As consumers switch from petrol cars to electric, fuel stations need new uses to stay relevant.

Finally, government regulation can drive stranded assets. The UK government declared the end of petrol and diesel car sales from 2030. Volvo and Volkswagen have committed to cease manufacturing petrol-only cars to keep their products and production assets relevant.

Having factories, technology, company operations or entire business models ‘stranded’ means they are marooned or obsolete. Not a good thing for investors.

The risk of assets being valuable today and stranded tomorrow is very real, especially over multi-decade horizons. KiwiSaver investors must navigate these uncharted risks that climate change serves up.

In the same way that short-term investment returns can be hit by trucks stranded in a Dover queue, long-term returns will be impacted by assets stranded as our climate changes. Yet on a positive note the contrary is also true – chances are you and your KiwiSaver can flourish by investing in those companies successfully transitioning to a lower-carbon world.

John Berry is co-founder of ethical investment manager Pathfinder Asset Management, and ethical KiwiSaver provider CareSaver. For 2020 Pathfinder was named Responsible Investment Manager of the Year by GoodReturns/Research IP and Social Impactor of the Year by the Sustainable Business Network.



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GENERAL INFORMATION ONLY

This information is general information only and does not take account of your individual investment objectives or financial situation.
Pathfinder Asset Management encourages all investors to seek independent financial advice prior to making investment decisions.