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A transformational alternative future for AGL
Leading responsible investment manager, Australian Ethical, this week highlighted the unique challenges facing investors in a response to the events at AGL Energy (ASX:AGL) in recent weeks. While the group is clear that it has not invested in coal or oil companies in more than 30 years, the unique viewpoint of this fast-growing manager offers an insight into the evolution of investment and energy production in tis country.
In their view, AGL’s demerger is important for two key reasons, being that AGL’s future direction has “huge implications for Australia and the climate” while also being a “critical global case study of the integrity of companies and investors” who claim to be responding to climate change.
The proposed AGL demerger, which would see coal production assets split from their strong retail business, is described as a “free ride” by management, which is effectively seeking to “wring every last dollar out of coal.” The impact, however, was minimal as “asset shuffles” like these simply mean fossil-fuel reserves and electricity generation is becoming increasingly concentrated in just a few companies that have no real intention of meeting climate targets.
“The proposed split of AGL was a flawed business strategy” both ethically and financially, according to Australian Ethical, which suggests that the idea that “Bad AGL” would be ‘impervious’ to climate history was somewhat naïve. The concept that the retail business could rebrand itself while hiding itself from structuring that kept it aligned with the fossil-fuel energy production assets was likely naïve and describe as attempting to “draw a curtain” rather than truly separate.
It isn’t all negative, however, with the group highlighting the alternative being to “lean into” the climate challenge, and “grasp the opportunity” as a vertically integrated generator and retailer of electricity in a country with an enormous advantage as a renewable energy producer. An under-appreciated opportunity is the ability to install solar panels on the assets of many of its largest clients.
The role of ethical investors has continued to evolve, with the line being blurred significantly in many cases. The core belief for any fiduciary investor should be that “meeting their responsibility to deliver strong financial outcomes for their customers relies on social and environmental foundations that cannot be taken for granted.”
Ethical investors simply will not invest in AGL as it stands today, nor in the proposed demerged AGL business, as the company “continues to fail to present a business strategy truly aligned with the transition of global emissions to net-zero by 2050.” Some investors have a goal of being a “positive influence” on change, but this has at best been “underwhelming” according to the report.
The withdrawal of the demerger proposal is a “real sign of positive intent” by the remaining AGL investors. And the opportunity set for the company is huge, with the IEA flagging an “unparalleled clean energy boom” that could see US$1 trillion to US$4 trillion in new investment required. This capital is going to renewables, upgrading and expanding the grid and other energy infrastructure, so it is clear the opportunity is there.
The group does not avoid energy companies altogether, noting a large investment in Contact Energy, which generates 80 per cent of electricity from renewables and is constantly looking for new opportunities, with Australian Ethical concluding “we would welcome the opportunity to contribute our ethical capital towards the many renewable, energy storage and other transition investment opportunities which an alternative-future, transformational AGL may offer.”
