Why OZ Ethical downgraded renewable stocks to negative

We had previously assessed Australia’s energy policy environment as neutral across all energy types but in February we downgraded our renewable energy assessment to negative.

Why did we do this?”

As part of the investment process for its International Equities Trust, Australian Ethical considers the energy policy of the countries/regions it seeks to invest in. This policy assessment is broken down by energy sources (coal, natural gas, oil, nuclear and renewable energy) and assessed as either Positive, Neutral or Negative from an investment perspective. To be clear, Australian Ethical does not support coal, CSG, oil or nuclear as these go against our Charter but it is necessary to monitor the entire energy landscape as changes in one area can have profound impacts on the rest of the energy complex.

We had previously assessed Australia’s energy policy environment as Neutral across all energy types but in February we downgraded our Renewable Energy assessment to Negative. Why did we do this?

Liberal Government Seeks to Repeal the Australia’s Clean Energy Legislation

The Government came into power with the promise to repeal the emission scheme established under Labour. Having secured power in September, the repeal has remained a high priority item for the government.

Emissions Reduction Fund Green Paper

The Government wants to replace the current emission scheme with its Emission Reduction Fund (ERF). We believe that putting a price on carbon is fundamentally correct and the ERF does achieve this but we suspect the price and structure will only bring forward projects that were going to be done anyway i.e. replacing old equipment, adding insulation, LED lighting conversions etc. These projects are largely economic today and are being rolled out by the most progressive companies so they really do not need much support. If the ERF was labelled a stimulus package and the reverse auction was replaced with cash grants we would have applauded it as a strong policy to promote energy efficiency but as the centrepiece of our national energy policy it lacks ambition and credibility. If the government is serious about tackling emissions we need to see structural changes on top of grassroots energy efficiency efforts otherwise the ERF is just an economic stimulus package masquerading as energy policy.

Renewable Energy Target (RET) Review

The Government’s announced review of the 20% renewable energy target introduces significant uncertainty for businesses as no projects would dare start planning while the review was being carried out. Large scale renewable energy projects of the sort needed to fundamental change the emission profile of this country need regulatory certainty given that these are long life assets. Developers need to believe that their investments will be protected in the long run and not suddenly find themselves uneconomic or stranded because of the stroke of the legislative pen. In fact, just calling for this review has already done considerable damage as it introduces doubt into the mind of any developer as to the long term support they can receive in this country.

Climate Sceptic Appointed to Lead RET Review

The appointment of the self-proclaimed climate change sceptic Dick Warburton to lead the RET review foreshadows the government’s intent with this policy. At the minimum we can expect the RET will be scaled back and at the worst it will be scrapped. Sadly, it would seem the government has already decided what it wants done with this important piece of legislation.

When considered as a whole, these actions by the Government paint a fairly hostile atmosphere for renewable energy investors which discourages the structural changes needed to fundamentally alter Australia’s emission profile.

Nathan Lim is portfolio manager with Australian Ethical Investment