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‘Fascinatingly scary’: What Scarborough plan tells us about investing in Australia

·7-min read
Police approach car blocking road with van that reads 'Bigger than Adani' (Source: AAP)
The Scarborough project provides a case study into the different expectations for companies and sustainability. (Source: AAP)

The decision to build a $16.6 billion liquified natural gas project has been described as a “fascinatingly scary” case study into the future of energy, with Woodside Energy now under pressure to defend its claim that the project is decarbonisation in action.

Woodside Energy last week announced it had been approved to build the Scarborough gas project off the West Australian coast, prompting outrage from environmental groups.

However, chief executive Meg O’Neill defended the project, noting that the Scarborough reservoir contained 0.1 per cent carbon dioxide.

“Scarborough gas processed through the efficient and expanded Pluto LNG facility supports the decarbonisation goals of our customers in Asia,” she said.

It’s the sort of statement that fund managers and investors will need to carefully examine, Responsible Investment Association Australasia (RIAA) chief executive Simon O’Connor told Yahoo Finance.

And it’s a statement Woodside will need to be able to prove if it truly is attempting to position itself as part of the solution to global warming.

“There’s no doubt that our members of responsible investors will be running the ruler very carefully over this claim,” he said.

“This [project] seems at odds with the global direction of travel towards net zero, so the onus will be on Woodside to really clearly articulate how they see this fitting into their plan.”

Essentially, for Woodside’s claims to be true, it will need to categorically show how its project is reducing demand for other fossil fuels in the countries it is selling to, and the size of the reduction.

O’Connor described it as a “fascinatingly scary” case study into how companies present their action on climate.

For individual investors, getting to the bottom of it is the trick.

Responsible investment is growing. Is greenwashing too?

RIAA chief executive Simon O'Connor.  (Source: Supplied)
RIAA chief executive Simon O'Connor. (Source: Supplied)

The global environmental, social and governance (ESG) investment sector is estimated to be worth US$53 trillion (AU$74 trillion) by 2025, according to Bloomberg analysis.

And locally, in the five years to October 2019, Australian Ethical nearly quadrupled the amount of super it managed, taking it from $639 million to $2.4 billion.

Investor demand is growing too: RIAA analysis has found that responsible investment assets were growing at 15 times the speed of the overall professionally managed investments sector in 2020.

RIAA works to verify whether investment products and managers’ claims of being sustainable and ethical are accurate.

Around 80 per cent of products and managers’ claims it receives don’t meet the benchmark for RIAA verification, with those groups required to improve their game.

“What we see that raises the most flags is when there are vague claims around funds such as ‘low carbon’ or ‘more sustainable’,” O’Connor said.

“Some of these claims are really variable as to what they can mean. If they’re not detailing precisely what that investment product means when it’s saying it’s low-carbon, green or sustainable, then that immediately raises alarm bells.”

If it’s not clear to a consumer, it’s game over for accreditation.

And that transparency is a key thing for investors to remember, O’Connor believes.

For investors looking to invest sustainably, if there seems to be a mismatch between what’s on the label and what’s inside the investment, it’s time to walk away.

Many companies that the RIAA initially bars from accreditation will go back and either clarify their policies, change the name of their products so they’re more accurate, or cut non-ESG companies from the products. This third step happens frequently, O’Connor added.

“This is what people want, at the end of the day,” he said.

The RIAA regularly strips products of accreditation. Generally, it’s less about those products actively changing and more about investors’ standards improving.

“It makes it harder [to get accreditation], but it also makes it more valuable,” he said.

“There are many that may take 12 months or longer to re-achieve certification, as they may have to go back to the drawing board,” he said.

“Five years ago, it would have been pretty fine to have an investment product that just excluded a few nasty sectors like tobacco or weapons and not do a lot else.”

Today, most investors simply expect these exclusions to be part and parcel with any investment. Now, they want to be actively supporting more sustainable outcomes.

“One of the things to watch out for is Australian equities funds that have a few exclusions such as weapons or tobacco - there’s not a lot of prevalence of weapons or tobacco companies on the ASX,” he said.

“It almost makes the claim meaningless.”

What if a product isn’t accredited?

 (Source: Getty)
(Source: Getty)

For individual investors looking to invest with ESG principles in mind, O’Connor suggested they use tools like the RIAA’s Responsible Returns tool to see if the investment products and managers matched their expectations.

If a product hasn’t been accredited, the next step is to go deeper.

“If [the ESG information] isn’t immediately accessible or clear on their fact sheet or website, then that’s a concern,” he said.

“If you still are attracted to that product, I would absolutely ask the fund manager: ‘Show us how you can prove to me that you’re doing what you claim to do.’”

If they don’t respond, that’s a fairly clear sign that the product or manager can’t back up its claims. And if they do respond, it’s time for the investor to choose what they do with that information.

The information should be quantifiable, with clear figures on progress made, the processes underway to achieve ESG goals and what they’re doing to maintain and update filters against non-ESG sectors and companies.

The Australian Securities and Investments Commission should soon be able to help investors tackle greenwashing.

Commissioner Cathie Armour announced a review into greenwashing in the investment sector. It’s going to be targeting large companies, and assessing whether they match up to their claims on climate action.

It’s a hopeful move, O’Connor believes.

“The regulators are catching up on this,” he said.

“This will really tighten the screws on fund managers and ensure that they’re not misleading clients in the way that they’re marketing products. The scrutiny has really arrived.”

And keep an eye on ETFs

(Source: Getty)
(Source: Getty)

Exchange-traded funds (ETFs) are one of the most popular ways for investors to gain exposure to the stock market as they are relatively cheap and provide diversification by tracking either an index or a theme, like ESG.

And they’re in demand: in the first quarter of 2021, inflows into global ESG ETFs overtook other ETFs for the first time, according to the RIAA.

MSCI also estimates that since 2015, ESG ETFs have grown from $6 billion to $150 billion.

“We’ve certainly seen a rapid increase in the number of ETFs emerge in this ethical and sustainable sector,” O’Connor said.

The few that are RIAA certified, including BetaShares BetaShares Australian Sustainability Leaders ETF (ASX: FAIR) and the Vanguard Ethically Conscious International Shares Index ETF have clear processes in place to prove that they are delivering on that ESG portfolio.

“You need to have a heightened expectation that a product like an ETF or passive fund does have really strong processes to ensure that they can constantly reassure investors that they’re delivering on that sustainability promise,” O’Connor said.

“It’s an area where a set-and-forget strategy isn’t really adequate … It needs to be a fund that has active elements to the management of that fund.”

For managers and investors, he would expect they were regularly checking in to ensure the filters used to select investments were robust.

It comes back to transparency, O’Connor said.

Products and managers are doing better, but the Woodside Scarborough project highlights the challenges that remain for consumers trying to sort the green products from the greenwashers.

“The general public is much more savvy and the whole net zero discussion has become a popular conversation, but getting to the bottom of whether this product is helping or hindering is something that investors will scrutinise really closely,” he said.

“I know that that kind of scrutiny is already going on, and we’ve seen some [managers] reduce their exposure to Woodside.”

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