Environmental issues move to the forefront
For the first time, environmental issues made up the entire top-five risks ranked by the World Economic Forum members at the annual gathering in Davos in 2020.
Rising temperatures and cutting emissions dominated the agenda. But long before these issues were brought to the forefront at Davos, the international investment community had been evaluating and rewarding companies in accordance with strong environmental, social and governance (ESG) standards.
In 2019, there was a fourfold increase in capital allocated to listed ESG investment products. A survey by Morgan Stanley found about 85% of investors were interested in sustainable investing, up from 71% in 2015, and specifically younger people — 95% of millennials polled in the survey — expressed interest.
In January, the world’s largest fund manager, BlackRock, with $7-trillion in assets, said it will double the number of its ESG-focused investment products. It will also cut companies that derive a quarter or more of their revenue from thermal coal from its managed portfolios as it aims to increase its sustainable assets tenfold from $90bn today to $1-trillion within a decade.
ESG-based investing will be an ever more important theme for investors in the future.
One of the best in class USlisted companies based on ESG criteria is NextEra Energy (NEE). NEE dominates the US renewable energy space — the company was the first to significantly transition its business to clean power over the last 15 years.
About 50% of its 51.5GW generation capacity stems from renewable sources. Its nearest large US competitor in the electric utility space only has 11% of its generation capacity from renewables. US regulation played a role in incentivising investment into renewables via tax credits, and among large US utilities NEE was by far the most aggressive in taking advantage.
However, the incentives are expected to be phased out by 2024, barring any changes in US regulation.
About 60% of NEE’s profits are generated by Florida Power and Lights (FPL), Florida’s largest regulated electric utility. In South Florida and more than half the state, FPL is the sole provider. Despite its near monopolistic status, the company’s customers pay on average 30% less for electricity in comparison with the US national average.
Gulf Power was acquired in 2018, another vertically integrated, regulated electric utility. Its integration is progressing well — 2019 operating costs were 20% lower year on year while the company achieved its best service reliability year, 20% better than 2018’s. Gulf Power now accounts for about 5% of the company’s profits.
NEE also has an infrastructure development business unit known as NextEra Energy Resources (NEER). It operates 21.8GW of renewable power assets across 36 US states and Canada with a strategy focused on the development of renewable energy infrastructure.
The economics of renewable energy has reached the point where it is on par with fossil fuels in terms of production costs. It is estimated that favourable trends in the cost of generating energy from renewable sources will continue, driven by technological advancement. This trend is evident in NEE’s increasing margins over time and is forecast to continue.
NEE has the largest renewable development pipeline among the large US power utilities, with the goal of adding 12.3GW to its capacity over the next couple of years — a clear sign of the company’s commitment to further secure its dominance in US renewable energy.