ESG:A different climate

A global agreement was reached for collective action on climate change at

COP21. The agreement commits nations to keep temperatures C, abovepre-industrial levels, C. Thisresearch note provides investment ideas on the back of this.

COP21 agreement dichotomy

There is a divergence in views on the outlook for ’ gy x, whichprovides an opportunity for investors to capitalise on. The industry remains morev ’ gy x, g vcommitted to the COP21 agreement, coal faces a more challenging growthoutlook. As discussed in this report, there is a dichotomy with industry forecastsvs. a carbon constrained scenario. There is further policy vulnerability as thecurrent suite of emission policies are unlikely to be sufficient for many - some aremore vulnerable (Australia) than others (Europe).

Notwithstanding issues relating to the path to implementation and the probableeconomic challenges associated with transitioning to a reduced carbon economy,the Paris agreement does establish an international framework for emissionscuts and highlights the direction of policy that will progressively unfold and leadto a gradual shift in energy mix in coming decades, if adhered to.

Energy mix shift under a COP21 scenario

We believe coal will still form part of the fuel generation mix and remain animportant source of the energy pie. However, from a valuation perspective - thegrowth assumptions and life value of coal assets may change. In the coal space,we prefer exposures with below average carbon emissions (EOAN GR),beneficiaries of distributed generation (ENEL IM) and strategically betterpositioned low cost producers (AGL AU), rather than coal companies TransAlta(TA CN), Capital Power (CPX CN) and Hokuriku (9505 JP) which are negativelyimpacted by exposure to coal or coal generation facilities.

While (cleaner) gas seemingly plays an important role in a carbon constrainedworld, with the threat of greater efficiencies already weighing on global gasdemand, COP21 could see further gas demand destruction compared to basecase industry assumptions and may threaten to crowd out high cost greenfieldprojects; STO AU and WPL AU are some that are exposed in this scenario.

Fossil fuels hedge - renewables, batteries, electric vehicles

Investors can hedge exposure to fossil fuels with companies that derive revenuesfrom renewable energy sources, batteries, or electronification of vehicles. Weexpect the renewable space will be the fastest growing energy source globallyover the coming decades as it will displace some of the emission intensive energysources. While the long-term outlook dynamics are positive, effectiveimplementation of government policies and capacity are issues that need to beaddressed in the short term, as highlighted by recent downgrades of Chinese windpower names due to weak demand, lower utilisation hours and new policies beingless effective. Our preferred exposures are: Huaneng (958 HK), SunPower(SPWR US), First Solar (FSLR US), EDPR (EDPR PL), NEE (US).