The dominance of resource and mining companies is a major contributing factor to potential losses.
Over 30 per cent of the value of the ASX 300 could be at risk by 2030 if the world becomes carbon constrained, new modelling from Australian fintech Emmi has revealed.
Based on the current $1.6 trillion market cap of the ASX 300, Emmi found that a total of $480 billion may be at risk over the next eight years.
“At face value, it is clear there is significant risk associated with the ASX 300 but it’s not all bad news, because we know a large proportion of this risk is linked to a small percentage of companies operating in the resource and mining sector,” said Emmi CEO Michael Lebbon.
According to the firm’s modelling, over half of the total potential capital loss, equating to $272 billion, is being driven by just 10 companies. If these top 10 emitters are removed from the index, the potential capital loss in 2030 falls from just over 30 per cent to 12.9 per cent.
“We speak with a lot of investors whose first reaction is to divest the carbon-intensive companies that are seen to pose the most risk. However, often this decision is made without an understanding of the drivers behind this risk,” said Mr Lebbon.
He, however, noted that the divestment approach misses out on the future growth potential of the portfolio, and the ability to work with these companies to maximise the alpha opportunities that will be created as they transition to net zero.
Mr Lebbon explained that while some investors are looking to avoid carbon in their portfolios at all costs, others are looking to realise the potential of the biggest emitters and underpin their investment strategy accordingly.
“The problem investors have faced up until now is the lack of quantitative data needed to confidently make and justify these decisions to their stakeholders.”
A significant contributor to the high exposure of the ASX 300 is Scope 3 emissions, which include indirect value chain and use of sold products. These, however, remain largely undisclosed by companies.
As such, the US Securities and Exchange Commission’s (SEC) recent mandate requiring companies to disclose Scope 3 emissions is expected to have an effect locally.
“Because Australia is a mining, materials and resources economy that relies on exports, we have significant global exposure and this ruling has the potential to significantly impact business,” Mr Lebbon said.
“Globally, the train has left the station and the US SEC decision shows they are now laying down the law when it comes to carbon risk reporting. The Europeans are at least a decade ahead of the US and China is moving too,” he continued.
Mr Lebbon underlined that to be globally competitive and operate in an economy that does not see carbon as a viable long-term option, Australia needs to fast-track its carbon transition and be more accountable and transparent in the way it reports carbon risk.
Conversely, 38 percent of the ASX 300 was found to be aligned with net zero, most notably in the healthcare, financial sector, consumer discretionary, real estate and IT sectors.
“The key to managing Australia’s economic future is dependent on how companies manage the carbon transition and also report their carbon risk,” Mr Lebbon said.
He supports stringent reporting, which he said “enables uncertainties in data predictions to be removed, so risk and opportunities can accurately be identified across the market.”
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
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