Leading ESG fixed-income investment manager, Cameron Hume, has revealed why simply setting net-zero targets is not enough information for investors wishing to limit their climate risk exposure.
In a case study comparing two prominent European utility companies, RWE and E.ON, Cameron Hume identifies that from a risk point of view, the path to achieving a net zero target is as important as the target itself. Investors must consider whether this risk is priced by the market.
Analysis of the two companies, their net zero targets and the business transformation required to meet those targets, shows that the transition required is much smaller and therefore much easier for E.ON to achieve than RWE. This means that RWE is at greater risk than E.ON of failing to meet its net zero target.
Alex Everett, Investment Manager at Cameron Hume, explains: “RWE offers an eye-catching transition story, with considerable ambition to meet its net zero targets. That said, current market pricing does not suggest that the risks involved are priced in. RWE bonds are offering lower yield premiums than its peers, but there is a higher risk of their targets not being met, so bond investors are not being suitably compensated. Even if RWE does manage its substantial transition successfully, its bonds offer no scope for further upside.
“E.ON bonds, on the other hand, currently present a more compelling investment case. E.ON requires considerably less investment in order to transition to net zero. This means that, all else equal, investors run less transition risk when lending to E.ON, principally because of the company’s greater likelihood of achieving its net zero target.”
“The result of our examination into RWE and E.ON shows that investors lending to European utilities can reduce their exposure to climate change risk by simply switching from RWE bonds to E.ON bonds at no cost.”
Cameron Hume is a specialist ESG fixed-income investment manager. It recently won its first ESG mandate from an Australian pension fund and now has more than $1bn assets under management.