The stocks that are leading the pack in each sector of the ASX
Despite a whole range of headwinds and volatile markets, Australian companies announced a resilient set of results this reporting season.
- This led beats to outnumber misses by a ratio of 3:2.
- Input cost pressures were felt across all sectors. But despite these challenges, most companies have been able to maintain profit margins, with strong end-demand allowing for costs to be passed through to customers.
- The Consumer was another area we were focusing on and despite sentiment measures plummeting over the past 6mths, results for the half showed that consumers are still spending. But remember this is backward looking, and we expect that higher interest rates will eventually weigh on the consumer. Arguably this is not priced in to a number of discretionary stocks.
- Another common theme across all sectors was greater focus and disclosure on Sustainability targets.
As climate targets will become law in Australia, companies are not just setting reduction targets for Scope 1 & 2 emissions, but are also disclosing how they plan to achieve this. This provides greater credibility to these targets and a more defined call to action.
There has also been an increase in separate sustainability reports, which include sustainability initiatives or climate scenario analyses. Socially, companies are committed to improving their safety metrics and diversity and inclusion scores.
We found it valuable to drill into these high-level observations, by sector, with a focus on our top 10 holdings across our strategies. This will aid any engagement we undertake with management teams and Boards over the coming 12 months.
Materials harness the decarbonisation narrative
The materials sector is aligning its strategy with the decarbonisation mega trend. This is being achieved through future-facing commodities and reducing emissions. The sector is recognising the role they play to protect biodiversity, as the World Economic Forum rated biodiversity loss in the top five risks for likelihood and impact in the next decade.
From a sustainability lens:
- BHP (ASX: BHP) have reduced its emissions by 15% since 2017. It is repositioning its portfolio to focus on future-facing commodities, with a planned $10 billion decarbonisation spend.
- OZ Minerals (ASX: OZL) is adopting a modern minerals strategy towards decarbonisation, so we expect their commodities to expand to other battery-type materials. Oz Minerals is leading with emission targets of Net Zero by 2030 for Scope 1 & 2 emissions.
- Pilbara Minerals (ASX: PLS) is leveraging this trend through their lithium exposure, and are also investing in new waste reduction technology.
- Rio Tinto (ASX: RIO)’s decarbonisation agenda is focused on lithium and copper. Management is evaluating areas across their assets for evaluation, as well as strengthening relationships with Traditional landowners and implementing recommendations to target sexual harassment, racism, and bullying within their business.
Energy companies turn to hydrogen, carbon capture, and more
Energy companies are recognising the role they play in the transition to clean energy, highlighting investment opportunities in hydrogen and electric vehicles. We watched keenly the development of Australia’s first carbon capture and storage project, Moomba CCS. This presents an opportunity for companies in the energy sector to reduce emissions and is on track to be operational by 2024.
In addition, Beach Energy is working with Deakin University to re-establish coastal wetlands, and Santos is looking at reforestation opportunities in PNG and pursuing pilot carbon projects in Eastern Australia.
Woodside (ASX: WDS) is making progress on its target of investing $5 billion into new energy products and lower carbon services by 2030, with liquid hydrogen projects in Oklahoma and Perth, as well as investigating carbon capture and utilisation opportunities.
Financials scout for more outstanding women
Gender diversity was a key improvement for companies in the financial sector, with some companies now setting more ambitious diversity targets. There is also an increased focus on sustainable finance measures like green bonds and decarbonisation investment opportunities.
Commonwealth Bank has invested $31 billion into sustainable assets and NAB has issued a €1bn green bond. Both banks have helped customers affected by natural disasters, like helping flood-impacted communities.
ASX (ASX: ASX) is exploring decarbonisation investment opportunities and has been shortlisted by the Clean Energy Regulator to participate in the development of an Australian Carbon Exchange.
Both ASX and Medibank (ASX: MPL) are aiming to improve their Diversity & Inclusion scores; ASX is targeting a 45% female workforce by FY25, and Medibank has 44% of women in senior executive roles and on the board. Medibank is now aiming to increase the representation of employees with disabilities and Aboriginal Torres Strait Islanders.
Safety first in consumer discretionary stocks
Companies in the consumer discretion sector highlighted an improvement in their safety metrics scores, using the TRIFR metrics (total recordable injury frequency rate). Companies are also focused on improving employee engagement following the impacts of the pandemic.
- Wesfarmers (ASX: WES) launched a $600m sustainability bond in February this year, following their $400m sustainability loan in FY21, and also increased the representation of women on their board and leadership team to 48%, up from 40%.
- Bapcor (ASX: BAP) made key improvements in their business, such as launching a women’s leadership development program ‘Ignite’, implementing flexible work policies, and improving their TRIFR score by 9.5% since FY20.
Consumer staples: Waste not, want not
Consumer staples companies are progressing towards more sustainable packaging to reduce waste levels, as packaging waste poses a threat to marine pollution worldwide. They are also diversifying their product range by introducing ESG-focused products to appeal to consumers.
- Coles (ASX: COL) has secured their transition to 100% renewable energy by FY24 and is working towards 100% recyclable packing for Coles Own Brand and Coles Liquor Own Brand by 2025.
- Woolworths (ASX: WOW) improved their TRIFR score by 9% to 11.13. Woolworths is progressing toward transitioning towards solar power with 30 solar-generating locations.
- Endeavour Group (ASX: EDV) by 4.7% to 11.43.
Industrials borrow a policy tailwind to go green
Disclosure of specific greenhouse gas target emissions is improving in the industrials sector, as companies set emission reduction targets. Companies are investing in the transition to clean energy, with the US Clean Energy Act marking increased momentum from the public sector.
- Auckland International Airport (ASX: AIA) is leading in ESG disclosures, committing to a 90% reduction in Scope 1 & 2 emissions by 2030, by using 100% renewable electricity by 2024 and transitioning to electric vehicles.
- Monadelphous (ASX: MND) has committed to Net Zero emissions by 2050 and noted the potential for opportunities in battery metals, wind, and hydrogen.
Healthcare stocks follow the science
Companies in the healthcare sector have highlighted an alignment to the Science Based Targets Initiative (SBTi) when setting emission reduction targets. This initiative is from an independent body and sets strict criteria when assessing and approving companies' targets.
Companies are also working on improving labour dynamics, such as conducting audits with suppliers and focusing on attracting and retaining female employees.
Both CSL (ASX: CSL) and Cochlear (ASX: COH) have set SBTi-aligned targets. CSL announced emission reduction targets for all scopes, aiming for a 40% reduction by 2030 for Scope 1 & 2, and working with suppliers for Scope 3. Cochlear is a leader in the sector, by committing to net zero by 2030 for Scope 1 & 2, and by 2050 for Scope 3. They both highlighted a push toward renewable power. Cochlear is ahead of its gender diversity targets with 40% females for senior management and 30% on board, and they announced their first Reconciliation action plan.
ASX Tech stocks innovate through diversity
Companies in the IT sector are focused on Diversity & Inclusion by setting gender diversity targets and are further looking at improving hiring processes to be fairer. Companies are also receiving carbon-neutral certifications for their operations domestically.
- Xero (ASX: XRO) said it has reduced 59% of its total carbon emissions since FY20, and they are prioritising the switch to renewable energy in its office buildings in FY22. They have also achieved their gender diversity targets set for FY21, and have now set new targets for 45% representation of women for all employees, people leaders, and senior leaders by FY25.
- Megaport ASX: MP1 has likewise set gender targets, at 50% female on board, 27% on the senior executive team, and 31% in the workforce, and is releasing its sustainability report later this year.
The communications sector is focused on setting emission reduction targets for Scope 1 & 2 emissions and is citing future plans for Scope 3 emissions. They are also focused on ensuring their offices will be powered by green energy.
- Telstra ASX: TLS and Spark ASX: SKI are exploring sustainable opportunities - Telstra in carbon dioxide storage and Spark in renewable energy, hydrogen, and electric cars. Telstra is targeting a 50% reduction by 2030, including Scope 3 emissions.
- Both Domain ASX: DHG has also signed up for the 40:40 Vision, an investor-led initiative to achieve executive leadership gender balance. The company has also reduced its Scope 1 & 2 emissions by 85%. Domain has extended green energy to cover 80% of their employees in offices.
- Both Domain and Telstra have launched a Reconciliation Action Plan.
- Spark has also achieved 40:40:20 gender representation at the board, leadership squad, and senior leadership levels.
There is increased disclosure of green ratings for properties developed in the Real Estate sector. Examples include disclosing each company's NABERS Energy or Water ratings. Companies are also differentiating themselves through carbon-neutral certifications.
- Shopping Centres Australasia (ASX: SCP) spent $17.5 million on installing solar power, LED lighting, and eliminating ozone-depleting R22 gases.
- Mirvac (ASX: MGR) continues to be an ESG leader by setting a net positive water commitment target by 2030, having already achieved its net carbon positive goals in 2021.
- Goodman Group (ASX: GMG) is now halfway to its 2025 400MW solar PV target and has maintained its certified carbon-neutral status. Goodman Group also successfully launched a Return to Zero program for safety standards and had zero fatalities in FY22.
Updates on progress towards scope 1 & 2 emission targets were the key theme in the utilities sector. Companies also focused on conducting risk and return assessments of assets under various climate change scenarios, as the risk of stranded assets accelerates.
- Mercury (ASX: MCY) is working on improving its Diversity & Inclusion by working with employee network groups and conducting an in-depth review of their relationships with iwi/Māori. They are currently conducting a carbon capture pilot project at Ngā Tamariki, which has to potential to reduce 30,000 tonnes of carbon dioxide per year.
- Infratil (ASX: IFT) is prioritising decarbonisation in their investment strategy, by reviewing climate risk and opportunities for their investments and conducting climate change scenario analysis on their investments.
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Michelle joined abrdn in 2004. Previously, Michelle worked for Watson Wyatt as a Quant Analyst. Michelle holds a BA in Applied Finance and Commerce (Marketing) from Macquarie University, Sydney and is a CFA® charterholder.