Change in sustainable funds
Obviously, I am biased, but it seems coal could be nearing an end to its banishment from fashionability, and I know about being out of fashion – I’ve done it for years. Probably too soon to proudly declare your involvement in coal at a Mosman dinner party, but the time is coming.
The chart left comes from an article in today’s WSJ (full article below) which shows people returning to the concept of investing to make money. The article confirms what we have all suspected and that is, it’s almost impossible to make a decent return investing in the ESG asset class. The message is clear - buy wind farm shares and enjoy caravanning holidays in regional New South Wales, buy coal shares and your kids will get over the shame after the 4th Aperol at Zanes Tavern in Aspen.
The outlook for coal does not have to be spectacular, reasonably steady demand pitched against longer & more difficult approval & financing processes should see the commodity remain better bid than offered. The real value add will come from ESS – a new term I have coined standing for Environmentally Softer Stance. Why should a company with a great balance sheet, fabulous (or at least not unfabulous) outlook trade on an ebitda multiple of 2 x? Entirely because of the wokeratti, who if you will pardon the pun, may have had their day in the sun.
In my opinion, the trend involving making money from investments returned with the Whitehaven deal – a once in a generation opportunity to buy fabulous assets from an organisation more interested in printing the annual report on recycled paper than paying dividends. The deal was so eye wateringly good (where BHP let WHC repay some of the proceeds from the cashflow of the asset they just sold them) that even young people were forced to put down their glass of Kombucha and buy Whitehaven stock.
The ONLY thing driving the valuation of coal assets is the ESG influence, should that wain, valuations of anti ESG assets could rise to outrageous levels – I’m not ruling out ebitda multiples of 4 x. The first sign of the waning is the decrease of funds flowing to ESG due to the very poor returns. Humans can justify anything if we try hard enough, Poker Machines, Vapes, Tesla’s – you name it. So, it would not be too much of a stretch to justify investment in what is an essential part of life on a “transitional basis” (especially if they help your fund generate outsized returns) There are 70 kilos of coal in every Tesla, 170 tonnes of coal in most windfarm towers and these sound like very laudable transitional uses to me.
Eventually all popular investment themes go out of style, Peak Oil, Y2K, The Carry Trade, The Peace Dividend, BRICS, FAANG, the list goes on, ESG will eventually fade, not completely but to a lessor prominence and that’s good news for coal stock multiples.
https://www.wsj.com/finance/investing/esg-branding-wall-street-0a487105
JWMA receives fees, brokerage and other benefits from coal companies and long may that last.
