As The World Transitions To Net Zero: Here’s What It Means for Investors and the Biggest Beneficiaries on the ASX

Like or loathe it Net Zero is here to stay. It may be ditched from the Liberal and National parties’ platforms, but it’ll be at least 2 terms before they are in power again. But while this term has been brandied about a lot, there has been little attention as to what it’ll mean for investors. Yes it’ll mean red tape from a companies’ perspective and some investors will lose…but some investors could win.

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What is Net Zero?

Net Zero refers to balancing greenhouse gas (GHG) emissions released into the atmosphere with emissions removed (through carbon sinks, offsets, or other methods), so that the net contribution to climate change is zero. Not zero emissions at all, but ‘net’ zero as in emissions removed exceed emissions added. By emissions, this term includes CO₂, methane, nitrous oxide, and other greenhouse gases.

How is this done? Through reduction of emissions by switching to renewable energy, improving energy efficiency, low-carbon transport. Also contributing is carbon removal and offset schemes including planting trees, carbon capture technologies, or investing in projects that reduce emissions elsewhere.

Why does Net Zero matter?

Well, basically because companies are compelled to. They often have legally binding targets, or at least reporting and some targeted reductions. Net Zero, theoretically, reduces the impact of climate change. But it can also impact a business’ operations, putting them at risk or on the other hand making them compelling and even possible in circumstances where that may not otherwise have been the case.

Who could win and lose?

To understand which sectors are likely to win or lose in a net-zero transition, it helps to look at their emissions exposure, their role in the energy system, and where substitution or decarbonization pathways exist. Some of the most exposed sectors are: fossil fuels (oil & gas as well as coal), utilities (power generation), industrial materials (steel, cement), and transportation.

Some of these companies are transitioning already such as oil and gas giants Woodside (ASX:WDS) and Santos (ASX:STO) as well as utilities providers like AGL (ASX:AGL) and Origin Energy (ASX:ORG). All of these are diversifying towards renewable solutions such as hydrogen in the case of Woodside, but these are not cheap.

Then again, neither is the status quo cheap. Legacy coal/gas-fired power plants are becoming less economically viable as renewables and storage scale up, but also as their resources deplete.

There are also several small caps that are aspiring to become the next big things like Pure Hydrogen (ASX:PH2) and Hazer Group (ASX:HZR). There are also companies that could be indirect beneficiaries like IPD Group (ASX:IPG) that is a provider of utilities infrastructure including EV charging stations.

Also key to consider is transportation companies that have relied heavily on fossil fuels. Airlines like Qantas (ASX:QAN) and Air New Zealand (ASX:AIZ) fit into this category, but even stocks like AP Eagers (ASX:APE) that sell cars.

What investors need to consider

Of course investors need to think before they invest many can be applied to all sectors. For instance, don’t put all your eggs in one basket and be an active investor (i.e. follow the company, go to the AGMs etc.)

But there are unique considerations that need to be made. Obviously some technologies (especially hydrogen) are not yet commercially proven at scale, and it’ll take a lot of time and money to reach that point.

Also consider that there may be a trade off between short term and long-term goals. Net Zero alignment may reduce exposure to stranded assets but could limit exposure to high-emission industries that might remain profitable in the short term. Moreover, some sectors may lag in emissions reduction but have long-term decarbonisation potential.

As well as this, while regulatory support has ensured certain technologies aiding Net Zero rise, changes in policy could derail projects. And of course many of these plays require huge capex — could struggle without scale or financing; and there is immense competition.

But the most important thing to consider is that net-zero is a long journey. For many plays, the economic payoff may come over decades, not years. Indeed, if there was immediate payoffs from a financial standpoint, Net Zero wouldn’t be up for debate at all.

The bottom line is that there is opportunity as the world transitions to Net Zero, but investors still need to tread carefully.