LGS co-files shareholder resolution at Rio Tinto AGM
02 March 2018
As a long term shareholder in Rio Tinto, Local Government Super (LGS) would like to better understand the shareholder value we receive from Rio funding third party industry groups whose energy and climate change policy stance seems entirely contrary to Rio's stated formal commitment to the Paris Agreement's target of limiting global temperature increases to well below 2°C.
This deadlock in turn has created the recent strong increases in electricity prices as the policy uncertainty deters any of the much needed investment in new energy generation across Australia. We estimate these high electricity prices are adding tens to hundreds of millions of dollars extra to Rio's overall costs. The shareholder value is not clear to LGS, particularly as Rio has exited the thermal coal business in Australia.
Furthermore these policy stalemate-induced electricity price rises have much broader negative implications for a long term institutional investors such as LGS. Over the last year we have witnessed a doubling of Australian wholesale electricity prices1. This creates an additional impost on Australian business and industries, where LGS invests significant funds - which we calculate to be in the vicinity of $4bn per annum. This causes negative flow-on effects for Australian companies’ profitability, debt servicing as well as our country’s trade competitiveness and economic growth.
Additionally Australian households, the members on behalf of whom LGS invests, have been significantly impacted by the rising retail electricity prices created by this energy policy stalemate. According to the Australian Bureau of Statistics2, retail energy prices have doubled in the last decade. In total Australians are paying $6bn more for electricity than they were a decade ago3, equating to approximately $250 per annum per person and $600 per annum per family.
Furthermore the stalemate has seen carbon emissions from Australia's electricity sector rise by over 5% from 2013 to 20174. This puts pressure on Australia's ability to meet its targets under the Paris Agreement.
In regards to Australian electricity market policy going forward, we believe that in order to attract the new investment necessary to upgrade the networks and reduce pricing pressures, it is essential to consider low carbon requirements on equal footing to the objectives of affordable and reliable electricity. Inability to address this trilemma will maintain heightened investment uncertainty and limit new investment flows.
LGS has for a long time considered climate change to represent the largest long-term ESG investment risks for our members. We continue to implement a comprehensive investment and active ownership programme to help safeguard our members’ long term savings.
1. Based on data from the Australian Energy Regulator, specifically noting Victorian wholesale electricity prices which have risen $40-60/MWh or 100% over the last year. As industry represents 34% of total Australian electricity demand, a $50/MWh increase is a $4.0bn p.a. impost on Australian manufacturing relative to the prior year.
AER, 2018, ‘Victoria comparative base futures prices’, viewed online at https://www.aer.gov.au/wholesale-markets/wholesale-statistics/victoria-comparative-base-futures-prices
2. The Australian Bureau of Statistics tracks indexed electricity prices as part of its CPI reporting. The CPI shows a more than doubling of retail electricity prices over the last 10-years.
ABS, 2017, ‘Consumer Price Index - TABLE 7. CPI: Group, Sub-group and Expenditure Class, Weighted Average of Eight Capital Cities’, viewed online at http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6401.0Dec%202017?OpenDocument
3. IEEFA analysis based on IEA, 2018, ‘Energy policies of IEA countries – Australia 2018 review’, viewed online at https://www.iea.org/publications/freepublications/publication/EnergyPoliciesofIEACountriesAustralia2018Review.pdf
4. Australian Government, 2017, ‘Quarterly Update of Australia's National Greenhouse Gas Inventory: June 2017’, viewed online at http://environment.gov.au/climate-change/climate-science-data/greenhouse-gas-measurement/publications/quarterly-update-australias-national-greenhouse-gas-inventory-jun-2017