Stock Pick Series #1 – Ørsted
Introduction
In this first blog post in our “CBS SFC Global Select ESG Fund: Stock Pick Series”, we will focus on the alternative energy company Ørsted, and describe why the company has been chosen to be included in the CBS SFC Global Select ESG Fund.
Company Description
The Danish utility company Ørsted renamed from DONG (Danish Oil and Natural Gas) Energy in 2017 after selling off its upstream oil and gas production (also known as black energy) assets and has since then undergone a significant transformation becoming a renewable energy company with the largest capacity of installed offshore wind power globally and is widely considered to be the leader in the offshore wind industry. Ørsted develops, constructs, and operates offshore and onshore wind farms as well as bioenergy, solar cell, and energy storage facilities and delivers energy products to its customers.
Investment Thesis (Business)
The investment thesis for Ørsted is rooted in the threat of global climate change. The generation of electricity is today one of the largest sources of CO2 emissions, where the combustion of fossil fuels such as coal is the primary source of these air emissions. Therefore, it is necessary to transform the production of electricity into a more sustainable production.
To this end, offshore wind, which is Ørsted’s primary business segment, constitutes an attractive solution: offshore wind exhibits unique characteristics that increase its attraction compared to other renewable technologies. This is primarily due to the following reasons: (1) there has been a (and continually is being) a significant drop in the “levelized cost of electricity” for offshore wind, (2) there is a growing pressure to keep wind farms offshore to reduce the associated disturbance to towns and people, and (3) offshore wind offers load factors (i.e. productivity) that are significantly higher compared to onshore wind and solar energy fields. Following these advantages, offshore wind is gaining political support at an accelerating pace globally. The increased climate push globally, including net-zero targets in some regions, will likely lead to a step up in the expansion of wind capacity: Bloomberg New Energy Finance predicts that capacity will exceed 150GW by 2030, from 22GW in 2018, representing an 18% CAGR – a number that we at CBS SFC expect is likely to be revised upwards.
At CBS SFC we believe that Ørsted possesses the right competitive advantages to take a significant part in this structural growth in global wind capacity. This is particularly due to the following reasons: (1) the company has a strong market position in an industry where size and scale is crucial, (2) it is very experienced in the construction of offshore wind and has a strong track record, and (3) it has a deep knowledge of the political game associated with these projects. Utilizing these competitive advantages, we expect the company to further expand a robust project pipeline and accelerate growth with attractive returns.
Investment Thesis (ESG Management)
Ørsted’s vision is a world that runs entirely on green energy. With such a bold ambition, it should come as no surprise that Ørsted’s ESG credentials are a cornerstone of the investment thesis. In 2020, Ørsted tops the Corporate Knights' Global 100 index of the world's most sustainable companies (within a universe of 7,395 companies with more than 1 billion dollars in revenue) and has the highest possible rating, AAA, from MSCI.
Undoubtedly, the high ESG rankings are underpinned by Ørsted’s endeavours of reducing its climate footprint and taking social responsibility. For instance, (1) the company has increased its revenue from renewable energy by 10% from 58.4% to 68.1% in the period 2018-2019, (2) it has increased its CO2 and water productivity by more than 50% due to reductions in total CO2 emissions and lower water consumption combined with higher turnover, (3) it has increased the proportion of female leaders from 33% to 38%, and (4) it has paid the tax the company must: 34% real tax / EBITDA over the past five years, which places the company in the 92nd percentile for this parameter in the Global 100 index.
These examples are only an extract of the various ESG initiatives taken by Ørsted that has resulted in the company delivering a high ESG performance. There is, however, also some negative points that investors may want to consider when it comes to evaluating Ørsted from an ESG perspective. An example of this could be that Ørsted still has some exposure to fossil fuels via its own coal-fired power stations. The company, however, is in the process of converting coal-fired power stations in Denmark to sustainable biomass, and by 2023, aims to be completely coal-free. The exposure to fossil fuels can in some instances lead to an exclusion of stock indices and mutual funds. At CBS SFC we believe, however, that the positives far outweigh the negatives in terms of ESG performance.
Investment Thesis (SDG)
The sustainable story does not end here, however. Ørsted has structured its work in 20 sustainability programs, which contribute to the UN Sustainable Development Goals (SDGs). Here, the company particularly focuses on two of the SDGs, namely 7 (clean and affordable energy) and 13 (fighting climate change), which is at the core of its business. In addition to these SDGs, Ørsted also works on a variety of other programmes to impact the SDGs.
At CBS SFC we believe that Ørsted’s systematic work with the SDGs gives evidence of a company that takes responsibility for its own business as well as for society as a whole. It gives evidence that Ørsted is well managed and well-positioned to capitalize on the global societal and climate challenges we face today and will face to an even greater extent in the coming decades.
Conclusion
In conclusion, CBS SFC believes that the main characteristics describing Ørsted, i.e. the present and attractive sustainable business model, the market-leading position within offshore wind, the magnificent ESG performance, and the undisputed alignment with important SDGs, makes Ørsted an obvious stock pick for our virtual sustainable investment fund.