Pivot to renewable energy
Germany’s RWE is an integrated global electricity producer that primarily operates in Europe and North America. The company was historically one of Europe’s largest carbon emitters and in the past few years it has transformed itself into one of the world’s largest producers of renewable energy.
We initiated a position in RWE in April 2018 after the company acquired E.On’s renewables and nuclear generation businesses in an asset swap valued at €43 billion. This transaction enabled RWE to shed its transmission and distribution assets and assume a pure-play power generation business model—a move we felt would improve its balance sheet. The swap also provided a large platform from which RWE could grow its renewables portfolio.
Navigating the exit from coal
RWE’s strategic shift occurred in a backdrop of Germany’s exit from coal energy, with the German Coal Commission tasked with developing a strategy to phase out coal-fired power generation in order for Germany to meet its climate mitigation goals. RWE’s legacy coal operations were, therefore, a source of risk. Having closely followed the Fukushima Daiichi nuclear disaster in 2011 and the subsequent political reaction in Germany, we believed the German government would be a constructive partner to RWE. After participating in a series of meetings with RWE and E.On in May and June 2018, we reinforced this expectation and increased our position in RWE.
In October 2018, a German court halted RWE’S clearing of Hambach Forest as part of its expansion of an existing lignite (coal) facility. We subsequently trimmed our position due to the risk that the court ruling might adversely affect discussions between RWE and the Coal Commission. By September 2019, however, both parties agreed that compensation was due to RWE for costs incurred from the shutdown of its coal business.
When we met with management the following month, we reviewed RWE’s combined renewables pipeline and projected that by 2024, more than 75% of RWE’s EBITDA would stem from renewable sources, which was encouraging. We were also heartened by RWE’s progress toward becoming carbon-neutral.
In January 2020 German authorities announced the favorable news that RWE would be eligible for €2.6 billion in compensation, provided that it shut down one-third of its existing 8.5 gigawatt coal fleet by 2022, another one-third by 2029, and the remainder by 2038 (with a possible early exit in 2035). With the coal exit agreement settled, RWE announced an even larger renewables pipeline with plans to ringfence its coal phase-out liabilities.
Through fundamental analysis, we identified that ESG factors were material to RWE’s outlook, in this case recognizing the upside potential from RWE’s ability to transform an ESG risk into a sustainable business opportunity. RWE now has a platform to capture long-term growth in wind and solar power generation, and the company has established a clear path to becoming carbon-neutral by 2040.
The specific security identified and described does not represent all of the securities purchased, sold, or recommended for advisory clients, and it should not be assumed that investment in the security identified and discussed was or will be profitable. This security was selected as we believe it aptly illustrates how Jennison integrates ESG considerations as part of our investment process.