ESG Telco shake series – EU Telcos' energy exposure
Energy cost and efficiency have become a growing area of focus following the recent spike in energy costs. We estimate energy costs are around 2% of opex for telcos. In the short term, we see little impact on opex for most telcos given widespread hedging of costs. But if prices remain high, it could ultimately take 10% off sector Free Cash Flow (FCF).
Telcos do not report specific energy costs, but we look at the major European operators’ reported energy consumption and compare it to their revenues to understand which are the most energy efficient. We review the major operators with the lowest energy consumption relative to revenue.
Longer term, we believe renewable energy exposure will be key, especially as the growing supply of renewables should reduce prices. There are now mandatory targets, and we consider the different strategies adopted by different operators. We identify the leaders in renewable energy plans, who are aiming to move to 100% renewable energy by 2021E.
ESG has been an area of growing investor focus among both ESG-focused investors and the broader investor community. We briefly outline the ESG metrics we consider for telcos.
E – Environmental. Data centres are responsible for a rapidly growing proportion of direct and indirect emissions for telcos (~2% of global CO2 emissions, according to Robeco). Exposure to renewable energy is a key mitigating factor to using fossil fuels as an energy source.
S – Social. Telecom services are essential in modern society. The COVID-19 pandemic has reinforced this view, as society has had to rely on the resilience of telcos’ networks. We review Cybersecurity, 5G risks, vendor security, workforce issues, employee satisfaction, and customer satisfaction.
G – Governance. Governance issues tend not to be specific to the Telco sector, but more often reflect market- or company-specific issues. We review the tactics being executed and their potential impacts on the business.