ESG Focus | Apr 15 2019
FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:
Consensus is that it’s not a matter of 'if' for coal's decline but 'when'. FNArena reviews a number of factors affecting the pace of the global transition. This is Part One.
– More than 100 major global financial institutions have divested from thermal coal
– More than 78% of global asset owners are seeking to align investments with the UN’s Sustainable Development Goals
– Institutions are pushing banks for greater transparency on carbon exposure
– The world’s biggest developer of coal-fired plants is now investing in renewables
By Sarah Mills
The rate of global ESG adoption, and the growing exodus of financial institutions has accelerated sharply within the past year.
Readers who are yet to catch up with this new dynamic that is increasingly commanding investors' attention are being directed towards FNArena's dedicated website section on the theme; ESG Focus.
In January, Jeremy Grantham, co-founder of US$118bn Boston-based asset management firm Grantham, Mayo & van Otterloo (GMO), and one of Bloomberg’s “50 Most Influential”, declared thermal coal “dead meat”.
He added the life of coking coal would only exceed that of thermal coal by a maximum of 20 years.
In March, The Institute for Energy Economics and Financial Analysis (IEEFA) published a report on the state of play with institutions and coal.
The report points out that more than 100 major global financial institutions have divested from thermal coal, including the top 40 global banks and 20 globally significant insurers.
More than five major financial institutions divested in the first nine weeks of 2019, and in the past two weeks, five more have divested, including the first major Chinese institution: the State Development & Investment Corporation.
“Since January 2018, a bank or insurer announced their divestment from coal mining and/or coal-fired power plants every month, and a financial institution who had previously announced a divestment/exclusion policy tightened up their policy to remove loopholes, every two weeks,” states the IEEFA report.
By the end of 2018, 415 global investors managing a collective US$32trn called for a complete thermal coal phase out by 2030 across the OECD. China is also committed to phasing out coal.
Lets not forget the Climate Action 100+ group
To date, more than 300 investors managing US$33trn have signed on to the initiative.
They are mobilising across dozens of countries to apply pressure on carbon emitters and support for the Financial Stability Board’s Task Force on Climate-related Financial Disclosures has tripled.
According to a Morgan Stanley survey of 118 global asset owners, more than four in five asset owners are pursuing or considering ESG integration and more than two thirds had allocated funds to some form of ESG strategy.
More than 78% sought to align their investments with the UN’s Sustainable Development Goals.
Evaporation of funding has major repercussions for thermal coal industry
Coal-fired energy generation is highly capital intensive in the construction phase of the project – from then on, it’s primarily maintenance and administration.
To date, pension funds have financed that construction. Once starved of pension funding, and given the limited life of existing coal-fired plants, thermal coal becomes a dying market.
Its heir is most likely to be renewable energy, which is receiving the lion’s share of alternative investment dollars.
“US$2 trillion a year of capital flows go into energy systems globally so without access to that capital, the transformation to renewables becomes so much faster,” says IIEFA’s Director of Energy Finance Studies, Australasia, Tim Buckley.
What has been particularly concerning for Australia has been the more recent pivot of Japan on coal, heralded by the exodus of Japanese institutions. Japan is Australia’s largest consumer of coal.
Last May, Dai-ichi Life announced it would no longer insure coal. Sumitomo Mitsui Trust Bank will no longer insure coal-fired power plants, and on February 15, Japan’s Itochu Corp announced it would no longer fund new coal-fired power plants and thermal coalmines.
Over the past two decades, Itochu has been inside the top 10 of investors in the Australian coal industry.
How is this institutional solidarity panning out in reality?
There is no doubt that financial pressure is being brought to bear upon miners. Institutions are pushing banks for greater transparency in their loan portfolios so that they can calculate each bank’s exposure to carbon.
Funding sources are drying up. Yancoal ((YAL)) was forced to seek a dual listing in Hong Kong after the company was ostrasised by local fund managers. Rio Tinto ((RIO)) recently offloaded the company’s coal assets to Glencore.
But just weeks ago, even Glencore, the most recalcitrant of miners, after just doubling down on coal with the Rio purchase, buckled to pressure from the Climate Action 100+ group of institutions and announced a cap on coal output.
Japan, after just announcing its commitment to build 45 new High Efficiency Low Emissions coal-fired plants in 2017, has cancelled 75% of its proposed coal-fired pipeline, according to IEEFA’s Buckley.
Last September, Marubeni, the world’s biggest developer of coal-fired plants announced its withdrawal. The company pledged to build no new plants and halve its ownership of existing coal-fired plants by 2030.
Marubeni is now investing in renewables – a strategy being adopted by most utilities around the world.
IEEFA’s Buckley says the implications for a country as reliant on thermal coal as Australia are real: “With New South Wales’ No. 1 market being Japan, some 44% of the state’s total thermal coal export volumes, those expecting to export thermal coal to Japan [will] need to review their business models.”
So where does this leave the miners?
“Mollification” has now become a catch-cry for the mining industry. The world’s biggest mining conglomerates are aligning themselves in word, if not in spirit, with the institutions, signing joint statements on climate change and employing other investor positioning strategies.
A few years ago, institutions presented a joint statement to coal miners requesting they not lobby against climate change, and the miners consented.
However, the Minerals Council of Australia continued to lobby as a representative body, but it too was forced to modify its stance.
Its CEO, Mitch Hooke, resigned after BHP Group ((BHP)) reportedly threatened to review its membership, supposedly due to pressure from institutions on the issue. Hooke’s departure has been cited as evidence of the growing influence of the global anti-coal lobby.
According to Ausbil, the number of general companies implementing climate change measures has increased in the past year – just another nail in the coal coffin.
“Several companies have now adopted the Taskforce on Climate-related Financial Disclosures (TCFD) reporting framework, which provides better transparency on the risks and opportunities from climate change. The Climate Action 100+ initiative has also grown to a major engagement initiative with significant scale and leverage,” Ausbil says in a press release.
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