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ESG Focus: Coal Showdown At The ESG Corral – Part Two

ESG Focus | Apr 24 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'. In this second part, FNArena reviews direct impacts from regulators, court cases, new taxes and changing public opinion.

-RBA has now identified climate change as an important factor for its policies
– Rocky Hill coalmine refusal in NSW court a global first
-Nearly 1,000 climate change related cases have been filed globally across 25 countries
– adoption of global carbon tax will change the economics of coal generation

By Sarah Mills

Regulations and legal precedents start to bite

The global economic-political scene is beginning to be marked by a weird schizophrenia, as governments, investors, and companies try to conduct business as usual and promote trade, while palming off billion-dollar carbon risks to each other – all while sidestepping the not insubstantial political risk – in a dangerous game of musical chairs.

Earlier in March, Western Australia’s Environmental Protection Authority announced new unlegislated guidelines for carbon dioxide emissions at all new LNG projects emitting more than 100ktpa of carbon dioxide. The government has since quashed guidelines, responding to pressure from miners.

But what was interesting about the EPA announcement is that it gave the WA Labor Premier Mark McGowan an opportunity to call for a national solution to the issue. Heading into a Federal election, this is significant. Federal Labor plans to create a Federal Environmental Protection Authority and Climate Change Action Plan with a legal cap on pollution and carbon offsets.

On March 12, the Australian Reserve Bank Deputy Governor Guy Debelle, speaking at the Centre for Policy Development, issued a warning about the risks that climate change posed to the economy.

Debelle initially focused on drought and weather risks, but he eventually got to the elephant in the room and singled out energy, pointing to the transition to renewables under way in the energy sector now that they have become a “cost-effective source of generation”.

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Domestic court cases

The other major front to heat up in 2019 domestically and globally was that of legal precedent.

Last month, Australia’s most senior environmental judicial officer Justice Brian Preston declared the Rocky Hill coalmine near the picturesque NSW tourist town of Gloucester to be unlawful on two counts: that it contributed to global warming; and that it is too close to Gloucester.

The company can appeal but even if a higher court ruled against the climate ruling, there is a strong chance the court would uphold the point that the mine is too close to Gloucester, which will have major ramifications for other mines.

It is the first time an Australian court has ruled on a mine’s contribution to carbon dioxide emissions. It is also the first time that evidence of a global budget of carbon dioxide emissions to avoid climate change to justify the refusal of a new coalmine has been brought before an Australian court.  

The implications of this landmark ruling are far reaching. It will set a precedent with domestic and international reach and elevates the risk of stranded assets.  

To date, most overseas coal-mine closures or refusals have largely been regulated by governments rather than the courts. Germany has been particularly active on this front, closing and compensating miners.

The Australian legal precedent may affect such payments – particularly for projects such as Adani's in Queensland –  which many surmise are aimed solely at gaining compensation, or saddling sovereign nations with hefty carbon bills.

In a separate fracking case, a court found this month that it is material to consider scientific evidence, including the effects on climate change, in deciding fracking policy, and that the government could do so, ruling key aspects of national planning policy to be unlawful, and opening the doors to climate-change based rejections to planning permission for fracking sites.

International climate change litigation

These cases are just two of almost 1,000 climate change related cases that have been filed globally, across 25 countries. Overall, corporations and industrials are the most common plaintiffs, with governments the most common defendants.

For example, in Urgenda Foundation v. The State of the Netherlands, 2015, the court accepted that the Dutch government had a constitutional duty to protect its citizens from climate change.  Similar cases have been brought against the Irish government, and the British Government.

Then there is the long-standing US suit brought by the youth of the United States in Juliana v. United States of America and its sister cases in Europe and Colombia, the latter being designed to protect the Amazon.

US West Coast fishers are also suing 30 fossil fuel companies for contributing to climate change which they say has devastated the region’s fishing industry.

Recently, the Philippine Commission on Human Rights started investigating 47 oil, gas, coal, cement and power companies that they dubbed the “Carbon Majors”.

Carbon tax bills

The adoption of a global carbon tax will also change the economics of coal generation.

Most European countries have a carbon tax of some sort and the EU’s Emissions Trading System is the world’s first and largest carbon market, trading EUAs. One EU Allowance Unit equates to 1 ton of carbon dioxide.

The likely end price of 1 ton of carbon dioxide varies according to whom you talk to. The Carbon Pricing Leadership Coalition estimates carbon prices will range between US$50 and US$100 per metric ton by 2030.

The United Nations Global Market has called on companies to set an internal price on carbon at a minimum of US$100 per metric ton over time to spur innovation and unlock investment.

However, IEEFA’s Buckley notes that the carbon price is trading at roughly US$20 a ton and believes US$20-US$50 will be sufficient to turn the economic argument against coal.

Buckley says that events to date have made it clear consumers will not tolerate anything near US$100 a ton.

Reporting technology raises the stakes

It has long been tacitly understood among corporations that corporate social responsibility ESG is generally not an issue unless a disaster happens. But this assumption may no longer hold true.

Increased disclosure and scrutiny means there is now more chance of getting caught simply because more people are looking; they have more to look at; and the stakes are rising.

CEO of the Responsible Investment Association, Simon O’Connor, notes that while it is very hard to divest one’s way out of climate change, the organisation is seeing a rise in the numbers of investors trying to divest.

Investors want to know at what point and how are climate change risks going to hit,” says O’Connor. “They want to know the physical risks, the transitional risks and the regulatory risks. The whole area of responsible investing is getting better at identifying future movements of share prices, so increasingly investors are looking for indicators from companies that are actively managing these things.

Technology is helping ESG reporting, making data more available and easily accessible. It is becoming embodied in the core investment infrastructure, such as on Bloomberg terminals, and more sophisticated tools for rankings. Investing is complex and interpreting good data is as important as the fund manager’s ability to report.

A recent Morgan Stanley survey of 118 asset owners showed that fewer than half felt they had adequate tools and resources to assess ESG issues. But this extremely complex area is becoming simpler by the day.

Aided by reporting systems, analysts now include ESG as part of their fundamental research offering. For example, Hermes Investment Management has created a carbon tool to help fund managers assess their carbon performance, carbon risk and improve reporting.

Research firms such as Macquarie, Morgan Stanley, Credit Suisse and Citi have invested heavily in ESG impacts research.

The court of public opinion

Another front is the arena of public opinion. This is the arena in which the role of stranded assets will meet its litmus test.

CEO of Balance Impact Emily Hollingham notes the risks surrounding stranded assets is high but it will be stranded energy infrastructure assets that are likely to sway public opinion.

If power becomes increasingly expensive and unreliable, there is a risk that more people move off-grid,” says Hollingham, “meaning that the infrastructure charge on a bill becomes higher as there are less people to share the cost; more people move off grid, and the cycle continues.  If we move out of coal too quickly this could exacerbate the unreliability of power and speed up this process, however I think that is a risk that can be managed and isn't a reason to stick with coal long term.”

The public has already shown marked resistance globally to the impost of a carbon tax. It contributed to the defeat of Labor Prime Minister Julia Gillard, and nearly sparked a revolution in France as the Gilets Jaunes (yellow jackets) movement took to the street, making it very clear that they expected the super wealthy to fund the carbon transition.

Germany has had better luck. Electricity prices have risen sharply in the country. About 56% of the German retail price is tax. About 20% of that goes to the renewable energy surcharge and then the balance of the excess was sheeted back to compensation for coal and nuclear companies and other costs.

At one stage, it appeared that the gilets jaunes protests would spread to Germany but the movement evaporated when the French President retreated on the carbon issue.

Given the political unpopularity of the carbon tax, it may end up being that the ESG framework and institutional pressure may prove the more subtle means to transitioning to a low-carbon world – something of a carrot and stick orchestra. It spreads the risks away from solely the taxpayer, to include investors and corporations. But it also incentivises investment in new technologies and mobilises funds for innovation.

If the institutional pressure brought to bear on thermal coal is any example, then the ESG framework may prove a formidable tool for change.

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