Pressure from anti-coal activists highlights investment dilemmas

Coal. For some it’s a four-letter dirty word that represents fossil fuels at their worst; for others, it’s an old and familiar source of energy that has been mined for centuries.

The world is increasingly leaning towards the first camp and away from the second. Coal is being shunned as being a contributor to global climate change, as well as a major pollutant in its own right.

As a result many companies, ranging from investment banks to insurance companies, are divesting themselves of investments or business activities that are coal-related, with the latter also refusing to re/insure assets that are directly involved in the coal industry, such as mines.

As a result, there are important questions about how these investment decisions are made. Can public pressure or specific pressure groups targeting controversial topics such as coal create a precedent in terms of investment choices when it comes to other forms of energy? Where exactly should the line be drawn?

Actions not words

According to Peter Bosshard, director of the finance program at renewable energy campaign group The Sunrise Project and coordinator at the Unfriend Coal campaign, there are two main considerations.

The first of these is that leading insurers have warned about climate risks for decades. As the need to scale up climate action is growing more urgent, they have realised that they need to put their money where their mouths are. Public pressure, including from the Unfriend Coal campaign—the aim of which, according to its website, is “to make coal uninsurable”—has certainly helped in this learning process.

The second reason is that divestment from coal has been made easier by the fact that according to Bosshard coal is a dying industry, and coal assets have underperformed compared with index funds and the clean energy sector more specifically over the past five and 10 years. According to Bosshard, without public pressure, insurers would have reasons to shift their assets out of coal but would probably not adopt formal divestment policies.

According to Tim Buckley, director for energy finance studies at the Institute for Energy Economics and Financial Analysis (IEEFA), insurance companies are being motivated by two key factors.

First is the need to deliver on a business model aligned with the Paris Agreement, which means a combined corporate and government pathway that gets the world collectively to limit the global temperature rise to the Agreement’s 1.5 degree target. Once a board says they accept the science of climate change and endorse a Paris Agreement target, the next step is to ensure their own business practice is aligned with this outcome.

“Thermal coal is one of the largest contributors to carbon emissions, and is the one most technologically challenged by increasingly competitive zero emissions alternatives,” says Buckley.

“Second, insurers are seeing increasingly frequent, increasingly extreme weather events related to climate change, and their annual profits are being eroded by the increased frequency.

“Knowing full well the impacts, insurers who are not acting on this increasingly key risk are being called out by civil society and held accountable by governments.”

With climate change in the headlines almost every day, there are questions as to what other kinds of energy production might be the subject of a similar kind of divestment in the future.

No herd mentality

Bosshard points out that the oil and gas industry has so far not shown any willingness to bring its operations in line with the Paris Agreement through a managed decline with science-based targets. Like the coal sector, the oil and gas industry is also not performing well on the stock market.

He states that insurers and other investors are well advised to divest from the oil and gas industry as well. If they are not prepared to do so in the short term, they should move away from the tar sands sector, which has a large carbon footprint and which according to him regularly undermines indigenous rights through its operations.

Buckley agrees that the science is clear and that the world collectively needs to reduce global carbon emissions, adding that all fossil fuels generate high carbon emissions.

However, he adds, economics and technology both play a key role in terms of which fossil fuels have viable alternatives. The Paris-based International Energy Agency (IEA) has a model of what is generally required, as defined it its Beyond 2 Degrees Scenario. Next to thermal coal, the highest cost fossil fuels are most at risk, be that deep sea and arctic oil and gas, as well as tar sands.

In the longer term, the convergence of transport and electricity means oil will progressively be impacted. But Buckley stresses that divestment is about thermal coal first and foremost—the IEA models that it must be entirely phased out by 2050, absent coal carbon capture and storage (CCS) becoming viable if the world is to meet the requirements of the Paris Agreement.

Companies are becoming more ethical in their coverage/investments, says Bosshard.

“Many companies will emphasise their growing investments in clean energy and other low carbon sectors, which make good business sense,” he says.

“Low carbon technologies will not, however, resolve the climate crisis if we don’t end support for dirty industries at the same time, and unless coal and other fossil fuel companies demonstrate a rapid transition to a low carbon future, an ethical response to the climate crisis requires divestment as well.”

Buckley says that the divestment of thermal coal is primarily down to alignment with a corporate policy and the Paris Agreement. A social licence to operate is part of this, but corporates are largely motivated by near-term profits. The fact that thermal coal is likely to leave an enormous financial risk of stranded assets means, he feels, that being ethical and maximising long-term profitability are entirely aligned.

The buck stops where?

There is a general assumption that, typically, chief investment officers will prepare such investment decisions in coordination with chief risk officers and sustainability staff, and that the CEOs will take the ultimate decisions as a result of their deliberations.

“While environmental, social and governance teams are implementing these decisions and deciding on their practical operation, this is ultimately a decision for the board to align the corporate policy with a key financial risk, as has been long and well articulated by Mark Carney, governor of the Bank of England,” Buckley says.

He adds that the growing emphasis on this key global risk is evident in the acceptance of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures and the UK’s RE100+ initiative involving corporate commitments to buy renewable energy.

Could this lead to the danger of outside interests forcing companies to draw the line in increasingly restrictive places?

“As they have pushed back the role of governments, private businesses have taken on a responsibility to act ethically even in the absence of regulations,” comments Bosshard.

“I can’t judge whether all the expectations that insurers are now facing from different groups in society are justified, but the climate crisis—a crisis where we have full scientific consensus that it puts the survival of human civilisation as we know it at risk—is certainly a good place for insurers to take strong and urgent action.”

Buckley concludes by pointing out that corporate entities ultimately are motivated by the ability to make profits.

“A social licence is a key part that makes profitability sustainable, but there is a key fiduciary duty of board members to evaluate and align polices with key financial risks. Failure to do so opens up personal and corporate liability,” he says.

“Ethics are a nice alignment, but the key motive is that this is the sensible financial decision.”