Coal and the rise of the activist investor

A raft of institutional investors from the Church of England to the University of Oxford to the Norwegian government’s pension fund manager (NBIM) have trumpeted decisions to cut their exposure to thermal coal on environmental grounds.

The cynic might suspect the timing has as much to do with the outlook for coal market fundamentals as it does with “responsible” investing. Thermal coal has become less attractive to investors, because prices are lower and the demand outlook is uncertain.

Europe’s large combustion plant directive, introduced in 2001, will lead to the closure of some 400 coal-fired plants by January 2016. Even China has rewritten its energy policy to cut emissions. Reduced demand has not yet led to an equivalent cut in output, but producers may be compelled to cut soon if aversion to investing in carbon-intensive assets grows. So, producers may yet see the seeds of supply-demand realignment in reduced investment.

Norway’s government has instructed NBIM to pursue “responsible investment opportunities”, complementing Norway’s target of reducing greenhouse gas (GHG) emissions by 40pc by 2030 compared with 1990. The fund divested from 14 coal mining firms last year after concluding that companies with “particularly high GHG emissions may be exposed to risk from regulatory or other changes, leading to a fall in demand”.

On 5 June, the Norwegian government votes on further coal asset divestments in what could be one of most significant policy decisions ahead of Cop 21 (the conference of the parties to the UN Framework Convention on Climate Change) in Paris in December.

There are signs that the moral argument and pressure from environmental groups is already hitting more controversial projects — the $16.5bn Carmichael mine in the Galilee basin in Queensland, Australia, is a case in point. Standard Chartered’s chairman said this month that the bank will review its role as project adviser. The bank — which has been advising Indian group Adani on the construction of the mine — has lent $680mn to the project, which includes expanding the Abbot Point terminal on the Great Barrier Reef.

Falling demand from Europe and China is casting doubt on the viability of projects such as Carmichael. But Adani is resolutely pursuing the project. “In India, around 16.6mn t/month is being imported and an additional 22.56GW in generation has been added recently to India’s generating capacity,” it says. “Of that increased capacity, 92pc is coal-powered — with more to come.” Indian demand is increasing and domestic production cannot satisfy demand.

Edinburgh University takes a more nuanced approach to investment, mindful of economic progress, investment returns and the power of the activist investor. It does not view investment choices as limited to “no change” or “pull out”. The university — the first in Europe to commit to the UN Principles of Responsible Investment — has set up a Fossil Fuels Review Group and is committed to changing investment policy to “seek to change the behaviour of companies”, working with them to reduce their emissions. It will focus on companies involved in coal and tar sands and withdraw investment in these companies, starting with the top three producers, if realistic alternative sources of energy are available and the companies are not investing in technologies that address the effects of carbon emissions and climate change. It will prioritise low or zero-carbon investments, replacing investments with lower carbon alternatives that deliver the same level of return and risk.

The motives for ethical investing are admirable, although most investors prioritise the return on their investment. But with coal prices at multi-year lows and limited upside in the medium term, investors would be hard pushed to believe a turnaround story. It is easier to pull out of thermal coal and style it “responsible investing”.

But divestment may have a silver lining. By pulling out of mining assets, investors may dissuade financiers from funding new projects. This might be the medicine the market needs to cure its oversupply ills, encourage supply discipline and pull prices off current lows. And a price recovery may lead to a strategic review by those threatening to shun thermal coal.

The Wellcome Trust describes calls to divest from fossil fuel companies as a “grand gesture” that can be made only once. The trust prefers “active engagement with the companies in which we invest”, using its weight as an investor to gain access to boards and encourage policies that support the transition to a low-carbon economy. Signs of sustained price recovery may further encourage the rise of activist investors such as the Wellcome Trust.

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