IEEFA update: Capital flight from thermal coal is accelerating

BlackRock’s January announcement of its divestment from thermal coal is huge, and an unexpected move by this global giant (US$7 trillion assets under management (AuM), given the asset manager’s entrenchment as a climate action laggard.

At the same time, asset manager Aegon has announced a new, enhanced, coal divestment program. In total, 116 globally significant banks and insurers have now put in place increasingly stringent coal policies to move towards alignment with the Paris Agreement.

Corporate greenwash is moving to polices of substance.

Already in 2020, the economic cost of inaction on climate change (as demonstrated by the catastrophic bushfires in Australia) has been made starkly obvious to even the dullest of climate science deniers (a grouping to which the country’s political ‘leaders’ seem to be excessively well represented).

Regardless of whether countries prepare for the climate science and technology-driven transformation of energy markets, the global energy transition is happening. Australia and others can start preparing for it or remain on a deeply rutted path of continued energy policy chaos.

Renewable energy deflation is accelerating below the cost of new coal-fired power plants in an increasing number of countries. This makes transition planning for the eventual terminal decline of thermal coal long overdue.

As one of the three largest fossil fuel-export nations globally, Australia’s economy is exceptionally exposed. Australia can continue ‘investing’ in yet more coal and liquefied natural gas (LNG) capacity and can build more and more stranded assets (along with the harm to regional communities involved). Alternatively, Australia could pivot towards the low-emission industries of the future. Australia’s Chief Scientist Dr Alan Finkel has been talking about this for a number of years, along with Atlassian co-founder Mike Cannon-Brookes, and Professor Amanda Cahill.

Australia should embrace the opportunities the energy disruption is unleashing.

Financial markets are already making the pivot. While Tesla shares have doubled in recent months, the world’s largest gas fracker, Chesapeake Energy’s (U.S.) shares have halved. Meanwhile, Peabody Energy has destroyed half of its shareholder wealth in just six months, 80% in just this past year.

As for renewables, the world’s largest investor in renewable energy and battery storage, NextEra Energy, just keeps skyrocketing.

BlackRock founder Larry Fink said last week he expects “a fundamental reshaping of finance.” IEEFA agrees with him on this.

Having worn investor losses of increasing stranded asset risks for a long time now (Peabody and GE, for example), Fink has belatedly announced the immediate divestment of their debt and equity stakes in mining firms materially exposed to thermal coal (>25% of revenues). In Australia, this catches Whitehaven Coal, Yancoal Australia, New Hope Corporation, Australian Pacific Coal, TerraCom, (and Wollongong Coal, although they do not have any revenue), plus a review of all coal-dependent utilities.

BlackRock is also expecting all companies to comply with the reporting requirements of the Task Force on Climate-related Financial Disclosures (TCFD), the Sustainability Accounting Standards Board (SASB) and Climate Action 100+. Further, BlackRock has set itself goals on proxy voting, as well as transparency in a timely fashion on this key implementation of their fiduciary duty to investors.

On the same day as BlackRock’s announcement, one of the largest insurance companies in Europe, Dutch Aegon (US$300bn AuM), announced an even tighter coal divestment policy. Aegon already excludes firms that derive more than 30% of sales from thermal coal mining. As of 2020, a declining revenue threshold has been introduced, which will be lowered in steps to reach a 5% or below sales threshold in 2029. Aegon will cease investing in companies who own more than 10 gigawatts of coal-fired electricity generation capacity and who have plans to extend their coal power capacity. Aegon will also cease to invest in companies that are producing more than 20 million tonnes of thermal coal annually while also expanding their coal-related business, catching the diversified coal mining major, Glencore.

Aegon first divested from coal mining companies in 2016. This new, tighter policy is the latest example of comprehensive divestment policies following soon after a financial institution starts to align with the Paris Agreement. The International Energy Agency models that unabated thermal coal use must cease globally well before 2050 if the world is to have any material chance of holding global warming to below 2 degrees Celsius.

IEEFA has been tracking bank and insurer coal policies. Our count has 116 globally significant banks and insurers with formal coal and coal-fired power plant exclusions, restrictions or divestment policies. There were 43 global coal policy announcements over 2019, up from 31 in 2018. And two weeks into 2020, there are already two.

Bill Gates in September 2019 said that divestment would have zero climate impact. IEEFA notes he is right – but will be proven entirely wrong.

Financial markets are mostly operated by a pack of lemmings. The move by Norway’s Government Pension Fund Global (GPFG, AuM of US$1.1tn) to progressively divest from fossil fuel firms who deny climate science and who are undermining the Paris Agreement had limited impact. Norway’s KLP Group (AuM of US$85bn) and Storebrand (AuM US$80bn) are both set to go coal-free. Morally principled and financially rewarding, these moves have had no discernible impact on financial markets. Or at least, not until now.

GPFG encouraged Japan’s Nation Pension System (US$1.6tn AuM) to strip a US$50bn mandate off Blackrock last month, and then award it to the Paris-aligned Legal & General Investment Management (LGIM UK, US$1tn AuM).

BlackRock then moved away from coal, fearful it will lose more mandates and more money holding onto stranded assets.

At some point, State Street, Vanguard and/or Fidelity Investments will also belatedly move to start aligning with the Paris Agreement.

Then watch the lemmings run!