End-of-Week Essay: How Capital is galloping away from Coal

IEEFA update: Capital flight from thermal coal is accelerating

Behind Blackrock’s grand exit from coal

Tim Buckley

20 January 2020

Global capital flight from thermal coal and the coal-fired power sector
is already at a canter in 2020.

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.

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!

Tim Buckley is the Director Energy Finance Studies, IEEFA Australia /
South Asia.

Interesting to see the role the Norwegian Pension Fund played in
Blackrock's shift ...