On 22 April 2016, 174 countries signed the Paris Agreement, drawn up at the United Nations Climate Change Conference (Cop 21), to limit global warming to less than 2°C.
The signatories also promised to pursue efforts to curtail the temperature increase to 1.5°C. Some scientists believe that this will require zero carbon emissions between 2030 and 2050. One way to achieve this is to move away from using coal to generate power towards renewables, which do not produce greenhouse gasses.
Asset managers have clearly taken this on board. Many have set limits on investing in companies that earn a certain percentage of their revenues from coal mining or generating power by burning coal.
Others have taken a bolder stance. Austrian group Erste Asset Management, for example, has banned managers on all its funds from investing in securities which derive more than 30% of their revenues from the coal mining industry. In its sustainable funds, this limit is as strict as 5%.
Dominik Benedikt, a senior ESG analyst at the Vienna-based group, says Erste set the 30% limit by looking at guidelines drafted by institutional investors and analysing companies’ balance sheets. He believes investors should look closely at how a company defines its dependence on coal.
‘When you exceed 30% you go up fairly quickly in terms of coal revenues. When you go below that, it drops off quite fast as well. For us 30% is the sweet spot,’ Benedikt says.
‘An integrated utility, that generates power from coal and distributes that energy, may say that only 50% of its revenue comes from burning coal, while the other half comes from distribution. But you could still say that ultimately, 100% of its revenue stems from burning coal,’ he says.
Benedikt also believes coal is a bad investment from an economic view. ‘Many listed coal mines in China are operating with negative profit margins, as at least a third were loss-making in 2016. At some stage even the most convinced coal miner will have to admit that this might not be the best way forward,’ he says.
Steffen Hoerter, global head of ESG at Allianz Global Investors, agrees. ‘Research shows that photovoltaic and wind are already comparatively cheaper per kilowatt hour of power generation than coal-fired utilities. Other analysis claims that any new coal-firing power utility is already a dead asset from an economic perspective,’ Hoerter says.
Fuel for thought
So, if investors divest out of coal, where can they put their money instead? ‘You should think about what you want to support. If you assume climate change is real and you want contribute to financing the transition to a low carbon economy, you have to have a view on reinvestment. For example green bonds or renewable infrastructure,’ Hoerter says.
However, it is not always a straightforward switch from coal to renewables. Benedikt says investors need to remember the unstable performance of energy stocks, regardless of their environmental impact.
‘Unfortunately renewables can still be comparatively volatile investments, it depends on the investment horizon. In the short term, it can be an aggressive play. In the long term, we think it’s the place to be.
‘Energy is cyclical by definition. Even if you forego renewables and invest in oil & gas, you still have substantial volatility. For example, European oil majors have risen quite a lot recently, but they had been badly hit in the past,’ Benedikt says.
Robert De Guigné, head of socially responsible investing at Lombard Odier Investment Managers, warns that investors cannot simply stop investing in traditional energy providers. Lombard Odier currently excludes coal miners or companies which derive 20% of their energy from burning coal.
‘We want to go through the energy transition the smart way. If we decide to disinvest from all types of traditional power generation, we will never reach the Cop 21 targets, because we need to go smoothly down that route.
‘We will still need some gas and oil, as well as other types of energy sources by 2050. We can’t just pull out our investments all of a sudden because these companies are part of the transition towards a low carbon economy,’ De Guigné says.
He adds that, like any investment, you need to do your homework. Companies can put out all the statements they want but it’s the numbers that count.
‘Greenwashing is part of company behaviour. Our methodology tries to identify green washers to see how they are implementing their policy. Is it just through marketing, are they really taking action and is their ESG policy having an impact?
‘Our process allows us to spot a company which may have a high score in terms of marketing but poor results in practice. In that case there’s a good chance you’re dealing with a greenwasher,’ De Guigné says.
This article originally appeared in the June edition of Citywire Selector.