Do we need to get coal out of the energy system? Absolutely. When do we need to do it? As soon as possible. These two points are not in question. How we do it is more nuanced.
Let us first look at the numbers. Coal accounts for 40% of our global fossil CO2 emissions. Coal use rose in the mid-2000s, overtaking oil, which is now responsible for 34% of emissions. Coal emits nearly twice as much CO2 as gas, and two-thirds of coal emissions arise from electricity and heat generation.
This makes coal an obvious target for immediate replacement by renewables, in combination with gas. Investors have been divesting out of coal for some years now, and one might therefore assume it is rapidly falling out of favour. Unfortunately, this is not the case.
Coal demand has slowed, but there is no collapse, with China and emerging markets like India continuing to drive uptake. Global demand rose in seven out of the past ten years, including 2017 and 2018. Coal use fell by 1.7% in 2019, and was expected to fall 5% in 2020, less than the 9% drop expected in oil demand due to COVID-19 – but is projected to bounce with economic growth in 2021.
Does divestment work?
How can investors play their part in taking coal out of the energy mix? One approach is divestment, through selling shares and bonds of companies that generate revenue from coal. Both Norway’s Government Pension Fund Global (“GPFG”) and Sweden’s AP2 have taken this approach. GPFG divested from Anglo American last year, whilst AP2 sets strict criteria, with a 1% limit on turnover from coal. It has divested from 23 coal producing companies since 2013.
However, if a fund divests shares in a company that owns coal assets, those shares don’t disappear – another investor buys them. In effect, the capital is already in place, the existing assets are already funded. The investor who divested the assets did little to remove coal from the energy mix, or CO2 emissions from the atmosphere. They likely just passed on assets at an attractive price to a less ethically-minded investor.
Were Anglo American to stop mining coal in South Africa, and shut down their mines, they would lose their mining licence and the government would give the rights to another business. The net effect is shifting ownership, but it will not stop mining unless regulation or market signals dictate. The risk then is that divestment is a distraction from what needs to be done.
Cutting out coal requires a multi-pronged strategy
The focus of investors should be on giving a clear message to management and boards that they do not want to see capex deployed on developing coal assets. One successful example of this was the victory of the shareholders of Enea, a Polish energy company, stopping the construction of a new coal-fired power unit in 2019. Secondly, they can influence the banking sector, ensuring lenders don’t finance new coal assets. Thirdly, they can ensure that no companies in their portfolios have coal in their supply chain. The most obvious way to do this is to pressure companies not to buy coal-generated electricity.
Yet even with these actions, there is unlikely to be a global collapse in coal. For that to happen we would need to increase the cost of carbon emissions, via carbon pricing or a carbon tax. It is only with this regulatory pressure that companies will cease producing from existing coal mines, stranding existing coal assets and stopping new development. Auctions could also be used to retire coal-powered plants, following Germany’s lead.
It is likely that in the absence of global agreement, there will have to be a carbon border adjustment. The EU is currently considering such a mechanism. This will help end the offshoring of our developed market emissions to the developing world, and force decarbonisation in China. If effective carbon pricing and carbon taxes, introduced globally, were to happen in the next ten years, then divesting from coal-dependent companies now is likely the best strategy for an investor.
Divesting with care
One final point on sustainability. While we want to close coal mines as soon as possible, we must bear in mind the large numbers of workers and communities dependent on such mines. In South Africa, 92,000 people are directly employed in the coal industry, with potentially four to five times that number of jobs dependent on the industry. Meanwhile, Coal India, the national coal company, employs 270,000 workers. In the UK we have some understanding of clumsily closing coal mines and the societal impacts; since the 1980s the UK coal industry has shed over 250,000 jobs. These jobs were concentrated in areas such as South Wales. Decades after the job losses, we continue to see the social impacts through high unemployment, poor health and high rates of poverty in former coal mining regions. A divestment strategy, based on ethical considerations, must act to mitigate these acute social impacts, ensuing local communities are not overlooked in the goal to get coal assets off our hands.
The statements and opinions expressed in this article are those of the author as of the date of publication, and do not necessarily represent the view of RWC Partners Limited. This article does not constitute investment advice and the information shown above is for illustrative purposes only and should not be construed as a recommendation or advice to buy or sell any security. No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment
