Lloyd’s of London insurer AXIS Capital announced yesterday it is limiting its exposure to thermal coal underwriting and investment, joining over 100 and counting globally significant financial institutions with coal finance restrictions in place.
IEEFA is tracking globally significant, public and private financial institutions in banking and insurance who have introduced formal coal restriction policies, including new announcements occurring almost weekly in 2019.
AXIS’ new policy announcement withdrawing the group from the construction of new thermal coal plants and mines, oil sands extraction and pipeline projects, and their dedicated infrastructure, highlights an increasing trend of global insurers recognising their important role in assisting the mitigation of rapidly rising global emissions.
Insurers have an important role to play in mitigating climate risk and transitioning to a low-carbon economy
AXIS President Albert A. Benchimol reflects this mood, stating: “insurers have an important role to play in mitigating climate risk and transitioning to a low-carbonThe company is re-orientating towards the “growth area” of renewable energy insurance.
AXIS’ coal withdrawal was signalled earlier this month when it ruled itself out from providing rail insurance for Adani’s new Carmichael thermal coal mine in Australia. The recently approved but still highly contentious mine, which Adani Enterprises now claims is self-funded due to its inability to attract investment partners, is proving to be a pivot point in the financial world as investors and lenders increasingly recognise climate risk and the urgent need to reduce global emissions.
AXIS JOINS A GROWING LIST OF GLOBAL INSURERS REFUSING TO INSURE THE HIGH EMITTING ADANI COAL PROJECT, including AXA SA, Allianz, Liberty Mutual Insurance Co, Munich Re, Swiss Re and Australia’s QBE and Suncorp.
It also brings the total count to 29 global insurers that have enacted formal coal insurance restrictions and associated divestments across their investment portfolios.
Insurers to re-evaluate if insuring coal mine and coal-fired power plant owners is an acceptable business risk
European insurers, UNIQA of Austria and MAPFRE of Spain, and French asset manager, BNP Paribas of France, brought in new restrictions on thermal coal financing, insurance and/or investments during March 2019.
In April 2019, Australia’s QBE Insurance announced the cessation of investment in and insurance for thermal coal projects; Switzerland’s UBS announced an updated coal power exit policy; Norway’s Government Pension Fund Global confirmed it will now invest in unlisted renewable energy infrastructure and is tightening criteria that will lead to divestment from large mines and coal-exposed power companies; and major German insurer Hannover Re announced a scaling back of its thermal coal exposure over the long term. While Hannover Re’s initial May 2018 coal policy proposal was mostly an effort in ‘greenwashing’, the institution revisited and tightened its policy in April 2019.
Following a February report showing a 45% decline in profitability due to increased extreme weather events, Suncorp limited coal insurance in July 2019.
Then in August 2019 Chubb U.S. became the first U.S. insurer to announce a formal coal exit policy, with Chairman and CEO Evan G. Greenberg stating the policy was a result of the company recognising “the reality of climate change and the substantial impact of human activity on our planet… The policy we are implementing today reflects Chubb’s commitment to do our part as a steward of the Earth.”
EVER MORE FREQUENT AND COSTLY EXTREME WEATHER EVENTS are forcing global insurers to re-evaluate if insuring coal mine and coal-fired power plant owners is an acceptable business risk.
Risk management, insurance brokerage and advisory firm Willis Towers Watson said in its 2019 review of power and renewable energy markets: “Insurers’ retreat from underwriting coal business has left coal-fired generators with a significant reduction in available capacity. This reduction in available capacity will invariably see upward pressure on rates and coverages as the competition for market share in this specific sector will be much more limited.”
Moody’s US published a report in August 2019 evaluating ArcLight Capital Partners’ Chief Power’s failure to finalize the syndication of a US$380m of senior secured notes, stating: “Moody’s believes that Chief’s elevated carbon transition risk as an owner of undivided interests in two coal-fired power plants was a primary factor as investor interest in lending to coal-fired generators continues to shrink in the face of stricter standards for invested capital as investors increasingly look to incorporate environmental, social or governance factors (ESG) into their investment strategies”.
And Peabody Energy’s annual SEC filings for 2018 note: “Our financial assurance obligations may increase or become more costly due to a number of factors, and surety bonds and letters of credit may not be available to us, particularly in light of some insurance companies’ announced unwillingness to support fossil fuel companies”.
COAL FINANCING IS GETTING MORE AND MORE DIFFICULT as insurers and lenders increasingly read the climate and energy transition.
In July 2019 BHP surprised the world’s mining industry by announcing the company was stepping up its commitment to align with the Paris Agreement. CEO Andrew Mackenzie acknowledged that climate change evidence is indisputable and global warming represented an existential threat to humankind. BHP had already recognized in May 2019 that thermal coal will be phased out.
Then in August 2019, Guillermo Fonseca, CEO of Colombian coal producer Cerrejon, jointly owned by BHP, Glencore Plc and AngloAmerican, stated , stating: “The large impact we foresaw from the market disappearing, we always saw as out there in the future. Well, the future is now.”
The coal industry is in terminal decline
In September 2019, Neil Johnson, a MD at Macquarie infrastructure and Real Assets, spoke about the capital flight from coal at the Belt and Road Summit in Hong: “Japanese banks and South Korean banks, two of the stalwarts of the power plants financing in Southeast Asia, have followed their western counterparts to largely move away from coal-fired project financing”.
FUNDS ARE BECOMING HARDER TO ACCESS DUE TO THE PROGRESSIVE WITHDRAWAL OF CAPITAL from the global thermal coal mining and coal-fired power sector over 2018/19.
The US$1,000bn Norwegian sovereign wealth fund has been the most visible of global asset owners divesting the most carbon intensive companies globally. But they are now far from alone.
In September 2019 it was reported that over 1,100 asset owners and investors managing a collective US$11 trillion have announced divestment plans, including the latest high profile addition, a US$80bn divestment announcement by the University of California, where Jagdeep Singh Bachher, UC’s Chief Investment Officer, was at pains to highlight this was done purely on financial risk assessment grounds.
And global investors worth by 2050 stating more needs to be done to “accelerate the low carbon transition”.
The increasing capital flight from coal indicates the change forecast in the energy transition is here.
Tim Buckley is director of energy finance studies, IEEFA Australasia.