The global coal industry has become an increasingly risky investment unfit for any investment fund with a fiduciary duty to those it serves.
We’ve just published a report that makes the point in no uncertain terms with regard to one of the world’s biggest public funds, the Norwegian Government Pension Fund Global (GPFG), whose total coal-sector holdings are valued today at roughly $12 billion.
Granted, GPFG has made strides over the years in divesting from coal, but our research indicates that the fund’s managers have not gone far enough. Coal holdings are simply too risky to own in this day and age. The industry is arguably the poorest-performing sector in the world and is in a state of deep structural decline simply because coal markets are not what they used to be. Nor will they likely recover.
We see very little upside potential in coal, and we believe the cyclical recoveries in which coal stocks and coal demand have historically rebounded are probably a thing of the past. To be sure, coal will remain part of the global energy mix, but its portion of that mix will continue to decline. Coal faces obsolescence from a combination of forces, including competition from wind and solar, growing concerns over climate and air pollution issues that lead to more restrictive coal-usage policies, and new waves of public opposition.
Our research notes that coal-company stock prices have collapsed in recent years and that the stocks of coal-burning utilities are in decline too. We note that over the past five years, the Stowe Global Coal Index—an important gauge of coal-industry performance—has lost 71 percent of its value
COAL HOLDINGS TODAY ARE BEST AVOIDED ALTOGETHER, YET GPFG CONTINUES TO OWN COAL ASSETS. Germany’s RWE AG is among the fund’s top utility holdings, for example, although the company derives 61 percent of its energy production from coal and is one of the poorest performers on the GPFG utility list (RWE AG’s market capitalization has plummeted from EUR50 billion in 2007 to EUR13.7 billion today).
Such holdings run counter to GPFG’s otherwise progressive skepticism around coal investments. The fund has fully divested, after all, from “pure-play” coal companies whose business consists entirely of coal-related activity. Now is the time for the fund to build on this wise policy.
We recommend the following course of action:
- A parliamentary mandate that gives fund managers clear, effective and achievable divestment guidelines to follow.
- Full divestment of companies with more than 20 percent of their production in coal or that mine more than 50 million tons of coal per year.
- Full divestment of utilities and power-generation companies that get more than 20 percent of their generation capacity mix from coal-fired power plants.
WE URGE PROMPT ACTION BY GPFG, AS WEAKENING GLOBAL COAL MARKETS CONTINUE TO BE HOBBLED by broader adoption of energy efficiency and by fast-rising, competing forms of energy.
And we discourage the strategy of “company engagement” over divestment. While a fund Expert Group appointed by the Ministry of Finance has recommended the former, the fact is that the coal industry has a deep history of intransigence in dealing with environmental and climate change initiatives. It has rebuffed a series of shareholder engagement initiatives on climate change in the U.S. and has generally refused to innovate in the face of changing energy markets.
Coal’s time has passed. The sooner managers of the Norwegian Government Pension Fund Global accept this truth, the sooner pension recipients will be spared needless risk.
Tom Sanzillo is IEEFA’s director of finance.