The international political landscape is moving fast - to date 127 countries responsible for around 63% of global emissions are considering or have adopted net zero targets. Whilst regulations do not yet reflect political ambitions, it is expected that they will follow to expedite the adoption of new technologies to decarbonise the energy system. We recognise that there are still some obstacles to reducing coal power generation in the short term in certain emerging markets, whilst satisfying the growing energy demands of increasing populations and economic development. Yet building new coal power plants today with expected working lives of 40 years or more is incompatible with reducing carbon emissions in line with the Paris Agreement, and is likely to lead to stranded assets in time.
Implementation
Addressing coal is a key building block in our net zero investment framework, and provides the foundation for approaching other high carbon investments.
As an asset owner
We will be implementing our approach to coal-related investments across our own internal investment portfolios over the coming year.
As an asset manager
We work in partnership with our clients to achieve their investment objectives, and we will be engaging with them on our approach to coal-related investments as a key step in the journey transitioning their investments to net zero by 2050.
We believe in active asset ownership and management which encourages companies to transition towards a sustainable future. Our approach applies to all listed equity and public fixed income investments, and we are using third party data providers MSCI, ISS and the Global Coal Exclusions List (GCEL) to identify the initial list of ‘coal-related’ issuers in scope. However, the third-party data available is generally historic and can be subject to inaccuracies and obsolescence. We wish to place due emphasis on forward-looking factors in addition to the coal expansion criteria, and therefore we are undertaking detailed qualitative analysis of securities across benchmarks and portfolios in order to determine:
- The accuracy of the population captured by the screens, undertaking further investigation to eliminate false-positives.
- The nature of companies’ transition plans, the extent to which they are aligned to the Paris Agreement, and the further information required to determine their credibility and to evidence progress made towards Paris alignment.
- The list of companies which clearly fail our criteria and therefore qualify for divestment or exclusion.
- Where engagement is appropriate, to define the objectives and actions required within a specified time period for each company, to support their phase-out from coal and transition to Paris alignment.
We will incorporate the coal-related investments identified for engagement within our climate engagement “Hot List”. The Hot List was created in 2020, and has focused our climate change engagement on the largest companies with high carbon emissions, particularly laggards. Meaningful engagement with our investee companies on climate change is part of what makes active investment so powerful, whether acting on our own or working collectively as part of the Institutional Investors Group on Climate Change or Climate Action 100+.
We are implementing this approach in two phases. In the first phase, we have been engaging with clients on our coal approach; completing forward-looking qualitative screening; engaging with investee companies; and making changes to funds and mandates to prepare to go live. In the second phase, from April 2022 we will begin the divestment process in developed markets, with divestment in emerging markets following two years later.
1. IIGCC paper: Accelerating the transition to zero emissions in the power sector, November 2020
2. ‘Unabated’ refers to coal power generation without any technologies to substantially reduce CO2 emissions, e.g. operational carbon capture and storage