There is clear evidence that global energy markets are being disrupted by technology innovation. Global warming remains toxic in Australian politics due to the power of the incumbent fossil fuel industry. In part because of this, there are an increasing number of Australian corporates stepping up to show leadership on this critical financial risk. IFM investors is the latest.
There are a multitude of reasons to consider the financial risks confronting the energy sector. Five years ago coal-fired power was the least-cost solution in most markets, but not today.
Unsubsidised renewable energy is the least-cost new source of electricity from India to Australia, and we can add China to this list in 2020. Ever more frequent 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.
Today we have seen IFM Investors taking a leadership position, announcing it would formalise and report on its Australian infrastructure portfolio’s emissions reduction targets.
IFM head of Australian infrastructure, Michael Hanna, said: “This exciting initiative represents a genuine commitment, and start, to aligning our assets to the Paris Agreement, and it makes perfect business sense by reducing costs, mitigating future business risks and contributing to outcomes that our customers value.”
Coal is the most emissions-intensive and polluting fossil fuel, so it is the most exposed and first to experience widespread coal exit policies. IEEFA has tracked policy announcements, and our count has reached 115 globally significant financial institutions across banking and insurance that have formal policies.
The $US1,000 billion 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. There are over 1,100 organisations managing a collective $US8.8 trillion of investments globally that have pledged to divest from fossil fuels.
Chief Executive Officer (CEO) Andrew Mackenzie surprised the world’s mining industry in July 2019 by announcing that BHP was stepping up its commitment to embrace the Paris Agreement, acknowledging the evidence is indisputable and that it represented an existential threat to humankind.
He concluded that it was critically important for BHP to act on the science and set in train a decarbonisation of the business, including taking responsibility for the downstream use of BHP’s products, particularly thermal coal. Mackenzie has tied executive compensation to joint action on this key goal. That the board of the world’s largest mining company has signed off on this climate policy is a key step forward.
Nor is BHP alone. South32 has announced its plan to exit thermal coal globally, as has Anglo-American. Rio Tinto and Wesfarmers have both divested their entire exposure to coal over 2012-2018, without shareholder wealth destruction.
Coal lobbyists claim the world can’t survive without coal-fired power generation. Today, that statement holds true for many countries slow to act. But an ever-increasing majority of global electricity generation investment in recent years has been directed to zero-emissions alternatives. The progress to shift to alternatives has been staggering. Coal use for power generation across the whole of the European Union in the first six months of 2019 is down 19% year-on-year.
Japan is Australia’s largest export destination for coal. It is therefore very significant for us that in September 2018 Marubeni Corporation announced its commitment to immediately cease building and/or financing any more new coal plants. Marubeni announced a pivot to accelerate their investments in developing renewable energy infrastructure instead. And Sumitomo Corp has followed suit in August 2019.
The speed of technology change in the energy sector is catching everyone by surprise. Relative costs are shifting rapidly. Solar costs are down 80% over the last five years. Lithium-ion battery costs are likewise down a similar order of magnitude. As coal-fired power plant technologies have been modernised to reduce carbon emission intensity by 10-20%, the capital cost has risen by upwards of 50% in the same period.
Across Asia, unsustainably bad air pollution is now a leading electoral issues and driving policy change from South Korea, Taiwan, China and India. Even Indonesia’s President Joko Widodo vowed in August 2019 to reduce his country’s reliance on coal. This is telling for Australia, given Indonesia is the world’s largest exporter of thermal coal.
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. Over 28 globally significant insurers have now enacted formal coal insurance restrictions and associated divestments across their investment portfolios. August 2019 represented something of a breakthrough, with Chubb being the first U.S. insurer to announce a formal coal exit policy.
Coal is the most emissions intensive and polluting fossil fuel, so it is the most exposed. IEEFA expects most energy companies to embrace this technology disruption and transition their business models to progressively decarbonise. However, there are many incumbent fossil fuel firms who are in denial of the science and that continue on with business models inconsistent with a liveable plant.
IEEFA has written about the near $US200 billion of shareholder wealth destruction at General Electric U.S. in the last three years. This is a foretaste for any investor who don’t take a proactive review of this growing financial risk.