Norway pension fund urged to dump $12bn in high-risk coal investments

A new report has called on one of the world’s biggest public funds, the $US900 billion Norwegian Government Pension Fund Global (GPFG), to reduce its exposure to what it describes as the “worst performing sector in the global economy,” by dumping its coal industry holdings, currently valued at just under $US12 billion.

The report, released on Monday by the Institute for Energy Economics and Financial Analysis (IEEFA), paints a grim picture for global coal industry and recommends “prudent investors” steer clear of coal holdings altogether.

“We see very little upside potential in coal,” says the report’s author, IEEFA’s US-based director of finance, Tom Sanzillo. “And we believe the cyclical recoveries in which coal stocks and coal demand have historically rebounded are probably a thing of the past.

“Coal faces obsolescence from a combination of forces,” Sanzillio adds, “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.”

In March this year, analysis emerged showing that the GPFG had divested from 53 coal companies in 2014, dumping 16 US companies including Peabody Energy and the mountain-top-removal companies Arch Coal and Alpha Natural Resources. The fund also dropped 13 Indian companies, including the giant Coal India.

In its report this week, IEEFA says the Fund must now “build promptly” on its earlier divestment of “pure-play” coal companies by divesting utilities and companies that rely on coal for more than 20 per cent of their activity or mine more than 50 million tonnes of coal. And it recommends this divestment strategy be mandated by the Norwegian parliament.

IEEFA notes the recent decline in coal-company stock prices, as well as in stocks of coal-burning utilities.

For example, Germany’s RWE – which is among the Norwegian fund’s top utility holdings, and derives 61 per cent of its energy production from coal – is also one of its poorest performers, with a market capitalisation that has plummeted from €50 billion in 2007 to €13.7 billion today, says the report.

The report recommends the following coal divestment measures be taken:

· A “clear, effective and achievable” divestment mandate by the Norwegian Parliament (Stortinget) to be implemented by Fund managers.

· 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.

IEEFA also recommends against the Fund adopting a strategy of “company engagement” rather than divestment.

“A process of mere engagement will be futile,” it says, citing the coal industry’s history of intransigence in dealing with environmental and climate change initiatives, including a range of shareholder engagement initiatives in the US.

“The whole engagement discussion relies on companies being open to taking a rational long term perspective of their fiduciary duties to shareholders,” said IEEFA’s director of Energy Finance Studies Australasia,Tim Buckley.

“Coal mining companies have generally failed to deliver, and their shareholders have suffered serious, sustained wealth destruction as a result.”

“IEEFA questions why would global investors continue to support companies who ignore key market changes? Worse, by building excess supply, these very projects further erode the profitability of the existing Australian coal mining industry,” Buckley said.

“Coal’s time has passed,” said Sanzillo. “The sooner managers of the Norwegian Government Pension Fund Global accept this truth, the sooner pension recipients will be spared needless risk.”