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Finding ways to assess and interpret climate impacts on coal companies and markets is increasingly necessary in order for investors to reap the opportunities that come with a changing climate, and not remain passive in the face of change.
By James Wellstead—Exclusive to Coal Investing News
Coal markets
In the face of climate risks and opportunities, institutional investors and activist shareholders are beginning to press companies on the importance of climate awareness in their investment portfolios and operations. Recently in the United States, 66 climate and energy-related shareholder resolutions were logged on 44 coal, oil and energy companies, a 50 percent increase in resolutions made in 2010. Companies such as Peabody Energy (NYSE:BTU), International Coal Group (NYSE:ICO), Alpha Natural Resources (NYSE:ANR) and Massey Energy (NYSE:MEE) have received shareholder motions related to concerns over greenhouse gas (GHG) emissions and the financial burdens that potential climate policies (e.g. cap and trade or carbon taxes) may carry on companies bottom-line.
Some coal companies have been on the leading edge firms adapting to the challenges that climate change will bring for coal production. Rio Tinto (NYSE:RIO) (LON:RIO) (ASX:RIO) has been one predominant company engaged in assessing, mitigating and minimizing its impacts from climate change. But as a large carbon emitter, the risk of carbon policies such as taxes or cap-and-trade schemes remains a real challenge, as it does for many energy-intensive coal operations.
Assessing the risk
A February 2011 report released by Mercer Global Investments has developed a framework for understanding the risks of climate change faced by investors. The report outlined a series of steps for investors to take in order to assess which of the company’s assets are climate sensitive and take proactive steps to adopt an “early warning” risk management process. While the brunt of the report was directed at institutional investors, and focused on a range of asset classes (infrastructure, real estate, private equity, agricultural land, timberland and sustainable assets), the importance of climate related impacts on coal and other extractive industries can heed the same advice provided by a growing number of investment houses.
Carbon taxes are one big concern. Outside of the political uncertainty within the United States, numerous European countries, including Finland, Sweden, and the UK have all made moves in terms of implementing taxation schemes. But even some developing countries, such as coal mining heavy weight South Africa, have started to move toward implementing policies which limit the amount of carbon emitted within the country. Beyond the national context, provinces like British Columbia and Quebec in Canada, and even municipalities such as Boulder, Colorado have experimented with various plans.
Outside of the framework developed by Mercer, there have been a number of instruments developed to help investors assess the potential risk of specific companies. The Carbon Disclosure Project is a leading source of information on the GHG emissions and climate change adaptation actions of global corporations. The Investor Network on Climate Risk (INCR) also provides tools for corporate leaders and investors with responsibilities related to risk management, governance or climate regulations. The World Resources Institute has developed a question list intended to help investors assess the amount of risk from climate change impacts and policies.
More specifically with a developing world perspective, the International Finance Corporation (IFC) also documents and studies the risks related to climate change for investors. In a 2010 report, the IFC stated that “the appropriate adaptation actions and associated costs for a given client are highly specific to the assets or processes being adapted.” As such, paying specific attention to the sector, geographical region and the realm of political and physical impact risks is required for investors to remain on top of this evolving component of investment.
Climate risks in australia
The issue of climate risks is making news in Australia in the wake of a report produced by Ross Garnault over the impact of carbon prices on electricity production across the country. The report warned that consumers face electricity bill increases of up to 27 percent from July 1, when the government’s federal renewable energy target comes into effect. Australia’s electricity production relies heavily upon thermal coal production. The claims made in the report were not well received by electricity industry leaders who criticised the report as being “naive” and “commercially unsophisticated.” Specifically, International Power’s corporate affairs manager, Jim Kouts, said that “any change to legislation that destroys equity virtually overnight would clearly be a sovereign risk issue and there is no doubt that International Power and other owners of generating assets will reserve their right to pursue full compensation for their investments.” While the risk of these policy reforms quickly sweeping away equity is likely to be fairly well legally protected in the face of such policy changes, carbon tax risk is real.
Finding ways to assess and interpret climate impacts on coal companies and markets is increasingly necessary in order for investors to reap the opportunities that come with a changing climate, and not remain passive in the face of change.