Global Institutional Investors Increasingly ‘Shunning Coal’

Major financial institutions are increasingly committed to divesting from coal, according to a new report from the Institute for Energy Economics and Financial Analysis, with Europe “undisputedly leading the divestment wave.”

According to the report, more than 200 “globally significant financial institutions” have established coal exclusion policies, with divestment accelerating in the last two years despite coal companies raking in record profits due to the global energy crisis. The IEEFA defines “globally significant financial institutions” as institutional investors with at least $10 billion in assets under management or loans outstanding or assets.

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The IEEFA report identified two prominent trends redefining capital markets. The first is a move away from high-emissions fossil fuels due to “accelerating climate action” and advanced clean energy technologies. The second is an increased understanding of climate risk as a source of systemic risk to the global financial system.

The response to both trends, according to the report, has been diversification away from fossil fuels such as coal. A growing number of financial institutions are quickly establishing policies to exit coal in an effort to decarbonize their operations and commit to net-zero targets.

“Institutions are getting tougher on what they will finance, and they have identified coal as a risky investment,” Christina Ng, IEEFA’s debt markets leader for Asia Pacific, said in a release. “They see climate risk as a financial risk.” [Source]

According to the IEEFA report, more than 300 global asset managers with $59 trillion of cumulative assets under management and 84 global asset owners with an aggregate of $11 trillion in AUM are currently members of the Net Zero Asset Managers initiative and Net Zero Asset Owner Alliance, respectively. Additionally, 87 global banks with assets greater than $10 billion have committed to restricting their lending to coal projects.

This is followed by 51 insurance/reinsurance companies and 36 asset managers and owners, including pension funds, with total assets under management of more than $50 billion that have set coal restriction policies. According to the report, 48 out of 87 banks on the list have joined the United Nations Net Zero Banking Alliance, which, as of February, represents approximately $73 trillion.

In just the last two years, 47 banks have bolstered their coal exit policies, while 16 banks have announced that they plan to exit coal completely. Although half of these new entrants are from Asia, “Europe is undisputedly leading the divestment wave,” the report stated. “Many European countries have set ambitious climate goals, and divestment from coal is seen as an essential step towards achieving these goals.”

The report also identified Asia-Pacific institutional investors as rapidly increasing coal divestment, with 53 now having formal exit policies, up from only seven before 2019. However, Europe still has far more institutional investors with stricter coal policies with 114, compared with 53 in the Asia-Pacific region, 27 in North America, six in Africa and two in South America.

The IEEFA found that while the momentum on coal exit policies has been increasing, financial institutions need to completely diversify away from climate risks that come with exposure to coal assets and close loopholes that will allow them to continue investing in companies that generate significant revenue from coal.

“As low-carbon technologies attain scale and achieve commercial viability, and as action on climate-related risks to financial markets accelerate, fossil fuels such as coal will keep losing interest both in the real and the financial economy,” the report stated.