The news is all over the world: Norway’s giant sovereign wealth fund – the largest in the world – will divest from companies which base more than 30% of their activities on coal.
Given the reputation of the Norwegian fund (the GPFG), it is not hard to believe that this news will cause – to use a more Scandinavian metaphor – a snowball effect. For sure, it sets a new gold standard for divestment. Still, many ask the question: will divestment really have an effect? What if other investors, with less stringent environmental standards, simply buy the stock instead?
Nobody has the definitive answer, since there are no automatic and foreseeable consequences in the stock market. But we have enough data to believe that this type of divestment will have a significant impact.
Does this mean the end of coal overnight? No. Does this mean that the end of financial support for coal is drawing ever nearer? Yes, as different pieces of the big puzzle come together.
Demand and offer: not all divestments are born equal
The first piece of the puzzle is how you divest: some investors may only divest from coal-mining companies (the offer side), and not from coal-burning utilities (demand side). The problem is that miners do not extract coal just because it is fun, but because there is someone who buys it. Utilities drive the demand by buying and burning coal to generate electricity.
While this made sense some decades ago, nowadays coal can be easily replaced with already competitive renewable energy technologies. Moreover, coal burning is under high regulatory pressure, since 90% of emissions arise when coal is burned.
The GPFG will set a clear cross-cut threshold (30% based on coal) which gives a strong guidance for utilities to reduce their reliance on coal. This will contribute to reduce the demand for coal, promote alternatives and contribute to the existing structural decline of the coal sector.
Life for coal companies gets tougher
The second piece of the puzzle is that divestment can increase the stigmatization of an industry, make it harder to get reasonable financing and ultimately affect the stock price. This will, in turn, decrease the ability of the companies to, for instance, open a new coal mine or a new coal-fired power plant.
With lower stock prices, even if other investors buy the share, this still means less money for the company to run their business.
Other investors will buy, so what difference does it make?
In principle yes, some sell, others buy. The important “but” here is that it is far from obvious that others are interested in buying, especially when it comes to the coal sector. A report from the IEEFA summarizes the state of financial analysis on coal, and confirms that the sector is in a “wrenching structural decline” and there is diminished interest in coal as an investment.
This mean that less and less investors will buy the shares.
One piece of clear evidence supporting this is the fact that all major coal indices lost more than 50% in the past years  while the global market indices gained significantly (+70% ). This level of value loss, added with a strong reduction in the price of coal (-40% since 2011), means investors are abandoning coal.
This is in line with the fact that, according to many analysts , the sector is in structural decline, the market is oversupplied, and few believe in a possible recovery. As Goldman Sachs points out, coal has reached the retirement age, and the golden years are unlikely to return.
All in all, does it make a difference if the world needs more coal?
The final piece of the puzzle is the demand side. The industry and others underline that demand for coal is still high, and that coal is an important part of the energy mix. Sure, we still have to reach the peak of coal, but growth forecasts have been regularly downgraded, as demand growth in China – the largest coal market – has slowed down sharply after the boom of the last decade. Last year, China’s coal use fell for the first time in 14 years, and some expect the peak to be as early as 2016.
The forecast for the global coal demand growth has been significantly reduced, from 9,4% in 2011 to today’s 2,1%, down from 2,3% last year. At the same time, forecasts for renewable energy have been systematically upgraded. This trend, coupled with the fact that in 2013 the world installed – for the first time – more renewable electricity capacity than fossil fuels based plants, and together with many other indicators, gives a fair indication of where we are heading.
Of course you could have faith that, someday, somehow, incredible technologies like carbon capture and storage (CCS)  will be able to clean the emissions and wipe out all environmental impacts of coal, which still contains over 20 heavy metals which need to be processed in some way.
But I’d like to remember Lavoisier’s (1743-94) law of conservation of mass: “Nothing is lost, nothing is created, everything is transformed.”
 Stowe Coal Index, -71% in past 5 years. Bloomberg Global Coal Index, -56% in 2011-2014. Dow Jones U.S. Coal Index -70% in past 5 years.
 For example, IEEFA, Citi, J.P. Morgan, HSBC, Goldman Sachs, Deutsche Bank, Bernstein Research.
 Goldman Sachs, among others, believe that “CCS is likely to account for less than 0.2% of the world’s global coal-fired fleet in 2020”.
About the author: Born and raised in the South of Italy, Stefano Esposito is a political scientist with a master in International relations and European studies from the University of Bologna, which dates back to 1088 AD (the University, not the degree…). He works as advisor sustainable finance in WWF’s climate and energy team since 2013. Long-standing vegetarian, he likes to explore tastes and foods from other cultures. And yes, Norwegian broccoli and potatoes are on the list!
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