In this context, climate change is one of the greatest challenges for Insight to navigate. It is unique in terms of its complexity, uncertainty and scope for material value destruction and indeed opportunities for value creation. It also divides people and societies, both culturally and intellectually. As a global business, we are aware that we need to be sensitive to the needs of our client base across the world and our policies need to represent them and their interests. Equally, we are cognisant that challenges like climate change cannot be addressed without institutions like Insight taking action. It is for this reason that we signed up in 2021 to the Net Zero Asset Managers initiative1 and below we outline our first firmwide position on thermal coal.
The sixth assessment report issued by the Intergovernmental Panel on Climate change (IPCC)2 in 2022 made clear that human-induced greenhouse gas emissions are responsible for global warming and its related climate events. Unless there are immediate, rapid and large-scale reductions in greenhouse gas emissions, limiting global warming to close to 1.5ºC or even 2.0ºC will be beyond reach3. The damage that temperature rises of this quantum would cause, both to the environment, society and financial markets, are well documented. It is our view that we have a role as stewards of our clients’ capital to prevent such a scenario and ensuring a phase-out of thermal coal is central to that.
Why thermal coal?
According to the International Energy Agency (IEA)4, carbon dioxide emitted from coal combustion has been responsible for over 0.3 ºC of the 1ºC temperature increase in global average annual surface temperatures from pre-industrial levels making it the single biggest contributor to anthropogenic climate change. Even today, it remains a key source of the global energy mix contributing around 40% of global electricity supply and makes up one quarter of all carbon dioxide emissions globally. While other industries have fewer transition options, there are clear, economically viable alternatives in the electric power sector evidenced by the plunging price of renewable energy (albeit not without issues around reliability and storage). Put simply, in our view, thermal coal does not present a long-term viable fuel source in a world which needs to cut its carbon consumption. We believe, therefore, that businesses that rely on thermal coal as an important part of their operating model, by extension, do not have a long-term future. In addition to a substantial pecuniary risk to direct holdings, we are also conscious of the indirect systemic risks resulting from such investments.
In time, we expect to broaden this position paper to other carbon sources. Lack of data, particularly on scope 3 emissions, makes it hard to do this initially but we believe thermal coal exposures provide an obvious first step.
Thermal coal phase-out
In our view, addressing thermal coal exposures is a financial imperative due to the potential pecuniary risks they present. To do this, Insight believes that engagement is likely to be more impactful than divestment. Engagement activity is an important aspect of our investment approach and our preference is to work with issuers wherever possible to ensure better outcomes for them, for our investors and for broader society. We are also aware, however, that when it comes to climate action, time is short and the timeliness of action matters. In this context and subject to our screening process and the available data, we are taking steps to phase out our exposure to coal companies5 in the relevant portfolios (see Scope section below) by 2030 for OECD-domiciled issuers and 2040 for issuers domiciled in the rest of the world, in line with the IPCC’s aim to limit global warming to 1.5ºC, while balancing the imperatives of a “just transition” as stated in the Paris Agreement (a “Just Transition”).
Our phase-out will begin with an initial process to screen holdings where material thermal coal exposure exists. Using internal and external research, we will initially look to screen for issuers where the level of corporate involvement exceeds that set out below. We expect that we will continue to tighten these thresholds as time progresses:
Table 1: Thermal coal mining companies
|New coal mines||Any new coal mine development|
Table 2: Thermal coal power generation companies
|Revenue||>20% OECD, 30% Rest of World|
|New coal generation||Any new coal generation development|
If any of these characteristics are met, they will be included on our exposure list.
Review and engagement selection
Once this exposure list is generated, we will look to review each company’s decarbonisation plan and specifically their roadmap for exiting thermal coal. When reviewing the list, we will seek to prioritise issuers with the greatest coal revenue weight in the first instance but anticipate both lowering the revenue threshold and increasing the relative importance of gross emissions, capacity and new assets in the coming years. At this point in the process, we expect to identify certain laggards that have no plan to exit their thermal coal exposure in line with the committed timescales and we will make a decision on whether an attempt at engagement is appropriate or a divestment should be enacted. Our holdings in companies that would be included on the list are already limited since climate risk assessment has been part of our core investment process for a significant period of time.
For companies that are identified as having decarbonisation and phase-out plans compatible with the timelines specified, we will put them on a ‘monitoring watchlist’ to seek to ascertain ongoing progress towards those targets but may maintain investments in them and potentially add new positions.
For companies that are identified as having decarbonisation and phase-out plans but where the timelines are not sufficiently aggressive, we will look to undertake a structured engagement programme with clear annual progress targets that we would expect them to meet to create a roadmap to achieving our overall phase-out in line with our ambitions. Failure to adhere to the roadmap will place a company on a ‘divestment watchlist’ with a period of 12 months to move back into line with the expected trajectory. Securities of a company which is out of line for longer than a 12-month period may be sold if we see this as a reflection that the company is not managing a key risk factor effectively and that as a result there is the potential for pecuniary impairment.
Figure 1: Proposed timeline*
*While we will endeavour to effect the phase out of coal companies by the timeframe specified (2030 for OECD jurisdictions and 2040 for the rest of the world), the steps for implementation are indicative and for illustrative purposes only and are subject to change, not least if scientific evidence or market policies evolve.
We recognise the scale and complexities of the ambition we have stated. The recent energy squeeze has illustrated the current reliance on thermal coal and many developing countries face severe energy shortages without it. It is for this reason that we have set a longer time horizon for non-OECD issuers to be compliant. As part of the analysis of phase-out plans, we will consider how companies are managing the Just Transition in countries or regions where there is significant economic dependence on thermal coal.
Institutions financing coal
In addition to phasing-out direct coal financing, we will also focus on engaging with financial institutions that continue to finance coal with a view to targeting that they too phase it out of their business. As a major investor in, and counterparty to, many financial institutions, we believe we have a significant opportunity to engage and influence change in this area.
We will initially analyse our exposure to the top financial institutions involved in thermal coal using a combination of internal and external data and then conduct a research-led engagement programme to ascertain the effectiveness of their phase-out approach. Where programmes fall short, we will seek to encourage change and may ultimately withdraw funding or trading where we feel risks related to thermal coal financing and insurance are not being sufficiently addressed and mitigated.
We intend to follow the approach set out in this document for all segregated and pooled discretionary-managed portfolios containing corporate holdings unless a client specifically requests or instructs otherwise or we consider (in our judgment) that this approach is inconsistent with the mandate or strategy (including the investment objectives and investment guidelines of the client or fund). This is because we see this approach as sensible risk management.
Any exclusions applied by us pursuant to this position paper are subject to the mandate we have with our clients and this position paper will not amend any contracts that we have with our clients.
For clarity, the approach will cover physical corporate instruments and single-name derivatives only. In many cases, thermal coal exposure may vary at issuing entity level and Insight will use its discretion to judge the relevance in each case before making investment decisions.
Investments that follow systematic management strategies (physical or synthetic) without binding environmental, social or governance (ESG) criteria relating to thermal coal may not follow this approach. Similarly, indirect exposures arising from holdings in units or shares in collective investment schemes will not be captured by the approach set out in this paper.
Whilst some investors are happy to invest in companies that are transitioning, we recognise that some investors have a ‘red line’ on investing in thermal coal.
For such investors, we adopt an exclusionary policy in our Responsible Horizons strategies (and a number of tailored client-specific segregated portfolios) which prevent investment in coal miners where revenue is greater than 5% from coal and utilities where coal generation revenue is greater than 10% unless the instrument being purchased is a use-of-proceeds bond and is part of a clearly defined corporate decarbonisation plan.
We expect to continue to monitor these limits over time and adjust them down as global decarbonisation trends take effect.
Our commitments under this position paper are subject to any express contractual, regulatory and legal duties to which we are bound, including in relation to the portfolio, fund or product (as the case may be). This position paper may be reviewed from time to time and amended or restated, at our option, including where we believe that such amendment or restatement is in the best interests of our clients or to account for good industry practice or any changes in law or regulation or to take account of any guidance issued by a relevant industry body relating to the subject matter of this position paper. Any updates will be posted here.