Insight's position on thermal coal | Insight Investment

Details on the scope of this position statement and references to related policies are provided at the end of this document.

Financial materiality

A financially material factor is one that is likely to have a positive or negative impact on the financial value of an investment. Our fiduciary obligations require that we assess the risks and seek to identify what we believe to be financially material factors where those factors play a part in the decision-making process for the relevant strategy. The importance of these specific factors – which may include what are commonly referred to as environmental, social and governance (ESG) factors – differs between individual investments and different types of investment strategies and these factors comprise the mosaic of factors that we believe can be relevant for effective financial analysis.

Assessing financial materiality relating to climate change is necessary for corporate issuers. We undertake analysis in order to better understand and assess the plans that companies issuing our investments have in place to mitigate pecuniary climate risk factors where the issues involved could be or are financially material. Specifically, companies whose revenues are linked to thermal coal may have elevated levels of risk due to their vulnerability in a transitioning world.

These risks require prudent management.

Timeframes

Different risk factors have different timeframes associated with them:

1. Issues that are relevant to the nearer-term prospects of the companies in which we invest tend to include factors such as mismanagement, disclosure gaps, poor manufacturing practices, and issues that are the subject of imminent regulation.
2. Issues that are relevant to the longer-term prospects of the companies in which we invest could include changing regulations or consumer/public attitudes to social or environmental issues, and systemic risks that could create economic disruption or prevent our clients from achieving their longer-term goals.

Near term issues can often be described in quantitative financial terms. It is typically straightforward to define requirements for additional analysis and/or engagement with an entity.

Longer term issues are more challenging to assess in quantitative financial terms, partly because the timeframes associated with any financial impact are less certain. Our emphasis here is to seek to better understand the issues and where relevant, we may seek to engage to encourage prudent actions that create long-term value for our clients and/or reduce the uncertainty involved.

Climate change is one such longer-term systemic risk and requires our attention as we seek to navigate the issues to fulfil our fiduciary obligation to our clients. It is unique in terms of its complexity, uncertainty and scope for material value creation and destruction.

In addition to a substantial pecuniary risk to direct holdings, we are also conscious of the indirect systemic risks resulting from such investments. We are equally sensitive to the fact that this has the potential to divide people and societies, both culturally and intellectually, and also that our policies must reflect our client base, with our clients having a range of views and requirements which they expect to be reflected in their investment strategy.

Because of the materiality of the topic and the risks and opportunities associated with climate change it is essential for us to understand and analyse the issues in order to manage risks effectively.

With the above context, in this position statement, we outline our position on thermal coal.

The IIPCC Sixth Assessment Report

The sixth assessment report issued by the Intergovernmental Panel on Climate Change (IPCC)¹ in 2023 made clear that human-induced activities, principally through the emissions of greenhouse gases, 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 reach². The potential damage that temperature rises of this quantum may cause, both to the environment, society and financial markets, are well documented. We believe that we must recognise and analyse the risks in our role as stewards of our clients’ capital to mitigate such a scenario and managing the risks involved with a long-term phase-out of thermal coal is important to this.

Why thermal coal?

According to the International Energy Agency (IEA)³, 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, thermal coal does not appear to present a long-term viable fuel source in a world which needs to cut its carbon consumption. By extension, businesses that rely on thermal coal as an important part of their operating model could face materially higher risk to their revenues in the future which could present a significant challenge to the viability of their business model and sources of revenue in the long-term future. In addition to a substantial pecuniary risk to direct holdings, we are also conscious of the indirect systemic risks which such investments contribute to.

Thermal coal phase-out

In our view, assessing and understanding 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. Our preference is to work with issuers, engaging with them 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, 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 companies⁴ that are involved in coal mining and/or thermal coal power generation activities and meet or exceed the relevant thresholds below within the relevant portfolios (see “Scope” section below) by:

• 2030 for issuers domiciled in a member country of the Organisation for Economic Co-operation and Development (“OECD”), 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”).

Screening

Our initial process is to screen holdings where material thermal coal exposure exists. Using internal and external research and/or data (as the case may be), we will initially look to screen for companies where the level of corporate involvement exceeds or satisfies (as the case may be) the prescribed thresholds set out below. We expect that we will continue to tighten these thresholds as time progresses:

Table 1: Thresholds in relation to thermal coal mining

Table 2: Thresholds in relation to thermal coal power generation

If any of these characteristics are met, they will be included on our exposure list.

Monitoring and engagement

Once this exposure list is generated, we look to review each company’s decarbonisation plan and specifically their roadmap for exiting thermal coal. In terms of priorities, we focus on issuers with the greatest coal revenue weight in the first instance while we anticipate both lowering the revenue threshold and increasing the relative importance of gross emissions, capacity and new assets in the future. We expect to identify certain laggards that have no plan to address 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 if the circumstances require a divestment to potentially be enacted for specific portfolios, for example, in circumstances where a response is mandated by the client or where we believe the company’s coal strategy to present a sufficient pecuniary risk to the investment.  

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 and 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 out of line with our expectations, we will look to undertake a structured engagement programme where we would expect to contact the company to create a roadmap for achieving our overall phase-out of coal. Companies that do not adhere to the roadmap will be placed on a ‘divestment watchlist’ with a period of 12 months to move back into line with the expected decarbonisation trajectory. If we view this as a reflection that the company is not managing a key risk factor effectively and that there is the potential for pecuniary impairment as a result, holdings of a company out of line for longer than 12 months may be sold.

Just Transition

We recognise the current reliance on thermal coal in many developing countries and that they face severe energy shortages without it. It is for this reason that we have set a longer time horizon for those companies domiciled in countries that are not members of the OECD to achieve compliance. 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.

Companies financing coal

In addition to phasing-out direct coal financing, we will also endeavour to engage with financial institutions that continue to finance coal with a view to understanding their approach to phasing coal out of their business. As an investor in, and counterparty to, many financial institutions, we believe we have relationships which give us an opportunity to engage in this area.

We will initially analyse our exposure to financial institutions most heavily 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 plans. Where programmes are not appropriately structured and detailed in our view, we may seek to encourage change, such as by escalating engagement. We may ultimately withdraw funding should we reach a position where the financial risks related to thermal coal financing and insurance are not being sufficiently mitigated.

Responsible Horizons

Whilst some investors are comfortable supporting companies which have transition plans and are on a transition pathway, equally there are those who have a ‘red line’ when it comes to investing in thermal coal.

For such investors, the “Responsible Horizons” strategies are available which apply certain exclusionary criteria in relation to coal-related activities. Such strategies may, for instance, prevent investment in companies which derive a certain percentage of revenue from coal mining and/or power generation, unless the instrument being purchased is a “use-of-proceeds” impact bond and the investment manager believes the issuer has a clearly defined, long-term plan to address its environmental impact and meets the ESG criteria of the investment manager. Specific details relating to these strategies (including the investment objective, investment policy and investment strategy) and the exclusionary criteria applied can be found in the relevant product documentation.

Scope

This position statement applies to Insight Investment Management (Global) Limited, Insight Investment Management (Europe) Limited and Insight Investment International Limited, collectively known as “Insight”.

Our role is to support our clients in meeting their investment objectives. We aim to do so by overseeing our clients’ capital in a responsible manner, and by creating value for our clients as specified in our agreements with them. Our activity will be consistent with regulatory requirements and with the investment mandates and terms agreed with our clients. Any exclusions applied by us pursuant to this position statement are subject to our investment mandate with the client and this position statement will not amend any client contract or product documentation.

Because this approach represents sensible risk management, where clients mandate us to do so and where the investment type allows it, we intend to follow the approach set out in this position statement for segregated and pooled discretionary-managed portfolios containing in-scope corporate holdings.

Our approach covers 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 position statement.

When acting for our clients, we have formal rights and informal influence and act in a way consistent with our fiduciary obligations. We conduct stewardship activity in the form of engagement with entities in order to inform our understanding of issuers, and to encourage them to manage and mitigate risks more effectively where we believe action is warranted to protect the value of our clients’ investments. For further details, please refer to our Stewardship Policy.

Reviewing our position on thermal coal

This positioning statement is subject to any express contractual, regulatory and legal duties to which we are bound, including in relation to the relevant portfolio, fund or product (as the case may be). We expect to review it periodically and may amend or restate this position statement, at our option, including:

• where we believe that such amendment or restatement is in the best interests of our clients;
• to account for updates to industry practice or any changes in law or regulation; and/or
• to take account of any guidance issued by a relevant industry body which impacts the subject matter of this position statement.

Supporting materials

This position statement should be read in conjunction with our responsible investment policies, which can be accessed here. Of relevance are our:

• Stewardship Policy
• Responsible Investment Policy
• Conflicts of Interest Policy
• Proxy Voting Policy

Full details of how Insight invests responsibly, and exercises stewardship are published on our website (www.insightinvestment.com).

Key terms in this document are defined in our ESG and responsible investment glossary, available here.