BLOGISARJA 1/6 tutkimustietoa palkituilta Finsif Stipendiaateilta-Phasing out coal – are investors willing to do it?

Phasing out coal is one of the most immediate steps that we need to take if we want to avoid a global climate disaster. By ending the use of coal and by transitioning into cleaner energy sources, we can cut 33% of the global emissions. This would bring us a step closer to achieving a 1.5-degree Celsius temperature rise.

In my research, Value Relevance and Impact of Sustainability Measures in the Coal Industry, I examined the value relevance of sustainability measures in the coal industry, in theory, how do investors appreciate environmental efforts coal companies conduct, and how do they value the coal expansion plans of these companies. The backbone of my research was Urgewald’s Global Coal Exit List (GCEL), which is an excellent tool for investors and asset managers to manage, and act on their own coal exposure.

The research showed that investors penalize the environmental efforts the companies conduct, which is a worrying result as the industry should see the environmental efforts the companies conduct as a value adding matter, and reward companies that are taking the right steps to phase out of coal. I studied the relationship between ESG performance and company value (Price-to-book ratio and Tobin’s Q), and when examining individually the respective ESG pillar scores, the largest value decrease was found from the environmental pillar. This further highlights the fact that environmental efforts are penalized in the coal industry.

The research also showed that investors penalize future expansion plans of the coal companies, which is a good sign, as it means that they see the future coal plants as a negative thing for the company value. Nevertheless, the world’s coal producers are currently planning as many as 432 new mine projects with 2.28 billion tonnes of annual output capacity. This is intolerable, and this is where investors step in – this can be stopped, and it should be stopped.

Often in sustainable finance the focus is on the companies that are doing good, for example measured by an ESG Score. What is needed, is to face the ugly truth, the largest emitters of our planet, and change those. In some cases, divesting from these companies is not enough, active ownership and an ‘activist approach’ is needed to change this industry, because at the end of the day, investors can have a huge impact on how economies change, and the financial industry can drive this transition quicker than policy makers can.

Antti Hämmäinen, Finance Department, Aalto University, Graduate 2021,
Cooler Future, Impact & Investments