On 15 April 2016, Norway's central bank Norges announced that it had decided to exclude 52 companies from the Government Pension Fund Global (SPU) under the sovereign wealth fund's new guidelines on investing in coal companies.

The Government Pension Fund of Norway comprises the NKr7,045 billion ($844 billion) Government Pension Fund Global (SPU) in which surplus wealth from petroleum income is held, and the NKr198.4 billion Government Pension Fund Norway (SPN) which the National Insurance Scheme Fund administers.

The exclusions followed a first round of analysis by Norges Bank Investment Management, which is looking to exclude more companies throughout the year. Among the 52 companies to be excluded, 22 are US-based and seven are Chinese. The rest are based in Australia, Canada, Chile, Greece, Hong Kong, India, Japan, the Philippines, Poland, South Africa and the UK.

Norway's Ministry of Finance implemented new criteria for exclusion on 1 February 2016 pointing at "companies which themselves or through entities [...] base 30% or more of their activities on coal, and/or derive 30% of their revenue from coal."

A couple of weeks earlier, the Norwegian government announced that neither of the country’s sovereign pension funds would start investing in unlisted infrastructure.

Global trend

Norges decision to prevent the SPU from investing in those coal-exposed companies came four months after COP21, the Paris summit on climate change which took place in December 2015 and pushed the debate on fossil fuel to the top of investors' agendas. Several commercial banks and equity investors have made similar moves to abandon coal-linked investments following the conference.

In the run-up to the Paris summit in November 2015, French energy company Engie’s announced its decision to end coal-related investments.

Sensitivity about coal-linked equity and similar ESG issues has increased in the industry overall and it has started to reach the fund managers community as well.

“Concern towards coal-linked companies was so far expressed as a preference by investors and is now treated as an exclusion in investment mandates by most of our investors,” says Charles Dupont, head of infrastructure finance at Schroders.

“Events like COP21 continue to bring climate change onto the top of the agenda. More and more investors are evaluating and considering the climate impact of their investments and the issue is certainly being taken more seriously not only in Europe, but across the globe,” agrees Gerry Jennings, head of infrastructure at AB.

Carbon-linked companies as liabilities

Michael Pollan, investment manager at French Omnes Capital, sees COP21 as a culmination of a series of events that date back to the Copenhagen’s summit.

“Back in 2009 in Copenhagen, climate activists started realising that they needed to create alliances with long term institutional investors. The key for them was to present carbon-heavy investment portfolios as liabilities for investors like insurances companies and pension funds. Liabilities both in the form of damage to their public image but more significantly, in financial terms, based on the belief that carbon would no longer be free in the future, but would have a very real financial cost,” he says.

According to Pollan, electric utility groups started seeing coal as unprofitable, as well as bad for their reputation, and had started to turn more towards renewable energy even before Copenhagen.

Future fund impact

When it comes to assess the impact that the climate change summits and linked lobbying activities are likely to have on funds that are in their shaping and launching stages, the picture gets more diverse.

“I’m not sure that all infrastructure funds are considering excluding companies for their exposure to coal at the moment, the more so as coal is still an important component of the energy mix in a number of European countries. As part of our ESG approach, our team at Schroders focuses on environmental issues and we have positioned our infrastructure financing in the context of the energy transition,” says Dupont.

While Jennings sees funds are increasingly assessing and acting to minimise the climate impact of their investments, he points out that some specialist funds might just focus on the renewable energy sector, while others will exclude forms of extremely dirty energy from their investment universe altogether.

“Our investors want to understand the climate change issues and impact of their investment. We have integrated ESG considerations into our investment process by identifying, assessing and acting upon material ESG factors, making them part of our investment thesis,” Jennings says.

As a result of broader trends, long-term investing funds will be increasingly hard-pressed to justify their exposure to coal-linked assets, Pollan argues.

“If COP21 has achieved one thing, it is that greenhouse gas emissions are now legitimately seen as a concern in both the developed and the developing world. Countries like China and India are starting to come around to this realisation, not just due to climate change, but also in respect to the severe human and economic cost of local pollution,” he says.

However, Pollan does not think that coal investments will disappear from one day to the next. On the contrary, some places will still continue building coal-fired power plants in order to meet soaring electricity demand.

“But it is possible these will become more and more the exception rather than the rule. Lastly, it should also be said that in many countries (e.g. the US) power generation from natural gas, which is much less polluting than coal in terms of CO2 emissions, is really benefitting from low gas prices. This displaces coal and makes the political cost of mothballing such power plants more acceptable given the cheap and cleaner alternative that is readily available in the current market context,” Pollan concludes.