First came the coal divestment campaign and now comes the call for a moratorium on new coal mines.
Its advocates say it has the unique political and diplomatic upside of delivering benefits (in the form of less competition and higher prices) to the owners of existing coal mines and simultaneously delivering benefits to oil, gas, renewables and the climate. And because it is a sectoral and global approach, it is less penalising of those coal companies who happen to be in the portfolio of pension funds that can be most easily lobbied.
So we asked Andy Howard, who was head of the ESG team at Goldman Sachs and who now runs Didas Research, which specialises in analysis to support long-term equity investors, what he thought. His reply was clear:
“A moratorium that constrained supply could actually be great news for the industry, to be welcomed by the Australian coal industry, contingent on doing so within a global framework of some sort. Coal is everywhere and there is loads of it, so controlling supply is beyond the capacity of a single country, as other countries can reasonably easily fill gaps (and will almost certainly do so). If something like this can be done internationally, it would be great news for the industry, particularly diversified companies that dominate Australian production (and can reallocate capital to other commodities). It could constrain supply in a way that would inevitably drive up the price of coal over time, allowing the industry to generate better returns than the 5-10% it has done through the last decade (at which levels they should be returning more capital to shareholders anyway on financial grounds irrespective of climate arguments). See tobacco as a case study (no new companies launched in decades and one of the most profitable sectors in the market – what they lost on volume (at least relative to the growth they might have expected before regulatory health constraints kicked in) they more than made up on returns). The conundrum could be that coal executives may have different incentives to the investors that own their shares – careers can be characterised by developing assets and growing businesses as much as generating cost of capital beating returns on dwindling asset bases.”
So who could do trigger this international action? The big investors in the energy sector! Since many have already lost a lot on coal – and here is data about the scale of the losses in the UK and Canada, for example – surely they should now be willing to be forceful stewards?