Investors with over $11 tn expect power companies to show they are ‘fit for clean energy future’
95 leading investors today call on power companies across Europe to demonstrate they are ‘fit for a clean energy future’. The investors, with a collective $11.5 trillion in assets under management, are asking firms to demonstrate they are implementing business strategies aligned with the goals of the Paris Agreement. This entails delivering rapid reductions in greenhouse gas emissions and keeping pace with the changing dynamics and economics of the power sector, transformed by the adoption and falling cost of renewables.
Through the Institutional Investors Group on Climate Change (IIGCC), the investors are writing to Eurelectric as the relevant sector trade body and Germany’s coal exit commission. A copy of the letter will also be sent to European power companies with the largest emissions footprints across the region, listed as Climate Action 100+ focus companies.
Less than a week after the UN COP24 climate conference in Poland, the investors make clear, “as investors collectively representing $11.5 trillion, we require power companies – including power generators, grid operators and distributors – to plan for their future in a net-zero carbon economy.”
The investors request that power companies:
- “Set out transition plans consistent with the goal of the Paris Agreement, including compatibility of capital expenditure plans.
- Set explicit timelines and commitments for the rapid elimination of coal use by utilities in EU and OECD countries by no later than 2030, defining how companies will manage near-future write-downs from fossil fuel infrastructure.
- Support the development of ambitious climate policy aligned with the Paris Agreement and to ensure that their trade associations are aligned with this objective.”
The investors explain that “the risks to global markets and companies we invest in from 2°C or higher temperature rises are potentially catastrophic.” The letter continues by stating that success in addressing climate change is “vital to those with a fiduciary responsibility for other people’s long-term investments.”
Coordinated by the Institutional Investors Group on Climate Change, with the lead authors Hermes Investment Management, the intervention has also been developed to deliver on the goals of Climate Action 100+. This is an unprecedented global investor initiative to engage and ensure the world’s largest corporate greenhouse gas emitters take necessary and sufficient action on climate change.
Signatories to the letter include some of the largest institutional investors and asset managers primarily across Europe, but also globally. 20 of the 95 total signatories each have over $200 billion in assets under management, for example Aberdeen Standard Investments, BNP Paribas Asset Management, DWS, Legal and General Investment Management, Nordea Group and M&G, among others2.
The rationale behind the disclosure sought by investors is two-fold. Firstly, as stated in the letter “decarbonisation of the power sector, which accounts for around a quarter of global emissions, will define the success or failure of the low-carbon transition since it is fundamental to also decarbonising heat, transport and industry”.
Secondly, the letter covers the risk of power sector companies failing to keep pace with the changing economics and dynamics of power generation, supported by policy to drive decarbonisation. Renewables increasingly provide the cheapest means of generating power as their adoption at scale, the digitisation of energy and transport, and convergence of broader innovation trends are leading to unprecedented disruption of the traditional utility business model. The European Union’s intention to put in place a target for net-zero greenhouse gas emissions by 20504, is one example of how the new economics of energy are being reinforced by climate policy.
Stephanie Pfeifer, Chief Executive, Institutional Investors Group on Climate Change, explains: “The investors writing the letter are clear power companies need to take account of trends that are materially shifting the economics of power generation, such as rising carbon prices and the rapid increase in the competitiveness of renewables. Research by Carbon Tracker shows that nearly all European coal-fired power plants will be loss making by 2030. Utilities need to demonstrate they are fit for the clean energy future.”
Over 40 percent of coal plants globally are already operating at a loss5, while solar PV and wind power are already cheaper than building new large-scale coal and gas plants6. The risk for investors and the companies in question is exposure to stranded assets in order of trillions of dollars for companies left behind7. Even if all planned future capacity was cancelled today, leading academics have shown that approximately 20 percent of existing global fossil fuel generation capacity will still need to be stranded in order to meet the goals of the Paris Agreement8.
Gerald Cartigny, Chief Investment Officer, at MN a Dutch asset management firm responsible for more than $130 billion on behalf of clients, and Vice Chair, Institutional Investors Group on Climate Change, adds: “Recent publications by IPCC, IEA and Nature among many others, emphasise that the world is moving too slowly and in the wrong direction. All sectors need to step-up and accelerate their efforts to decarbonise. As investors we are calling upon the power utility sector and policy makers to demonstrate they are taking the right measures at the right pace.”
The expectations set by investors are made on the basis that the sector should be actively managing the transition already evident and disclosing relevant details to their shareholders.
Bruce Duguid, Head of Stewardship, Hermes EOS, advising on corporate engagement for investors with $468 billion of assets under advise, adds: "The falling cost of renewable technologies and improvements in energy efficiency have consistently beaten forecasts, placing enormous pressures on the traditional business models of utilities. Utilities companies must embrace these changes in order to deliver the societal imperative of providing clean energy solutions across the world. For these reasons, investors are increasingly supporting and influencing companies in asking them to demonstrate plans consistent with meeting the Paris goals."
Power companies that significantly rely on coal will be most exposed to stranded assets. In recognition of the need to move away from coal, 16 European nations, as part of the broader Powering Past Coal Alliance, have already committed to the phase out of coal power no later than 2030, in addition to a range of power sector utility companies.
James Bevan, Chief Investment Officer, CCLA one of the UK's largest charity fund managers responsible for $10 billion in assets, notes: “Investors increasingly understand that coal power belongs in the past. We need reassurance all companies across the power sector are on the same page. In addition to wreaking havoc on the climate, the economics of coal power are crumbling in the face of cleaner renewable energy.”
“There’s good reason so many countries and an increasing number of power utilities have already committed to phase out coal. If applied across the EU, the power sector and investors collectively can avoid up to €22 billion in losses we otherwise face by 2030. Companies such as RWE are still clinging to coal and lobbying against its necessary phase out in Germany. The message today is this needs to end.”
The letter is clear that investors will continue engagement with power sector utilities, especially through Climate Action 100+. Where necessary, they will “also deploy all the tools available to us as shareholders” to ensure laggards are aligned with the expectations outlined, again through Climate Action 100+ as appropriate.
Anne Simpson, Climate Action 100+ Steering Committee member and Director, Board Governance & Strategy, in the Executive Office at CalPERS, CalPERS, also a signatory to the letters explains: “The European power sector is leading the way when it comes to decarbonisation, but other markets aren’t far behind. From the U.S, to China and India, renewables are transforming power markets across the globe. Climate Action 100+ investors are paying close attention and engaging with the largest emitting power companies globally, in line with their right and responsibility as major shareowners, to ensure they are helping drive the clean energy transition instead of being left in its wake.”
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A copy of the letter from investors available here. It was also published by the Financial Times. See PDF download for references.