The combustion of coal is the largest single source of global warming, accounting for 29% of total manmade greenhouse gas (GHG) emissions and 44% of total manmade CO2 emissions. The largest single source of coal combustion is the power sector, with electricity generation from coal accounting for 20% of total manmade GHG emissions and 30% of total manmade CO2 emissions.
Reducing emissions from coal is therefore the single most effective way of moving towards an energy system consistent with the Paris Agreement. Indeed, the numbers in the IEA’s Paris-compliant energy scenario out to 2025, the Sustainable Development Scenario (SDS), show that between today and 2025 nearly all of the emissions reductions from the energy sector required to put the world on an emissions pathway consistent with the Paris Agreement come from cutting back on the use of coal in power generation.
At the same time, coal faces an increasingly risky future from an investment point of view as less carbon-intensive fuel sources, especially renewables, become ever more competitive. On a levelised-cost-of-electricity (LCOE) basis, the main renewable technologies are already competitive with fossil-fuel power generation on a global average basis, and in the best locations for wind and solar globally the costs of new build are actually below the cost of existing fossil-fuel plants. The trend is inexorable as costs for all renewables technologies continue to fall.
Divesting from coal is therefore the rational thing to do from a portfolio perspective in order to avoid the risk of stranded assets.
For this reason, with effect from 1 January 2020, BNP Paribas Asset Management will continue progressively to align its portfolios with the Paris Agreement by implementing a significantly tighter exclusion policy on companies engaged in (i) the mining of thermal coal and (ii) the generation of electricity from coal. The policy will apply to all of BNPP AM’s actively managed open-ended funds and will become the default policy for mandates.
New policy on thermal-coal mining
From 1 January 2020, BNPP AM will exclude companies that derive more than 10% of their revenues from the mining of thermal coal and/or that are responsible for 1% or more of total global thermal-coal production. The share in global production is designed to capture those companies whose share of revenues from coal might be below 10%, but that nonetheless account for a meaningful level of absolute production.
Exhibit 1: regional electricity generation by fuel 2017
New policy on the carbon intensity of electricity production
From 1 January 2020, BNPP AM will exclude all power generators with a carbon intensity above the 2017 global average of 491g/kWh. Thereafter, BNPP AM will follow the Paris-compliant trajectory for the power sector’s carbon intensity as determined by the International Energy Agency (IEA) in its SDS. The IEA’s SDS requires the power sector’s carbon intensity to fall to 327gCO2/kWh by 2025. Accordingly, BNPP AM will require that companies engaged in power generation reduce their carbon intensity over 2020-2025 at a rate consistent with the IEA’s Paris-compliant trajectory. Those that do not keep pace with this trajectory will be excluded.
Forward-looking rule to allow for exceptions
BNPP AM recognises the importance of encouraging companies to reduce their dependence on coal mining and coal-fired power generation with a view to aligning their activities with the Paris Agreement. As a result, BNPP AM will consider exceptions to its exclusion rules for those miners and power generators that make credible commitments to reducing their coal-based activities to levels consistent with the Paris Agreement within the required timeframe.
- Exceptions for coal miners: For coal miners, BNPP AM will exempt from its exclusion policy any company that gives a credible commitment to reduce its share of thermal-coal revenues to below 10% and/or its share of global thermal coal production to less than 1% within a two-year rolling timeframe from when any exception is made.
- Exceptions for power generators: For power generators, BNPP AM will exempt from its exclusion policy any company that gives a credible commitment to reduce its carbon intensity to a level consistent with the IEA’s Paris-compliant trajectory within a two-year rolling timeframe from when any exception is made.
Whether a given company’s commitment is credible will depend on both quantitative and qualitative criteria, e.g. strategic considerations such as disposal plans for coal assets or acquisition plans for lower-carbon generation capacity, capex plans (ideally out to 2025 but at least for the next three years), and the degree of prioritisation given to a lower-carbon business model by management.
Consideration for exemption from the policy will be at the approval of the Investment Committee on a semi-annual basis. The two-year timeframe is designed to strike the right balance between giving those companies that appear committed to reducing their exposure to coal-based activities more time to comply with the policy, and having a clear and visible deadline that gives urgency to this commitment and hence credibility to the case for an exemption.
 According to the most recent iteration of the SDS set out in the IEA’s 2018 World Energy Outlook, CO2 emissions from energy need to fall by 3.1Gt by 2025 versus 2017 levels, and all of this 3.1Gt reduction comes from lower emissions from coal (emissions from natural gas are slightly higher in 2025 versus 2017 levels, and emissions from oil only slightly lower). Moreover, nearly all of this reduction in coal emissions – 2.83Gt of the total 3.1Gt required, or 93% – comes from the power sector.
 The EU power-generation sector suffered EUR 104 billion of asset write-downs over 2010-16. According to Credit Suisse, write-downs by January 2018 had reached EUR 145 billion, and as of today the top 24 utilities by market capitalisation have lost a combined EUR 270 billion of market cap since 2008 (EUR 417 billion today versus EUR 684 billion in 2008).
 The policy applies to thermal coal only. Metallurgical coal (also known as coking coal) is not covered by the policy as it is used mainly to produce coke for steel-making, and there are limited viable alternatives in the steel-production process. By contrast, the main use of thermal coal is for power generation, and there are many alternative and less carbon-intensive ways of generating electricity to using coal. According to the IEA’s 2018 World Energy Outlook, in 2017 thermal coal accounted for 77% of global coal production, metallurgical coal for 18%, and lignite for 5%, with power generation accounting for about 80% of the demand for thermal coal and lignite combined.
 The practical effect of this policy is to exclude coal-heavy power generators, as the carbon intensity of coal ranges from 0.73kg/kWh for modern super-critical coal-fired power plants to 1.2kg/kWh for old lignite plants. As a result, the greater the share of coal-fired production in a given generator’s output, the greater the likelihood that its carbon intensity will be above the power sector’s global average and, going forward, the IEA’s Paris-compliant trajectory.
 See IEA, Power: Tracking Clean Energy Progress, © 2019 OECD/IEA. Note that the Paris Agreement (Article 2a) commits its signatories to: “Holding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels, recognizing that this would significantly reduce the risks and impacts of climate change.” The IEA’s 2018 World Energy Outlook states (p.89): “The CO2 emissions trajectory to 2040 in the Sustainable Development Scenario is lower than most published decarbonisation scenarios based on limiting the long-term global average temperature rise to 1.7-1.8°C above pre-industrial levels.” Ideally, we would like to see the IEA publish and regularly update a 1.5°C scenario and to adopt a more precautionary stance with regard to negative emissions technologies in its modelling, but the SDS is without doubt the most widely referenced Paris-compliant scenario for the global energy industry, and as such the clearest reference point for governments, companies, and investors concerned with aligning energy emissions with the Paris Agreement.