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Coal extraction and mining: sector exclusion or greater selectivity?

Given the proliferation of environmental and social risks related to coal mining, is it possible to define good practices in sectors related to coal mining and combustion, or should one systematically exclude companies operating in these sectors (upstream in mines, downstream in electricity production)?

Against the backdrop of growing awareness of the risk of global warming and the determination of the 195 countries present at the 21st Conference of the Parties (COP 21) to limit the rise in temperatures to well below 2°C, the use of coal in the energy sector is increasingly called into question. Thermal coal stands out as the largest source of CO2 and presents a significant climate risk due to its low cost and considerable amount of existing reserves.

After a detailed analysis of the different types of coal, mining techniques and the economic context of the coal market, we will examine how substituting coal with less polluting energy sources appears to be one of the most effective levers to reduce global emissions.

Over and above the issue of CO2 emissions, coal mining also raises issues related to the pollution of surrounding resources and the impact on biodiversity. Another issue is the health and safety of employees working in mines, who face significant occupational hazards such as exposure to harmful agents or to landslides and floods. Finally, coal mining also generates problems in terms of respect for human rights and local communities, for instance forced displacement of populations.

We will identify the ESG issues related to coal mining and combustion, the main actions implemented by the companies concerned, and the impact on these companies’ extra-financial ratings. For the mining sector, we will detail companies’ positioning in respect of the following issues:

  • Biodiversity and Waste
  • Health & Safety
  • Local communities and Human rights

For the electric utilities sector, we will focus on the Emissions and Energy criterion, which is the main one related to coal. Finally, the positioning of companies in the financial sector will be examined based on the Eco-investing criterion.

For each of the various criteria, we will assess companies’ exposure to the risk represented by coal and if their management is adapted to the scale of this risk. In order to assess companies on these criteria, we will specify:

  • The key indicators used to estimate each company’s risk exposure to coal-related criteria. This risk can be reputational, operational or regulatory.
  • The key indicators used to assess the quality of each company’s risk management.

Because of the very different risk profiles of the major countries of extraction, the geographic breakdown of the revenues of the companies reviewed is an important part of our risk assessment. In addition, the business profile of the different companies (underground or opencast mines) has an impact on their Biodiversity and Health & Safety risk.

In terms of managing the various risks, we will specify the best practices observed for each of the criteria studied in order to identify the least well-positioned players, which cannot be included in SRI portfolios given their sub-par performance in respect of the coal theme.

Finally, we will see that players who generate more than 50% of their revenues from coal mining have an ESG and financial risk profile that, in our view, is too high for them to be included in Amundi’s portfolios. We therefore recommend excluding these stocks from all Amundi’s portfolios.

Regarding the Utilities sector, excluding the companies in question from SRI portfolios depends on the non-publication of CO2 emissions for companies exposed to coal, on their relative level of carbon intensity compared with their peers and on the technologies of the coal plants owned by these companies. 29 companies would have to be excluded from SRI portfolios based on the filter defined by the above criteria.

Finalised at Octobre 2016

CROZAT Catherine , ESG Analysis

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