Pension Fund to Curb Thermal Coal Investments: What Are the Potential Impacts?

Australian Retirement Trust (ART), the country's second-largest pension fund that manages over A$280 billion worth of savings, has announced plans to stop directly investing in most thermal coal companies from July, according to a statement last week. This makes ART the largest super fund in the country to exclude thermal coal.

Prior to ART's commitment, Aware Super, a fund managing A$163 billion in assets, had already excluded companies deriving 10% or more of their revenue from thermal coal mining from its investment portfolio. HESTA, another substantial fund with A$82 billion under management and over one million members who are predominantly women in healthcare and community services, has blacklisted publicly traded companies that earn 15% or more of their income from thermal coal extraction. UniSuper also ranks among the funds that have transitioned away from such investments.

Australia has the world's third-largest coal reserves, while coal is considered one of the most polluting energy sources. Australian pensions are under pressure to take actions to support their net-zero commitments and compete for members who are increasingly environmentally conscious. Environmental groups are also publicly pressuring funds to divest from polluting companies. Market Forces superannuation funds campaigner Brett Morgan said,

From the perspective of capital flows, ART's default investment option has had no investment exposure to coal companies Whitehaven and New Hope since 2022, which could mitigate the impact on market volatility. In fact, many major pension funds have divested from stocks linked to thermal coal. According to a 2023 report by the Institute for Energy Economics and Financial Analysis, more than 200 globally significant financial institutions, including banks and asset managers, have established exclusion policies for coal-related assets.

From a fundamental perspective, coal continues to play a significant role in the current energy mix, with the demand for thermal coal expected to remain relatively stable in the medium term. However, against the backdrop of long-term energy transition, the proportion of fossil fuels such as coal in the overall energy structure is set to gradually decline, which could bear negative implications for coal demand.

For companies in the sector, many coal mining firms in Australia have seen a substantial increase in revenue and profits in the years following the pandemic. These companies have taken advantage of this to deleverage and optimize their balance sheets. Currently, these coal mining firms have very low capital leverage ratios, with a few even devoid of long-term debt. The optimization of balance sheets has effectively enhanced these companies' abilities to withstand market fluctuations and risks.

In the absence of significant mergers and acquisitions or capacity expansion plans, these companies' daily operations can largely rely on their organic growth, with almost no short-term refinancing needs. Strengthened by substantial cash reserves documented on the balance sheets, these companies are well-positioned to deliver generous dividends. Coupled with their appealingly low valuations, they present an attractive safety margin for investors eyeing stock prices with prudent optimism.

However, some companies may face adverse impacts, particularly those that have recently entered coal mining through debt financing, as well as coal exploration companies that have not yet reached the production stage.

Source: Reuters, Bloomberg, IEA, moomoo

By Moomoo News Marina