Restrictive finance policies are hastening coal's decline
More than 100 globally significant financial institutions — those with at least $10 billion in assets under management (AUM) — have now restricted access to financing for the coal industry, according to the Institute for Energy Economics and Financial Analysis.
Why it matters: The International Energy Agency estimates that global investment in coal plants and mines has dropped by $38 billion (22%) in the past two years. Almost every other week now, a major global bank, insurer or other lender announces new coal finance restriction policies.
The decline in coal supply investment comes as the price of internationally traded coal has hit a five-year high, which historically would have stimulated investment.
- Instead, coal production investment has fallen each year since its last peak in 2012, betraying the diminished faith that markets have in future coal growth or profitability.
- Clean energy investment, in contrast, reached $334 billion in global investment — nearly 1.5 times that of coal — in 2017.
Beyond limiting access to capital, this trend has raised the industry's costs and reduced its attractiveness to investors. Goldman Sachs believes divestment has been a key driver of the 60% price drop coal stocks have suffered over the past five years. At the same time, over $6.2 trillion in AUM have some form of fossil fuel divestment restrictions, which has driven sell-offs of the stocks and bonds in coal companies and commitments not to purchase them in the future.
Yes, but: Globally, there's still $420 billion in proposed coal plants in the pipeline, with construction finance in Southeast Asia, the last frontier for new coal expansion, coming largely from public institutions in South Korea, Japan and China. The current cohort of plants under construction represents $231 billion of investment committed in recent years.
- Whether those East Asian countries will further limit available investment and favorable terms will be an important test of restriction policies.
The bottom line: Global investors have siphoned capital from the coal industry through a combination of policy restrictions, divestment, public resistance to new plants, and the shifting economics of coal and clean energy. Expect that trend to continue as more global financial institutions turn away from the economic and reputational costs of coal.
Justin Guay directs global climate strategy at the Sunrise Project and advises the ClimateWorks Foundation.