LONDON : The world is getting hotter, but when it comes to achieving net zero investors are cooling. In November 2021 many large corporations gathering at the COP26 climate summit in Glasgow committed to decarbonising their operations by 2050 in an attempt to limit global warming to 1.5 degrees Celsius above pre-industrial levels. Less than two years on, despite the world hitting its highest-ever average temperature, the pressure is off. Glencore (GLEN.L), the $75 billion Swiss group that is one of the world’s biggest coal miners, makes an interesting case study for what’s changed.
One of COP26’s key objectives was to encourage countries to “phase out” coal, which last year contributed over a third of the world’s annual 41 billion tonnes of energy-related greenhouse gas emissions. At the eleventh hour the conference downgraded that wording to “phase down”. Yet coal’s status as kryptonite for environmentally conscious investors and banks seemed set in stone.
Big mining companies exposed to the sector therefore had to make a decision. Anglo American (AAL.L) washed its hands of coal used for generating power by spinning off Thungela Resources , (TGAJ.J) to its shareholders, only for the newly independent group to crank up production. Glencore boss Gary Nagle took a different approach, arguing that his group would be a responsible owner by gradually winding down its coal business, which digs up about 110 million tonnes of the black rock every year. Glencore would close 12 mines while halving the company’s annual greenhouse gas emissions by 2035. This would give the world time to pivot from using coal for a third of global power generation and most steelmaking.
Fast forward to 2023, and Glencore’s strategy looks rather different. In April Nagle launched an all-share offer for Teck Resources (TECKb.TO). The Canadian miner has exposure to metals like copper but also produces over 20 million tonnes of metallurgical coal, which is used for making steel. When Teck rebuffed the offer – currently worth $23 billion – Nagle said he might bid just for the company’s coal arm, an option he had previously described as a “distant second” preference. Either way, the plan raises the prospect of Glencore bulking up in coal before offloading some or all of the enlarged business. The idea of gradually winding down production appears to be on the back burner.
True, a listing of Glencore’s enlarged coal business might not happen for a few years. And the company’s preference would be for the spun-off entity to stick to its current owner’s responsible wind-down template. But if Glencore was no longer calling the shots, it wouldn’t be able to stop the company from bulking up in coal if it wanted to.
A few years ago, this strategy would have risked a backlash from Glencore shareholders. And it’s true that some are still unhappy. A third of the miner’s investors demanded more clarity on Glencore’s emissions reduction plan at its annual general meeting in May. Meanwhile Bluebell Capital Partners, a hedge fund that owns a small stake, has suggested Nagle should quit. But a more aggressive rebellion is unlikely.
The shift is partly down to geopolitics. Russia’s invasion of Ukraine sparked an energy security crisis which prompted some countries to burn more coal instead of Russian gas. Investment in global coal supply in 2023 is expected to rise about 10% from the $135 billion spent in 2022, the International Energy Agency said.
The financial picture for coal miners has also changed. Immediately after the invasion, the price of coal futures soared above $400 a tonne, enabling Glencore’s coal business to make $18 billion in EBITDA in 2022, against just $1.2 billion in 2020. While prices have now more than halved, Glencore‘s coal business would still make $9 billion in EBITDA in 2023 if they averaged $200 a tonne.
In purely financial terms, investors have little to complain about. Since Nagle took charge in July 2021, Glencore shares have returned 76% including dividends, far outperforming the 15% average for rivals Rio Tinto (RIO.AX), (RIO.L), BHP (BHP.AX) and Anglo American over the same period. Most of the company’s top 20 investors are U.S.-based institutions like GQG Partners and Capital Research Group, as well as big investment firms like BlackRock (BLK.N) and Vanguard.
Stateside investment managers were always less vocal about environmental, social and governance (ESG) issues than their European counterparts. Now they also have to take account of a political backlash which has seen some U.S. state pension funds blacklist investors which shun fossil fuels.
This shift goes way beyond Glencore, though. Average support from investors in U.S. companies for environmental and social proposals has fallen significantly for the second year running, from 26% in 2022 to around 19% so far in 2023, according to Institutional Shareholder Services, an advisory firm.
There’s also safety in numbers among energy producers. Wael Sawan, the incoming chief executive of Anglo-Dutch giant Shell (SHEL.L) recently said cutting oil and gas too quickly would be “irresponsible” and “dangerous”. BP (BP.L) has reduced the pace of its exit from fossil fuels. BlackRock boss Larry Fink, previously a vocal advocate of sustainable investing, just appointed the chief executive of Saudi oil group Aramco (2222.SE) to the asset manager’s board. Meanwhile, large insurance companies have left the United Nations-backed body set up to coordinate decarbonisation targets for the industry.
Those investors that do actually want to hold companies to account on climate issues, like the Church of England Pensions Board, have been left isolated. The investor sold its shares in Shell last month, underwhelmed at the lack of progress. It was always a stretch to think the private financial sector could stamp out carbon emissions. It seems even less likely now.
Glencore Chief Executive Gary Nagle hit out at European investors for placing environmental, social and governance (ESG) considerations above financial returns, as he defended a proposal by the London-listed miner to list a spinoff of its coal business in New York, the Financial Times reported on June 30.
“In Europe, investors seem a little bit more focused on ESG, and it seems to be the ESG desk that makes more decisions — and returns are sometimes put second or third in the list. That’s a concern for us,” Nagle said at the Melbourne Mining Dinner in London on June 29.
Activist investor Bluebell Capital Partners on June 28 issued a letter asking Glencore’s board to remove Nagle and commence the search for a new external CEO.