Home Impact producer The return of coal threatens the ESG ratings of European companies

The return of coal threatens the ESG ratings of European companies


An aerial view shows coal at a dry bulk terminal at the German port of Rheinberg-Orsoy along Europe’s most important shipping route, the Rhine, in Rheinberg, near Duisburg, Germany, April 6, 2022 Photo taken with a drone. REUTERS/Stephane Nitschke

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LONDON/FRANKFURT, July 26 (Reuters) – European companies turning to coal as an alternative to Russian gas are facing a blow to their environmental, social and governance ratings, forcing them to scramble to impress investors still voices on sustainability.

Despite an energy crisis following sanctions on Russia, major European investors say they will not relax their investment principles of achieving net-zero targets on greenhouse gas emissions by 2050 or before.

Investors are increasingly using ESG ratings, developed by companies such as MSCI or Sustainalytics, to judge the merits of companies. Burning coal, which emits more carbon dioxide than alternatives like oil and gas, gives companies a black mark.

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European countries, including Germany and Italy, are nevertheless considering bringing back coal because of the Ukrainian crisis, which has cut off Russian gas flows. Some companies, such as German specialty chemicals maker Lanxess (LXSG.DE), have also said they could consume more coal. Read more

Companies forced by cost pressures or national policy to use the fuel could catch up by finding other ways to boost their environmental credentials, or by focusing on S&Gs in ESG, sources add. Of the industry.

“When your emissions go up, all things being equal, you have more problems from a ratings perspective,” said Sylvain Vanston, executive director, climate change investment research at MSCI. “If you come up with a fantastic new engagement, that might balance it out.”

But so far, few companies have managed to find a miracle solution to counter the use of this highly polluting fuel. Lanxess, which has previously acknowledged the hit to its carbon footprint, declined to comment on the potential impact on its ESG rating of burning more coal.

He stressed, however, that if he sold out of the market, it could mean factory closures and job losses, potentially affecting the “social” aspect of his operations.

There are other options available to companies looking to preserve their ratings. David McNeil, head of climate risk at Sustainable Fitch, said the agency looks at a company’s overall ESG impact when assessing it. “If an electric utility issues a green bond, that’s something we would look at,” he said.

Some companies such as Italian utility Enel (ENEI.MI) have issued sustainability bonds linked to their overall sustainability performance.

Sustainability bonds and green bonds, which fund specific environmental projects, have performed poorly in recent months, however, as the prospect of higher interest rates and a possible recession has affected bond markets more broadly. corporate debt.

Germany’s largest power producer RWE (RWEG.DE), whose CEO last month said Germany needed to save gas in its power sector by replacing it with coal, has already issued green bonds.

A spokesperson for the group said RWE was still focused on expanding its use of renewables and hydrogen to further accelerate the phase-out of coal, a strategy its investors had given a ” broad approval”.

Other companies, such as Europe’s leading copper smelter Aurubis (NAFG.DE), also said their goal remains to decarbonise, despite the added short-term complication of including coal in the energy mix.

Investors insist that they engage in the same way. AXA Investment Managers, Allianz Global Investors and Zurich Insurance, which together manage $1.8 trillion in assets, have all said they are sticking to their plans to cut coal despite the war in Ukraine.

“We are not changing our position and we are not changing our policy – we are staying the course,” said Linda Freiner, Zurich Group’s head of sustainability.

So far, Europe’s energy crisis shows few signs of solving. It remains to be seen how confident companies or investors can be in the importance of long-term ESG principles like coal phase-out if things get worse.

“Coal poses an issue of energy security that, in the short term, conflicts with the issue of decarbonization,” said Alex Simcox, head of ESG investments at asset manager Mondrian.

“If you’re in Germany and Russia cuts the gas, even if you’re in the Green party, you have to accept that extending coal power is a pragmatic response.”

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Reporting by Carolyn Cohn in London and Christoph Steitz in Frankfurt; Additional reporting by Ludwig Burger, Christoph Steitz and Patricia Weiss in Frankfurt, Michael Hogan in Hamburg and Marc Jones in London; Editing by Jan Harvey

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