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Australian bushfires intensify scrutiny on insuring, investing in coal

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Australian bushfires intensify scrutiny on insuring, investing in coal

Massive wildfires across the world's second-largest exporter of thermal coal could intensify a drive to move insurers away from the sector, which poses financial risk both from the physical damage caused by climate change-amplified natural disasters and from the possibility of stranded fossil fuel investments.

Amid growing pressure to divest from coal and other fossil fuels, insurers in Australia are preparing for worsening conditions as claims continue to increase from the recent bushfire season. According to Australia's Bureau of Meteorology, 2019 was the country's hottest and driest year on record, creating conditions that helped to fuel and exacerbate the bushfires.

As of Jan. 23, the Insurance Council of Australia had tallied 20,000 bushfire-related claims since November, with insured losses estimated at A$1.65 billion. The country can expect more frequent and extreme events, as well as a longer fire season, industry heavyweight Insurance Australia Group Ltd., or IAG, wrote in a recent climate report.

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"The devastating loss of life and property in communities across the country as a result of this season's bushfires is heartbreaking," said Luke Gallagher, executive general manager of IAG.

"Lives have been lost, vast swaths of property destroyed and whole cities exposed to ultra-hazardous smoke clouds for protracted periods of time," Greenpeace Australia Pacific CEO David Ritter said in a Jan. 14 news release about Aegon NV's decision to add nine Australian companies to its coal exclusion list. "Insurers know better than anyone that climate-induced extreme weather events are becoming increasingly common and the costs are growing."

Australian coal exports at record levels

Australia itself is using less coal for power generation. In 2018, the country consumed 105 million tonnes, down 7.8% from the previous year, according to the International Energy Agency.

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Coal production also fell, by 3.3% to 483 million tonnes. But the country sold A$66.85 billion of coal to other countries in 2018, setting a record for the fuel and making it Australia's largest export commodity. That included A$25.61 billion worth of thermal coal exports, which make up slightly more than half of the country's exports by volume.

At a Jan. 29 meeting of the National Press Club, Australian Prime Minister Scott Morrison emphasized his support for the country's coal sector.

Shutting down Australian coal mines will eliminate jobs in Australia, but it will not reduce global demand for coal, Morrison said.

"Other countries will just buy the coal from somewhere else — often poorer quality with greater environmental and climate impacts," he added.

However, investment conditions are increasingly challenging for coal producers in Australia. Adani Mining Pty. Ltd. downsized and self-financed its controversial Carmichael coal and rail project in Queensland after failing to find outside investors. Though the company has not announced such a policy to the public, Australia & New Zealand Banking Group Ltd., a prominent coal project lender, plans to shed some A$700 million of its thermal coal loans by 2024, a 75% reduction, according to internal emails reported by ABC News in late 2019.

"For smaller players, particularly in the thermal coal business, the cost of money has increased and the time taken to find it is a little longer," Warren Pearce, CEO of the Australia-based Association of Mining and Exploration Companies, told S&P Global Market Intelligence. "But the market is still there, and while it's in demand, the market will supply."

The bushfires, like wildfires in California and other large environmental disasters, are drawing negative attention to the sector, even as the IEA projects that coal exports from Australia will ramp up steadily. Several infrastructure projects are underway across the country to increase export capacity, and the IEA expects coal production in Australia to rise 1.4% per year through 2024 and thermal coal exports to grow 1.6% per year over the same period.

"Under the global microscope, coal suppliers looking to grow will continue to face creeping resistance, grappling with an unfriendly permitting environment, and a climate-induced shift in capital," Wood Mackenzie warned in a recent outlook on the metallurgical coal sector. "The specter of new external threats highlighted by recent Australian bushfires, and growing water stress, will add to the challenges for those trying to bring new [coal] supply to market."

Insurers move away from coal

Corporations in Australia and Europe, particularly banks and insurers, are increasingly excluding coal and other fossil fuels from their investment portfolios and list of clients.

"While many U.S. and Asian insurers are still trying to postpone the inevitable low-carbon transition, disasters like the Australian bushfires serve as a wake-up call for many citizens, investors and regulators and will certainly increase the public pressure on insurance companies to shift away from coal and other fossil fuels," said Peter Bosshard, director of the finance program of The Sunrise Project, a campaign pushing insurers away from coal.

Cutting exposure to coal had not been a primary focus of insurers in Australia until the past couple of years, when the majority began participating in a global initiative to provide greater transparency in their financial disclosures around exposure to climate risk, said Frank Mirenzi, vice president and senior credit officer for Moody's.

Since then, some of the largest Australia-based insurers have committed to phasing out investments and insurance exposure to the coal industry.

A spokesperson for Suncorp Group Ltd. said in an email that the company does not finance or underwrite new extraction projects or new thermal coal electricity generation, that it intends to phase out those exposures by 2025, and that it aims to increase exposure to businesses that have a "positive environmental impact."

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IAG and QBE Insurance Group Ltd. have also announced plans to cut certain exposures to coal by 2023 and 2030, respectively. A spokesperson for IAG noted that the company does not underwrite any mining operations.

Suncorp applauded its fellow Australian insurers for phasing out coverage of the coal industry.

"This trend shows the industry is serious about responding to the risks posed by climate change," the Suncorp spokesperson said.

As it stands now, exposure to fossil fuels makes up a tiny percentage of Australian insurers' portfolios, Mirenzi pointed out. He estimated that exposure to fossil fuels represents roughly half a percentage point of QBE's revenue and investment portfolio. Suncorp's exposure is less than 0.5% in its insurance business and investment portfolio, a spokesperson noted.

Mirenzi said he thought that many fossil fuel businesses in Australia might be obtaining their insurance through the global market. However, while coal and fossil fuels may be a small segment of many insurers' and financiers' portfolios, those relatively small amounts can be significant for any given producer.

For example, asset manager BlackRock Inc. recently announced that it would remove the public debt and equity securities of companies generating more than 25% of their revenues from thermal coal production from its discretionary active investment funds. The change marks a substantial milestone in the finance sector's move away from fossil fuels, even though it impacts less than 1% of the asset management giant's total investable assets.

Yet within that small relative total sits, for example, 15.7% of thermal coal producer Consol Energy Inc. and 5.4% of the outstanding shares of coal mining giant Peabody Energy Corp. BlackRock pointed out in a 2019 report that insurers invested in coal expose themselves to two types of risks: physical damage from climate change and the financial risks associated with transitioning to a lower-carbon economy.

A BlackRock global survey of 360 senior insurance and reinsurance executives in July and August 2019 found that insurers are more closely scrutinizing their portfolios for overlooked environmental risks. Two-thirds of those surveyed said they were incorporating more ESG considerations into their investment strategy and process than they did a year earlier.

Whether the recent bushfires hasten insurers' move away from coal is uncertain since most have already given time frames for severing their exposures, Mirenzi said. While it is unclear if action will come in the form of divestment, government regulation or something else, evidence points to rising pressure for countries around the world to take action on climate change.

Natural disasters increase pressure to act

A November 2019 poll by daily Australian newspaper The Guardian found that 60% of the country's voters do not think enough is being done about climate change, up from 51% in March. Research from the High Lantern Group published in January showed that climate change generated the highest degree of public pressure on corporations by activists, policymakers and journalists last year, overcoming a living wage as the top issue the year before.

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"When you think about the intersection of climate risk in the coal industry, any example is going to catalyze the opposition and the focus around the issue," said Benjamin Nelson, senior credit officer and lead coal analyst at Moody's. "The current in ESG is intensifying, so the coal producers are swimming upstream."

Recent research into the public response to climate change found that Hurricane Irma in Florida heightened negative emotions about climate and strengthened beliefs that global warming is causing more intense natural disasters. The event also fostered a willingness to sacrifice for environmental solutions.

"After experiencing an extreme weather event, participants in our study were more willing to pay higher taxes for the environment," said Magnus Berquist, a psychology researcher at the University of Gothenburg in Sweden who was among those who conducted the study. "This is in line with other studies showing that experiencing extreme weather events can increase people's likelihood to engage in environmental activism and to accept environmental policies."

Pro-environmental engagement is more likely among those who believe human activity to be behind catastrophic weather, Berquist said in an email on behalf of his fellow researchers. People often perceive global warming as an abstract, distal and slow concern, but severe weather events are concrete, close and rapid.

"At least for some segments of the public, a lack of trust in climate scientists and governmental institutions may contribute to a relatively low impact of the warnings," Berquist said. "Experience is not directly dependent on trust in order to have an impact."