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US coal sector struggling to find a place in an ESG world

In a finance world increasingly committing to investing with environmental, social and governance factors as a priority, the coal sector is finding it difficult to find its place.

Over the past several years, the industry has seen banks and insurers increasingly pledge to abandon the sector to appease environmental concerns, particularly around climate change. There are 116 globally significant banks and insurers with coal divestment, exclusion or restriction policies in place, Tim Buckley, director of energy finance studies at the Institute for Energy Economics and Financial Analysis, said in a Jan. 17 email.

The divestment movement is accelerating and marked a major milestone this month when BlackRock Inc., the world's largest asset manager, announced a coal exclusion policy impacting about $500 million of its assets under management.

"As Blackrock says, this is the easy one — it is losing economic competitiveness; coal power is screwed if and when a carbon price comes in and renewable energy just gets cheaper every year," Buckley said. "Coal is the largest single carbon emitter globally. So it is a bit of a no-brainer."

The BlackRock announcement came up frequently in Miami during CoalTrans USA, where a panel of coal executives gathered for a discussion titled "Coal investing in an ESG World." Daniel Scott, managing director of equity research with Clarksons Platou Securities, moderated the event and wrote earlier this year in a note to investors that "ESG is one of the strongest headwinds facing the industry today."

Consol Energy Inc. President and CEO Jimmy Brock said ESG investors are mostly about the "E," and the environmental concern they are most worried about is climate change. Burning coal emits more carbon dioxide than natural gas and has proven to be more replaceable than oil. That means for many ESG investors, coal companies are going to be automatically ruled out, Brock said.

"We've been able to maintain a lot of the investor base that we have now, but it takes work," Brock said of Consol, which primarily produces thermal coal for power generation. "I personally believe that we can mine coal. We can mine it responsibly, and we can provide a very valuable resource for everyone in America and across the world. But it does take work."

It also takes significant capital. Technology that would capture carbon dioxide from coal-fired power plants has proven to be challenging to commercialize, and few coal companies are in a position to invest in developing the technology.

"If we spend the money, do the research, we can burn coal cleanly. We need help doing it," Brock said. "They keep subsidizing all of our competitors, wind and solar and everyone else, and it distorts the market and it's not competing in an open market. ... We've got to continue to innovate with new technologies. And we have to find someone who's willing to provide capital to do it because it's expensive."

Divestment from the coal sector has a real impact. Many coal companies have warned that such movements could increase the cost of debt, insurance and other services. Blackhawk Mining LLC President Jesse Parrish said that even though his company primarily produces metallurgical coal, it will likely see higher costs.

"We've already been forewarned going into renewal that'll be later this year that basically the property-casualty insurance is going to be more difficult," Parrish said during the panel. "It's the same thing with banks."

Ramaco Resources Inc. CFO Jeremy Sussman added that the rising cost of insurance and banking is probably the only inflationary item most U.S. coal producers are facing in 2020.

The broader ESG movement may be shying away from coal altogether, but some, including Brock, suggest there is room for a more nuanced look at coal producers. Rather than excluding coal, ESG screeners could instead look to some of the things the industry and specific companies are doing to provide the fuel more responsibly.

Consol was applauded for its ESG disclosures in the past by a B. Riley FBR analyst who has suggested that early adopters of ESG principles in the coal sector will be able to distinguish themselves from their peers. Brock said some of Consol's efforts include recycling water it consumes and goals to reduce methane emissions and maintain a safe workforce.

"The team works really hard at it, to make sure that we can take those ESG rating agencies to task just like they do us," Brock said. "So when they come in and they would say, 'Look, we are sorry this is what we have to do, because you are a thermal coal producer,' we push back and say, 'Here's what we do.' The problem is, we really haven't told that story well enough as an industry."