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ESG focus pressures coal but could be tailwind for 1st movers in sector

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ESG focus pressures coal but could be tailwind for 1st movers in sector

Increased scrutiny from investors concerned about environmental, social and governance issues has put pressure on some of coal's top customers, but there may be benefits for a "first mover" in the coal mining space to acknowledge ESG risks to its bottom line, two analysts wrote in a recent investor note.

There are about $12.0 trillion in U.S.-based assets that invest using ESG criteria as of early 2018, according to the Forum for Sustainable and Responsible Investment. Despite climate change being a key concern of ESG-minded investors, the coal sector has done little to address and mitigate risks from ESG mandates on investment, B. Riley FBR analysts Lucas Pipes and Matthew Key wrote in a May 13 note to investors.

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"We appreciate the challenges to the sector in light of hardened positions, but we believe that more positive engagement could preserve and enhance value," the analysts wrote. "Despite ESG concerns, coal is here to stay."

The analysts said the first mover in the U.S. coal space to acknowledge ESG concerns could be rewarded by certain investors. They said Consol Energy Inc. stands out for its ESG disclosures and strategic initiatives.

"Although there is a common perception that the sector is abandoned by ESG irrespective of its actions, we believe the industry could consider a more active stance," the analysts said. "Those companies that are able to brand themselves as providers of the fuel that enables many of the luxuries we enjoy as an advanced economy while recognizing the importance of being responsible corporate citizens will, in our opinion, be best positioned to maximize shareholder value over the long term."

The broader mining sector faces similar scrutiny from ESG investors and customers. Several major international mining companies such as Glencore PLC, Anglo American PLC and Teck Resources Ltd. have already set examples on how to address ESG concerns by recognizing the risks of climate change in communication with investors, the analysts noted.

Exxaro Resources Ltd., a South African coal and heavy minerals mining company, touted its ESG score on a March 14 earnings call. Exxaro CEO Mxolisi Mgojo said shareholders are increasingly highlighting the impact of ESG investing.

"It's going to be a journey for all of us," Mgojo said. "We're in a new space where now suddenly things that were seemingly not so important in the past are beginning to have a huge bearing on all of our investments, whether in banking, financial services, whether in insurance, all of them, they are being driven by these pressures."

Sophisticated ESG investors will not screen out entire industries but will instead use a scoring system that recognizes companies distinguishing themselves from their peers, the B. Riley FBR analysts wrote. While some investors avoid owning shares in a power company that relies on fossil fuels, that does not mean all ESG-minded investors will ditch those investment opportunities, a trio of professors associated with Stanford University, Columbia University and other entities wrote in "How Investors Can (and Can't) Create Social Value" published in early 2018.

"Of course, individuals have diverse views of what is socially valuable and the appropriate tradeoff between different value," the professors wrote. "For example, those concerned with protecting coal mining jobs in West Virginia to address income inequality may value supporting low-income communities through support for clean coal more highly than concern over greenhouse gas emissions."

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Pure-play U.S. coal miners only have a cumulative market capitalization of about $11.7 billion, so the industry can manage even if some investments may screen out coal completely, the B. Riley FBR analysts suggested.

"As long as the right investors remain committed, this is a risk that we believe can be managed," they wrote.

Concerning climate, the B. Riley FBR analysts suggested that coal companies should acknowledge risks to their business, make a public commitment to lower greenhouse gas emissions from the mining process and target the most efficient coal customers. The analysts also pushed for companies to increase diversity within corporate governance, focusing on worker health and safety and community engagement and other ESG-minded efforts.

That could be a tough sell for an industry historically associated with environmental damage, fatal mine disasters, black lung disease and other societal problems. At the same time, as investors look more closely at environmental and other concerns associated with mining and burning coal, the economics of electricity generation are making it easier for utilities to turn away from the fuel.

When IDACORP Inc., which plans to transition to 100% clean energy by 2045, hosted its May 16 earnings call, it was joined on the call by Zack Waterman, the Sierra Club's Idaho chapter director. Waterman, a personal shareholder in Idacorp, applauded the company's efforts to transition from coal and do what is "right for communities and our environment."

"Many of our customers have shared with us that clean energy is important to them, and we listen," Idacorp President and CEO Darrel Anderson said earlier on the call. "We voluntarily adopted the clean energy goal. While reaction was overwhelmingly positive, some asked why would we voluntarily adopt such a goal. Well, we believe it's the right thing to do, and we think we have the resources, planning and commitment to make it work."