Monday, December 21, 2015

Will the Paris Agreement Help Usher in the End of the Coal Era?

By Amelia Schlusser, Staff Attorney

On December 12, 2015, 195 nations signed onto a new international agreement to address climate change. The agreement sets an ambitious but essential goal of significantly reducing greenhouse gas emissions to prevent global temperatures from increasing beyond 2° Celsius. While the individual emission reduction pledges included in the agreement are not legally binding—primarily because the U.S. Senate would almost certainly have rejected a legally binding commitment—the Paris Agreement signifies the start of a global transition away from fossil fuels and towards sustainable, renewable energy sources.

Many believe that the Paris Agreement will help usher in a new era of sustainable investment, in which investors will begin to shy away from risky investments in fossil fuel assets and invest capital in renewable energy.  As quoted in the Guardian, the International Investors Group on Climate Change stated: “Investors across Europe will now have the confidence to do much more to address the risks arising from high carbon assets and to seek opportunities linked to the low carbon transition already transforming the world’s energy system and infrastructure.”

There are two overarching reasons why the Paris Agreement should precipitate investment in renewable energy. First, by establishing the goal of attaining global carbon neutrality by 2050, the agreement serves to delineate the long-term risks associated with fossil fuel investments and establishes a more clearly defined timeline for the clean energy transition. Second, the agreement reduces the uncertainty associated with renewable energy investments by ensuring that demand for renewables will steadily increase over the coming decades.

In reality, the market transition from fossil fuels to renewables has been growing for some time. In the United States, coal stocks continue to decline in value as coal companies post substantial economic losses and confront increasingly stringent environmental regulations. Two major coal companies have made the headlines in recent days. Last week, the New York Stock Exchange threatened to delist Arch Coal due to its sub-par economic performance. Earlier this week, Peabody Coal submitted a filing to the Securities and Exchange Commission that fails to list climate change or greenhouse gas regulations as potential risks to the company’s investors.

Arch Coal May Get Booted from Wall Street

Last week, the New York Stock Exchange (NYSE) threatened to kick Arch Coal out of the Wall Street exchange after the company’s market value dropped below $50 million for 30 consecutive days, while shareholders have owned less than $50 million of the coal company’s stock. Because these conditions violate the NYSE’s listing requirements, Arch has 45 days to submit a plan to the exchange demonstrating how the company can re-achieve compliance with NYSE’s listing requirements within 18 months.

Arch Coal’s stock values have plummeted dramatically in recent years. According to ClimateWire, Arch’s stock fell from $350 per share in December 2010 to $1.03 a share on December 10, 2015. The company posted $2 billion in loses in the third quarter of 2015.

Arch isn’t the only coal company facing dire economic conditions. Alpha Natural Resources, Patriot Coal, and Walter Energy all filed for Chapter 11 bankruptcy protection in 2015.

Peabody Coal Fails to Disclose Vulnerability to Climate Change-Related Risks

In 2013, New York’s Attorney General, Eric Schneiderman, launched an investigation into Peabody Coal regarding the company’s failure to disclose climate change-related risks to investors. The investigation concerned Peabody’s annual filings with the Securities and Exchange Commission (SEC) in 2011, 2012, 2013, and 2014, in which the company asserted that it was not possible for it to “reasonably predict the impact” that future laws and regulations addressing climate change or greenhouse gas emissions would have on Peabody.

According to the New York Attorney General’s investigation, while Peabody’s SEC disclosures denied its ability to value climate change-related risks, the company’s internal market projections concluded that aggressive greenhouse gas regulations for existing power plants would reduce coal values by 33% to 38% in 2025, and a $20 per ton carbon tax would reduce coal demand by 38% to 53% below 2013 levels by 2020.

On November 8, 2015, Peabody Coal entered into an agreement with the New York Attorney General in which the company agreed that “any future SEC filings, or any future communications with shareholders, the financial industry, investors, the general public, and others” will not assert that it cannot reasonably predict the impacts that future climate policies would have on Peabody. The company also agreed that these communications would not contain any disclosures that were “inconsistent” with international findings that climate regulation could significantly impact demand for coal. 

Peabody filed a prospectus with the SEC on December 14, 2015, announcing its plans to sell $1 billion in stock. As reported by E&E News, while this prospectus listed a number of “risk factors” that may impact investments, it does not mention climate change, global warming, greenhouse gases, or carbon emissions. Meanwhile, following the finalization of the Paris Agreement, the value of Peabody Coal’s stock dropped by 13%.

The Paris Agreement may not have precipitated the shift away from coal-fired power, but the international climate deal will almost certainly help to expedite the transition to renewable energy. Investors should read the writing on the wall and begin to revise their portfolios accordingly. Those who don’t may eventually see their assets go up in smoke.

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