Over the past six years, environmental, social, and governance (ESG) investing has captured the imagination and money of investors and corporate executives. More recently, however, its influence has been weakening. While the underlying rationale for ESG is sound – companies and investors should be mindful of larger societal principles – its execution has been so overzealous that it eventually generated investor and corporate blowback. Glencore’s recent decision, after consulting shareholders, to retain its coal assets is the latest evidence that uncompromising and counterproductive ESG attacks on fossil fuels are peaking and that shareholders and corporate managers can support realistic and economically sound decarbonization and energy transition strategies.
In November 2022, Glencore agreed to purchase the coal assets of Teck Resources. In keeping with the ESG zeitgeist, the original thinking was to combine Teck’s considerable coal assets with Glencore’s coal assets and then divest them into a separate company. Presumably each of the companies would be worth more than the combined company, especially since the rump Glencore, with its focus on transition metals, would be free of its ESG stigmatized coal assets. However, the logic of this plan was flawed. Glencore’s shareholders and management soon realized that the company’s value would be greater if it kept the coal assets. Central to this reevaluation was the ability of the coal assets to generate enormous amounts of free cash flow with a minimum of new investment. ESG fatigue also contributed to the reversal.
Morningstar data indicates that ESG funds have experienced seven consecutive quarters of outflows. Among the primary motivation for these outflows, Morningstar cites mediocre returns and concerns over greenwashing. Many corporate executives and investment managers also altered their attitude toward ESG, witness Blackrock CEO Larry Fink’s flipflop on even using the term. Others, like JPMorgan CEO Jamie Dimon, have become more vocal about the need to keep funding the oil and gas industry. But shareholder support for Glencore’s coal decision is especially notable because of the size of Glencore’s coal operations and because vilification by climate activists of coal gives the decision great symbolic importance.
Coal is especially despised by the environmental community because it is the most carbon-intensive fuel and it is responsible for over 40% of all energy sector CO2 emissions. Coal also creates a range of other problems from premature deaths from soot exposure, to toxic mine waste. Yet, global demand has never been higher. From under 5 billion tons consumed in 2000, global consumption rose to a record 8.7 billion tons in 2023. Despite a substantial decline in developed world coal consumption, the developing world, especially China and India has more than offset this decline. The earlier demand increase was caused by China’s industrialization, but recent increases are coming from higher electricity demand, especially in India. Coal is still the world’s largest source of electricity generation.
New solar and wind generation construction cannot keep up with the increase in electricity demand, so keeping older coal generating facilities operating, and building new ones is a rational choice given the alternative of dire energy poverty and deprivation. It often is forgotten, but 745 million people today still lack access to energy. It is a safe assumption that most of these people worry more about having electricity, refrigeration, and air conditioning now, rather than about the temperature in 2100, or even next year.
But Glencore’s rationale for continuing to produce and sell coal goes beyond the world’s dire need for reliable and affordable power. In announcing the retention of its coal assets, Glencore made clear that the cash-generating capacity of the coal operations will fund opportunities in its energy transition metals portfolio, especially copper projects. Having the funds to develop the resources and products necessary for the energy transition is critical for decarbonization. General Motors and Ford recently learned this the hard way when they prematurely emphasized electric vehicle production and had to reverse course.
Since Glencore has committed itself to making only minimal investment in its coal operations and running production down over time, some of the fossil fuel industry’s most vocal critics are supportive of Glencore’s decision to keep the coal assets. These critics know that divesting the assets will not reduce global emissions and since the new owners are less likely to want to run the assets down, divestiture may increase emissions.
Glencore’s coal decision is evidence that ESG’s narrow strictures do not do justice to how a product with a negative carbon profile may still be necessary and good. The environmental-ESG community is partially reacting to this by emphasizing “sustainable” investing which considers how business activities affect society more broadly, but even this is inadequate because of the central role of climate change above other concerns. Choking off the supply of coal by attacking companies that supply a vitally necessary form of energy will only punish hundreds of millions of people and damage the development potential of billions more. A better climate solution for ESG proponents would be to stop interfering with the adoption of natural gas and nuclear power, which provide both reliable sources of energy and helps reduce global carbon emissions overall. Until that time, Glencore’s shareholders were correct in continuing to operate its coal assets.
