While many investors may consider phasing out thermal coal alongside reductions to other fossil fuel assets (such as oil sands, crude oil, natural gas and metallurgical coal), this section focuses on thermal coal assets as a starting point due to their high CO2 content (and potential for carbon reduction), the high risk that some assets may become stranded and the relatively low weighting of the assets in global equity portfolios. 

Investors may, however, also use this framework for reducing exposure to a wider array of fossil fuel assets, in addition to thermal coal. Investors should also explore their role in ensuring an economic transition away from coal delivers an inclusive economy, for example, through engagement with companies on workplace and community implications. The PRI is working with the Grantham Research Institute and Initiative on Responsible Investment as well as with the International Trade Union Confederation to explore this more in depth.

Drivers behind phasing out investments in thermal coal

Drivers behind phasing out investments in thermal coal

Stranded asset risk

Various research reports (by IEA, the Carbon Tracker Initiative and the PRI and the University of Oxford’s Stranded Assets Programme, to name a few), have studied the risk of fossil fuel assets becoming stranded in a strong climate change mitigation scenario. These reports have produced varying estimates based on different future scenarios, some of which could have detrimental impacts on investment portfolios. As noted by Towers Watson, it is in the interest of investors with a medium- to long-term investment horizon to explore the stranded assets argument in the context of their own portfolios, defining their beliefs and assessing current portfolio exposure.

Some of the issues that investors need to take into account when considering the risk of stranded assets include:

  • the extent to which climate policy and technology adjusts, placing fossil fuel assets at risk;
  • consumer trends that may impact on fossil fuel demand;
  • the role of geopolitics and the commensurate variation in fossil fuel asset re-pricing;
  • measuring the extent to which the market has priced in these uncertainties;
  • the timing of when any further asset re-pricing may occur;
  • assumptions around the use of negative abatement technologies such as carbon capture and storage;
  • the role and interplay of asset values with commodity price movements.

Source: Global Investor Coalition (2015) Climate Change Investment Solutions Guide

There are a number of factors that investors need to take into account as part of their fiduciary duty to beneficiaries when considering the possibility of phasing out investments in thermal coal, as outlined below.

Process for phasing out investments in thermal coal

Process for phasing out investments in thermal coal

Evaluate potential benefits and costs

This list is not intended to be exhaustive but aims to provide a prompt for investors to help undertake their own assessment:

Potential benefits and costs of phasing out investments in thermal coal

Potential benefits and costs of phasing out investments in thermal coal

Set the parameters

Setting the parameters includes considering the type of thermal coal activities to phase out, the measures and thresholds that will be used to frame the investment constraint, the asset classes and investments affected and the timeframe for implementation.24 Figure 18 provides examples of how some investors have set these parameters in practice.

Examples of how parameters are being set for phasing out coal investments

Norges Bank Investment Management (on behalf of the Government Pension Fund)  The criterion states that coal power companies and mining companies who themselves, or through other operations they control, base 30% or more of their activities on coal, and/or derive 30% of their revenues from coal, may be excluded from the GPFG. “In the process of considering recommendations for exclusion or observation of companies that breach the thresholds above, emphasis should also be given to the forward-looking product/fuel mix transition as well as the degree to which the company utilizes renewable energy in its activities. 
New York City Pension Fund In response to the Fossil Fuel Divestment Act in the State Legislature related to limitations on investments of public pension funds, New York City Mayor Bill de Blasio and Comptroller Scott M. Stringer say that they will seek to divest the City’s US$189 billion pension funds from fossil fuel producers. The pension fund has begun analysing ways to divest from fossil fuel owners in a responsible way that is fully consistent with fiduciary obligations. The City’s pension funds hold approx. US$5 billion in the securities of over 190 fossil fuel companies. The City has also filed a lawsuit against the five largest investor-owned fossil fuel companies as measured by their contributions to global warming for “the billions of dollars the City will spend to protect New Yorkers from the effects of climate change.
US Pension Funds CalPERS and CalSTRS  The Californian Legislature prohibits the boards of the Public Employees’ Retirement System and the State Teachers’ Retirement System from making new investments or renewing existing investments of public employee retirement funds in a thermal coal company. A thermal coal company is defined as “a publicly traded company that generates 50% or more of its revenue from the mining of thermal coal.”
Zurich Insurance Group   Zurich “will divest from equity holdings in companies that derive more than half of their revenues from mining thermal coal, or utility companies that generate more than half of their energy from coal. It will not invest in new debt issued by such companies and will run off existing holdings. 
Wespath Investment Management   Wespath issued a publicly available Climate change (thermal coal) guideline that sets out its approach to managing the risks related to thermal coal investments, delineated by varying thresholds and activities across developed and developing countries.  
AXA Global Insurance and Investment Management  AXA will “divest €500 million from the coal industry by targeting companies which derive over 50% of their revenues from coal. Today (12th December 2017), the Group decided to increase its divestment fivefold to reach €2.4 billion, by divesting from companies which derive more than 30% of their revenues from coal, have a coal-based energy mix that exceeds 30%, actively build new coal plants, or produce more than 20 million tonnes of coal per year.”
ING  “By the end of 2025 ING will no longer finance clients in the utilities sector that are over 5% on coal-fired power in their energy mix – though they will continue to finance non-coal energy projects for these clients as they seek to transition away from coal. Further, and more immediately, ING will only support new clients from today onward if their reliance on coal is 10% or less and if they have a strategy to reduce their coal percentage to close to zero by 2025. ING will also phase out lending to individual coal-fired power plants by the end of 2025.” 
United Nations Joint Staff Pension Fund The Office of Investment Management, which manages about $68 billion in assets of the Fund, will divest from investments in publicly traded companies in the coal energy sector by 31 December 2020. Additionally, OIM shall not make any new investments in the coal energy sector across all asset classes.

Reflect into policies and processes

Integrating the considerations made so far into investment beliefs, policies and processes includes looking at the investment strategy, governance arrangements, risk management processes, adoption of metrics and targets and disclosure efforts. Some examples of how different investors have approached this are provided below.

Examples of how investors reflect phasing out thermal coal into beliefs, policies and processes

CalPERS, US Public Pension Fund  Response to Senate Bill 185, Public Divestiture of Thermal Coal Companies Act. “Potential consideration of divestment from coal-related assets supports Investment Belief 3 that investment decisions may reflect wider stakeholder views, provided they are consistent with its fiduciary duty to members and beneficiaries…also consistent with Investment Belief 9 in that risk is multifaceted and not fully captured through measures such as volatility or tracking error. As a long-term investor, CalPERS must consider risk factors, for example climate change and natural resource availability, that emerge slowly over long time periods, but could have a material impact on company or portfolio returns.”
Environment Agency Pension Fund, UK  Decarbonise the equity portfolio, reducing our exposure to “future emissions” by 90% for coal and 50% for oil and gas by 2020 compared to the exposure in our underlying benchmark as at 31 March 2015.”
Church of Sweden  Responsible Investment Policy and specific instructions (2017) for ethical and sustainable asset management for the national level of the Church of Sweden, including specific guidance on screening and engagement to minimise exposure to thermal coal-related companies (excludes the coal sector as well as companies with >5% of turnover from prospecting and extraction of coal). The policy specifies the need for investment managers to pay greater attention to individual equities and the risks therein, with less focus on benchmarking and tracking error risk. 
CalSTRS, US Public Pension Fund  “Using its 21 Risk Factors, CalSTRS has a well-established policy to assess environmental, social and governance investment risks – such as climate change impacts related to coal production – in addition to a formal divestment policy. Both policies emphasize engagement first – an approach that was well received by the affected companies. In the review of CalSTRS’ portfolio of US and nonUS thermal coal companies, models comparing the actual portfolio with a hypothetical coal-free portfolio, showed divestment would pose an insignificant impact on fund performance over a three-, five-, or 10-year period.” 

Possible actions for investors

Approaches that investors can take include negative screening, changing benchmarks, reviewing mandate design, integration into portfolio analysis and engagement with companies and policy makers.

  • Negative screening: Remove or reduce exposure to specific thermal coal companies and assets from the investment universe based on the parameters that have been set and reflected into policies.

Asset owners: Investment policies and an exclusions list can be provided to portfolio managers of listed and unlisted assets (internally or externally managed).

Examples include Norwegian Government Pension Fund Global, CDC Group, Hesta, Local Government Super, Storebrand, KLP and AXA.

Investment managers: Investment policies and an exclusions list might result in the development of a new product and/or service for asset owners, or a modification of existing products.

Examples include RobecoSAM, Australian Super, Mirova, TIAA-CREF, Calvert, PAX, Parnassus and Morgan Stanley.

  • Benchmark shift: Shift to a fossil-free or thermal coalrestricted benchmark for listed assets. For asset owners and investment managers, the benchmark underpinning existing and/or new investments could be modified to reflect a reduction in exposure to thermal coal-related companies. Examples include MSCI, S&P, FTSE Russell and Thomson Reuters
  • Mandate design: Design new mandates or alter existing ones to restrict investments in thermal-based coal and to capture new opportunities related to the transition to a lower carbon economy. This might encompass a range of asset classes where thermal coal companies are present, such as listed equity, fixed income, infrastructure and private equity.

Asset owners: Review the design of investment mandates to reflect the goal of phasing out investments in thermal coal-related assets (either internally or externally managed) and replace these (where possible) with lower carbon opportunities.

Examples include AP4, FRR, Vicsuper and TPT Retirement Solutions.

Investment managers: Work in partnership with asset owners to design and tailor investment solutions that meet their goals and investment restrictions with respect to reducing exposure to thermal coal-related assets.

Examples include Blackrock, Amundi, Vanguard and TIAA-CREF.

  • Integration into portfolio analysis: Reflect exposure to thermal coal-related assets into company/asset valuations, with the goal to explicitly incorporate future coal-related risks into asset values.


  • Consider the exposure to thermal coal-related assets as part of the due diligence process.
  • Engage with investee entities about reducing their exposure to thermal coal production, distribution and consumption.
  • Assess the assets in the portfolio at risk of becoming stranded in a 2°C or less scenario (as part of TCFD disclosure).
  • Use various sources of information to stay abreast of developments.
  • Measure and report the portfolio’s exposure to thermal coal assets (as part of TCFD disclosure).
  • Consider introducing targets to reduce or eliminate exposure to thermal coal assets in a manner that supports a just transition for individuals and communities.
  • Company engagement: Engage with companies that are involved in thermal coal-related activities (non pure play), either in the production or consumption of energy, to encourage them to shift away from coalrelated activities by a specified date. 

For both asset owners and investment managers: Engage with companies that pose the greatest risk in terms of exposure to thermal coal and/or that sit close to the threshold of the agreed investment parameters, both individually and in collaboration with others.

Examples include Norges Bank Investment Management, PKA, Hermes, Aviva, as well as collaborative efforts such as the Climate Action 100+ Initiative.

  • Policy maker engagement: Engage with policy makers to encourage them to implement measures (and reinforce existing efforts) that encourage a shift away from thermal coal-related assets.

For both asset owners and investment managers: Engage with policy makers individually on a case-by-case basis as well as collaborating with other investors at the domestic and global level.

Examples at the international level include the Global Investor Statement on Climate Change, engagement with G20 leaders on climate change, supporting the Financial Stability Board (FSB) Taskforce on Climate-related Financial Disclosures recommendations, supporting the Fossil Fuel Subsidy Reform Communique, and supporting the growing efforts amongst governments to justly phase out coal through the Powering Past Coal Alliance, to name a few.