Case study by Nordea Asset Management

In the spirit of showcasing leadership and raising standards of responsible investment among all our signatories, we are pleased to publish case studies of all the winning and shortlisted entries for the PRI Awards 2021.

Give a brief overview of your initiative, its objectives, and why you decided to undertake it.

Phasing out coal from the electricity sector is one of the most important steps to achieve the goals of the Paris Agreement. However, over 1,000 coal-fired units are currently in a construction or a pre-construction phase globally. Nordea Asset Management (NAM) has a critical position on any of its investments being involved in the construction of new coal-fired power plant projects, which it believes to be inherently inconsistent with limiting global warming to below 2°C.

The construction of a new coal-fired power plant in Vietnam, Vung Ang 2, would further contribute to the world’s continued dependency on coal. Furthermore, the project is located near to the Vung Ang 1 coal plant and the Formosa Steel plant, which have already caused major environmental pollution accidents in the area. The Vung Ang 2 project poses high climate-related, financial and reputational risks.

NAM therefore initiated a collaborative engagement to urge its owners, financiers and constructors to withdraw and to make commitments to end all future involvement in new coal projects. Its request to the companies involved is based on three facts. First, the Paris Agreement and the UN Sustainable Development Goals set clear targets for addressing climate change. Research, such as that carried out by Climate Analytics, concludes that coal power must be phased out globally by 2040 to meet the Paris objective of limiting global warming to 1.5°C. Any new coal-fired power plant is inconsistent with the goals and timelines of the Paris Agreement.

Secondly, Vung Ang 2’s economic viability is uncertain. A September 2019 report by the UK think tank Carbon Tracker concludes that the cost of constructing new renewables will be lower than operating costs of existing coal-fired power generation in Vietnam by as early as 2022. Lastly, analysis by the Environmental Law Alliance Worldwide found that key aspects of the project’s 2018 environmental impact assessment did not meet internationally accepted standards.

Describe how your initiative is aligned to Active Ownership 2.0, including:

  • The significance of the systemic, real-world outcomes it seeks.
  • How the initiative uses a variety or combination of stewardship tools/activities to achieve outcomes.
  • The theory of change for the initiative (making clear how the initiative intends to drive real world outcomes through use of the selected tools/activities).
  • The ambition, ingenuity and/or effort of the initiative.
  • How collaboration was used to drive outcomes.
  • Any challenges associated with the initiative and how these were overcome.

NAM chose to approach this important issue via a collaborative engagement method because it enables it to leverage knowledge and expertise from other investors and because it increases the ownership share in the companies tied to this project, consequently elevating the likelihood of a successful outcome. Its invitation for collaborative engagement was positively received. The collaboration comprises 25 investors, with NAM as the lead investor, representing approximately €4.8trn in assets under management. The scale of the engagement effort not only put great pressure on the companies involved, but was also heavily covered by global media and even discussed in national parliaments.

This collaborative initiative highlights the importance of engagement as a tool to change behaviour and enhance investee companies’ performance. NAM believes that divestment is ultimately a passive acceptance of suboptimal standards. This means that sometimes, instead of directly excluding companies with exposure to unsustainable practices, investors should choose to engage to enable real-world impact.

On 22 October 2020, NAM officially initiated a collaborative engagement against the construction of the planned Vung Ang 2 project. The consortium sent a letter to the 14 companies associated with the construction project, urging them to withdraw from the project and to commit to end all involvement in new coal projects worldwide, without exceptions. NAM issued a press release and also encouraged other participants to do so, to garner media attention.

In addition, when deemed relevant, NAM uses its voting rights to support climate resolutions that it considers as contributing to aligning its portfolios with the goals of the Paris Agreement. One voting example associated with the companies involved in Vung Ang 2 came in 2020, when NAM voted in support of a climate resolution at Mizuho’s AGM.

Since sending the letter, NAM has held follow-up meetings with the companies involved to discuss the topic. Depending on how the discussions evolve and what measures the companies take, the engagement may entail a dialogue with the companies’ executive bodies, and/or voting at AGMs. Citing contractual agreements, some companies have informed the collaboration that they are unable to withdraw from Vung Ang 2. However, several have recognised the importance of ending their involvement in coal and committed to withdraw from all future coal projects.

The results achieved in the initiative to date, including evaluation of its success against the objectives; any adjustments to plans going forward; any insights learned from this project that can be applied more broadly?

Media interest in this engagement has been extensive and has contributed to growing public opposition to coal in general and Vung Ang 2 in particular. As a response to the collaborative engagement, several of the companies involved in the project have committed to exit coal. NAM also believes that the initiative has contributed to decisions by a number of Asian governments to adopt new climate targets.

A few highlights of the success of the engagement include Samsung C&T’s commitment to withdraw from all future coal projects, stating that shareholder pressure has played a key role in in its decision to exit the coal industry, as well as decisions from KEPCO, Mitsubishi Corporation and Sumitomo Mitsui Financial Group to end involvement in future coal investments. In addition, Mitsubishi Corporation has informed the collaboration that it is withdrawing from Vinh Tan 3, a sister project to Vung Ang 2, while KEPCO has decided to cancel or convert to gas several of its overseas coal power projects.

The engagement can also claim some part of the credit for the Korean government’s decision to announce a net-zero target: leading up to the parliamentary vote, the engagement was heavily publicised by pro-climate members of parliament.

Despite progress, challenges remain, especially in terms of the geopolitical forces that are encouraging companies to remain involved in coal, even though the financial case may be weak. However, the tide is turning. Japan, China and South Korea, where many of these companies are located, have all recently made net-zero commitments. There is now momentum, both in terms of companies withdrawing from this specific project and also for committing to exit the coal business. NAM will continue to urge the companies involved to withdraw from the project and to commit to ending involvement in new coal projects, in line with the recommendations of the United Nations Secretary General.