"Despite the expected increase in steel production and coking coal demand, many large investors are not allowed to own coal companies due to ESG mandates. In fact, many of them are being forced to sell their stakes, causing low valuations."
Thanks for sharing this. Do you have links/sources about this? Some questions I'm trying to get more color on:
Do you know when this started taking place? Is there a risk that these mandates are withdrawn in the new future (if new president elected, etc)? Are there not loop-holes for big investors via hedge funds, or other ways to invest? What entities are/are not affected by the mandates?
If you look at large pools of money, like public pension funds, most have some sort of ESG consideration. Some of the time, they're mandates, sometimes they're principles. While there's really no standard definition for ESG, coal is pretty hated. Some time spent searching the investment documents will turn up quite a bit.
Two of the largest are CalPERS and CalSTRS. Together they're over $800 billion.
CalPERS stopped investing in coal in 2015 and sold all their coal holding in 2017. You can see more from them here:
A few other points that contribute to lower valuations:
1. None of the mentioned companies are in the S&P 500, excluding them from most passive money.
2. Coal as an industry is generally seen as dying. For proof, look at analyst coverage. Most of the mentioned companies in the article have 2, maybe 3 analysts covering them. Other similar sized, "boring" industrial / materials companies like Atkore or Boise Cascade have double the analyst coverage.
On hedge funds - even if the hedge fund doesn't consider ESG, the investment managers at CalPERS can tell the hedge funds "we don't want to own coal companies" and the hedge funds will comply. If not, CalPERS will move the money.
I don't see ESG principles being withdrawn as a risk - that COULD potentially drive up the prices of coal companies as large pools of money would be allowed to return. Even if ESG were off the table, I don't think large funds would rush back to coal. I also think it's unlikely ESG considerations go away. As I said, CalPERS got out of coal in 2015 - 2017. That period includes Republican and Democratic leadership.
Remember, my ideas are just a starting place. Do some digging, do your own research and form your own opinion. If you're going to make an investment, even if the idea came from someone else, you need to do enough research that it becomes your own idea. I could always be wrong!
Thanks for the links, I'll have a closer look. Generally, I think it's a good practice to lay out a short/bear thesis and then disprove every point before making a decision. What could go wrong, and if so, what's the downside, etc.
Another way of getting exposure without investing in a particular coal stock is to buy an underlying royalty, e.g. NRP. However it's not a pure play so a few other factors need to be considered here, but it could still mitigate downside risk if the coal industry was to be punished even further
Nice piece.
"Despite the expected increase in steel production and coking coal demand, many large investors are not allowed to own coal companies due to ESG mandates. In fact, many of them are being forced to sell their stakes, causing low valuations."
Thanks for sharing this. Do you have links/sources about this? Some questions I'm trying to get more color on:
Do you know when this started taking place? Is there a risk that these mandates are withdrawn in the new future (if new president elected, etc)? Are there not loop-holes for big investors via hedge funds, or other ways to invest? What entities are/are not affected by the mandates?
Thanks
If you look at large pools of money, like public pension funds, most have some sort of ESG consideration. Some of the time, they're mandates, sometimes they're principles. While there's really no standard definition for ESG, coal is pretty hated. Some time spent searching the investment documents will turn up quite a bit.
Two of the largest are CalPERS and CalSTRS. Together they're over $800 billion.
CalPERS stopped investing in coal in 2015 and sold all their coal holding in 2017. You can see more from them here:
https://www.calpers.ca.gov/docs/climate-related-financial-disclosure.pdf
CalSTRS:
https://www.calstrs.com/sustainable-investing
https://www.calstrs.com/files/b956aa967/calstrs_esg_policy.pdf
A few other points that contribute to lower valuations:
1. None of the mentioned companies are in the S&P 500, excluding them from most passive money.
2. Coal as an industry is generally seen as dying. For proof, look at analyst coverage. Most of the mentioned companies in the article have 2, maybe 3 analysts covering them. Other similar sized, "boring" industrial / materials companies like Atkore or Boise Cascade have double the analyst coverage.
On hedge funds - even if the hedge fund doesn't consider ESG, the investment managers at CalPERS can tell the hedge funds "we don't want to own coal companies" and the hedge funds will comply. If not, CalPERS will move the money.
I don't see ESG principles being withdrawn as a risk - that COULD potentially drive up the prices of coal companies as large pools of money would be allowed to return. Even if ESG were off the table, I don't think large funds would rush back to coal. I also think it's unlikely ESG considerations go away. As I said, CalPERS got out of coal in 2015 - 2017. That period includes Republican and Democratic leadership.
Remember, my ideas are just a starting place. Do some digging, do your own research and form your own opinion. If you're going to make an investment, even if the idea came from someone else, you need to do enough research that it becomes your own idea. I could always be wrong!
Thanks for the links, I'll have a closer look. Generally, I think it's a good practice to lay out a short/bear thesis and then disprove every point before making a decision. What could go wrong, and if so, what's the downside, etc.
Another way of getting exposure without investing in a particular coal stock is to buy an underlying royalty, e.g. NRP. However it's not a pure play so a few other factors need to be considered here, but it could still mitigate downside risk if the coal industry was to be punished even further
Cheers
Phenomenal work, once again.
TJ do the increase of EAF and the new laws re carbon imports into Europe, china’s willingness to adopt green steel… scare you?
In short, no. Two-thirds of new steel plants being built today are blast furnaces.
In the short term, agreed. But every single steel producer is talking about converting in 26 and 27. Do you have sources?
https://www.iea.org/energy-system/industry/steel