Reprinted with kind permission. The original article and graphics that appeared in Environmental Finance can be found here.
5 October 2010
The planned listing of Coal India is the latest example of how capital markets are failing to price – or even consider – climate change risk, says Mark Campanale
On the 18th of this month, state-owned Coal India – which claims to be the world’s largest producer of coal, with the largest reserves – is intending to list on the Bombay and National stock exchanges. This will be the largest ever initial public offering (IPO) in India, estimated at more than $3 billion, and follows New World Resources (NWR), the largest IPO in London in 2008 and, of course, Xstrata in 2002. It appears the appetite of global investors for carbon-intensive companies is undiminished.
In 2010, it simply beggars belief that the 510-page offer document for Coal India makes not even a passing reference to climate change, the UN climate negotiations or carbon regulations. It is more remarkable that the company counts among its advisers Deutsche Bank, Morgan Stanley, Citigroup and Bank of America Merrill Lynch – all of whom trumpet their climate change research and corporate responsibility. The prospectus does identify that “adverse weather and natural disasters” can affect its business; although ironically it doesn’t make the link that the frequency of these events is likely to increase as a result of the combustion of its products.
Coal India, NWR, China Shenhua Energy (which listed in Hong Kong in 2005), Xstrata and many like them bring significant coal reserves to the market. Coal India’s IPO is offering a 10% share of its 52.5 billion tonnes of proven geological reserves and 21.7 billion tonnes of extractable reserves. Each tonne burnt for power generation in India can be expected to produce at least the equivalent of 2 tonnes of carbon dioxide (CO2), meaning Coal India’s proven reserves could pump more than 105 billion tonnes of CO2 into the atmosphere. The Indian capital market is effectively financing 180 years worth of UK emissions in one go. As capital shifts to Asia’s emerging economies, Western investors are racing to find the next asset-rich, high-value fossil fuel opportunity.
Companies, their financial sponsors and stock market regulators have collectively failed to respond to the issue of climate change. Previous attempts to get the UK’s Financial Services Authority to review the risk disclosure of Xstrata at the time of its listing exposed the laissez-faire approach applied by regulators. Despite India currently considering how to regulate future carbon emissions, Coal India does not see fit to provide any commentary on how this could affect demand or coal prices.
In 2010, it simply beggars belief that the 510-page offer document for Coal India makes not even a passing reference to climate change
The current valuation of coal, oil and gas extraction companies is based on a magic formula of reserves replacement. City analysts continue to misprice replacement risk and place faith in unreliable reserves data. They also assume that there is unlimited capacity to burn carbon in future decades and that all that has been listed as ‘reserves’ will be developed and burnt. It is clear that we cannot afford to burn all the reserves that have already been discovered if we are to tackle climate change effectively. This overcapitalisation of extractives companies with what we call ‘unburnable carbon’ puts investors at risk of the resulting asset inflation bubble bursting.
We have seen the damage inflicted on financial institutions due to overexposure to sub-prime markets. Today, City institutions – including the signatories to the Climate Principles, the UN-backed Principles for Responsible Investment, the Institutional Investors Group on Climate Change and the Carbon Disclosure Project – have not kicked their addiction to fossil fuels. By continuing to participate in coal IPOs such as Coal India, investors are actually intensifying their carbon exposure, not decreasing it. They and the exchange regulators who are happy to turn a blind eye are complicit in this deceit. If this cabal is allowed to continue promoting a high-carbon future, we are heading for a carbon crash.
Mark Campanale is co-founder of Investor Watch, a not-for-profit which promotes sustainable financial markets.
The author would like to thank for his help with the article James Leaton, project director of Carbon Tracker, Investor Watch’s first project, which is aimed at improving the transparency of the carbon embedded in stock markets.