The coal challenge

Phasing out coal – the largest single source of energy-related greenhouse gas emissions – is critical to tackling the climate crisis.

The move away from coal needs to be managed in a way that ensures energy security and affordability. New coal power plants make no more sense now than they did before today’s energy crisis. They are slow to build, make less economic sense than renewables, and will rapidly become a stranded asset risk.

HSBC sits at the geographic heart of the energy transition. We know the road from coal to clean is toughest in emerging and developing markets where most of the world’s existing coal-fired power generation sits, and where coal plants are relatively young in comparison to in the West.

A 2040 coal phase out date globally is required by science (opens in new window) , but for this to work in the real world, engagement, financing and investment – not divestment – will be required to transform the energy and industrial systems in the coal-reliant markets HSBC serves.

Our Group coal phase-out policy has a dual objective to enable both a science-aligned thermal coal phase-out and the clean energy transition in emerging markets.

This week, HSBC Asset Management announced its own coal phase out policy . This builds on the principles of the Group’s policy, factoring in Asset Management’s fiduciary duties and distinct influence as an investor.

What are the key tenets of HSBC Asset Management’s new Coal Policy?

We believe our policy to be progressive, substantive, and among the industry leaders. It means no new money goes to companies engaged in coal expansion, by restricting participation in IPOs or new debt issuance. We already ban investing directly in new or existing thermal coal projects.

In our ‘active’ investment portfolios , where managers pick which stocks or bonds to invest in, we will no longer hold companies exposed to thermal coal by 2030 in EU and OECD markets, and by 2040 globally. This difference reflects the science-based timeline set out by the International Energy Agency (opens in new window) (IEA) and enables a just and orderly transition.

Our exclusion threshold of 2.5 per cent of a company’s revenues exposed to thermal coal is more exacting than other asset managers, and half that set by the Science Based Targets initiative. This intentionally low threshold conveys our ambition, while avoiding unintended consequences.

In our ‘passive’ investment portfolios , which track an index from companies such as FTSE or MSCI, we will not launch new funds or ETFs that include companies active in thermal coal above that 2.5 per cent threshold. The only exception would be if these funds are explicitly aligned with 1.5°C or with clear plans to divest from coal. We know that many investors want a greater choice of low-cost sustainable funds through ETFs and tracker funds. So we will work with index providers to extend the range of indices that limit exposure to thermal coal. This will support mainstream investors to make net zero-aligned investments and give index providers confidence there is a market for these products.

How will we actively engage to drive change?

We’re strengthening engagement with companies across all funds so we can use our influence as an investor to drive change. This is a public signal on our intentions and how we’re going to vote.

This new policy will bring forward stronger active engagement with company management on their transition plans, encouraging and supporting them to develop credible plans and divesting over time from those that do not.

By the end of 2023, we plan to have engaged with all listed companies in actively managed portfolios with more than 10 per cent of their revenues exposed to thermal coal, and all listed issuers over that threshold in passively managed portfolios by 2025. These criteria are more specific than our peers, as we understand their public commitments. We have added new staff to our asset management engagement team to help us do this.

What are the consequences of inaction?

We will vote against the re-election of company chairs which do not provide Task Force on Climate-Related Financial Disclosures (TCFD) or equivalent reporting (with over 10 per cent of their revenues exposed to thermal coal). We have also already co-filed a shareholder resolution requiring an improved transition plan at a large Asian power producer. Over time, we will divest from companies whose transition plans are incompatible with our own net zero commitments. This policy brings that judgement into formal assessment processes, prioritising outcome-focused engagement. We will form an institutional view of the credibility of transition plans and expectations for change, enabling ratchet over time.

How will we exercise our duty to investors?

Simply put, our fiduciary duty means acting in our client’s best interest when we invest their money. Our policy is framed to drive action. It avoids both ‘business as usual’ and overnight divestment in favour of supporting change and transition. By staying invested we maintain influence over companies at the heart of the energy transition. Our increased engagement will advocate for high-quality reporting and transition plans. This engagement has teeth, and explicit phase out timelines, designed to set expectations and share expertise.

That means our clients benefit from value generation if these companies successfully transition.

How will we enable investors to support a clean energy future?

We want to be at the heart of investing in new clean energy infrastructure to build the new economy – solar, wind, hydropower, next generation nuclear, and of course energy storage – and the new minerals and technologies critical to both a reliable future clean energy system and decarbonising industry. Our Alternatives business will focus on some of these areas going forwards.

What can you expect from us next?

This policy is part of a wider review and update of our financing and investment policies critical to achieving net zero by 2050. Before the year end, we will release our new energy policy, having consulted with leading international energy and scientific bodies. This will update on our approach to coal and include our approach to the wider energy system – including oil and gas, nuclear, biomass, renewables, hydrogen, and power production.

We know the energy transition is dynamic. So we will review our policies annually, taking into account emerging science, international guidance, and good industry practice.

All asset managers have a fiduciary duty to their investors. We believe that aligning our investment decisions to a net zero future – including phasing out coal – is the best way for us to stick by this duty, and help open up a world of sustainable, long-term opportunities for clients.