The canary in the coal mine

A significant chunk of Australia’s financial services industry has a problem.

On the one hand, many of the world’s banks and insurers have refused to finance and insure fossil fuels industries because of their inherently conflicted ESG principles.

Yet, on the other hand, their shareholders are missing out on a huge opportunity to create value for themselves, Australia and the rest of the world.

Adani, the canary in the coal mine.

After years of difficulty, the Carmichael mine is now on its path to successfully produce ten million tonnes of high-quality thermal coal per year.

Adani exports coal to generate reliable and affordable energy for people in the developing world, predominantly its home country, India.

…and yet activists did everything they could to shut the project down.

In April 2019, Greens leader Bob Brown led a convoy of vehicles to protest against the proposed coal mine.

According to the Financial Times, Marsh McLennan, the world’s biggest broker, stopped arranging insurance for Adani last year after the conclusion of the mine’s construction phase.

In January 2020, Siemens announced it would re-evaluate its $20 million contract to supply signalling systems for the Adani rail link in response to protests in Berlin by Extinction Rebellion.

After making the right decision and backing the project, then-CEO Joe Kaeser apologised to the activists, saying “we will establish an effective Sustainability Board to better manage environmental care in the future”.

Earlier this year, Lockton – one of the world’s largest privately owned insurance brokerage firms – entered talks with Adani before deciding in July not to proceed after pressure from campaign groups and staff.

This came after activists parked a van outside the broker’s London office, displaying the message: “Lockton taking on Adani’s new coal mine as a client will fuel climate disaster.”

Investment bank, BNY Mellon and China’s ICBC have cut ties with or ruled out financing the Carmichael mine in Australia.

According to Market Forces, 44 of the world’s biggest insurers and reinsurers, including many that initially saw the project as insurable prior to the pressure exerted by activists — have said they will not provide coverage to the mine in the future.

… and even contractors to Adani weren’t (aren’t) safe.

Last year, BMD – one of Australia’s largest construction companies, and one of Adani’s most significant contractors – said it found itself in the extraordinary position of being unable to find any insurer for its work on Adani-related projects.

CRE is aware of this occurring throughout the entire supply chain; in some cases removing smaller suppliers/contractors ability to trade entirely.

Meanwhile, the International Energy Agency was admitting at the time, that global coal-fired power generation hit an all-time high in 2021.

Coal production is set to rise to its highest ever levels in 2022.  Global coal demand may well hit a new all-time high in the next two years.

The futures markets also suggest coal prices will remain over three times higher than the 2009-2020 average for another five years.

The imposition of broad brush ESG principles to Aussie enterprise

A recent report published in the Environmental Research Journal titled – Acute Climate Risks in the Financial System: Examining the Utility of Climate Model Projections – demonstrates similar concerns.

The paper was authored by Professor Andy Pitman AO – the Director of the Australian Research Council’s Centre of Excellence for Climate Extremes – along with several academics from universities across the country.

Pitman and his peers concluded:

“… we used data… to determine the degree to which estimates of global mean temperature can be used to estimate changes in the annual extremes of temperature and rainfall, two compound events (heatwaves and drought, and extreme rain and strong winds), and whether the emission scenario provides insights into the change in the 20, 50 and 100 year return values for temperature and rainfall.

We show that global mean temperature provides little insight on how acute risks likely material to the financial sector (‘material extremes’) will change at a city-scale.

“We conclude that ‘top-down’ approaches are likely to be flawed when applied at a granular scale, and that there are risks in employing the approaches used by, for example, the Network of Central Banks and Supervisors for Greening the Financial System.

“Most fundamental, uncertainty associated with projections of future climate extremes must be propagated through to estimating risk.

“We strongly encourage a review of existing top-down approaches before they develop into de facto standards.”

While only one study, there appears to be a sense that we are making some extremely reactionary decisions predicated on less than convincing facts, and at the moment, this is having a significant effect on cost of living – at what point will it become a real humanitarian disaster when energy access is removed from developing, emerging and potentially even some developed countries?

Bankers and insurers can’t turn their back on the Aussie mining industry.

Our miners are some of Australia’s largest taxpayers, and best employers keeping regional centres alive.

If we keep making it as hard as possible for them, they’ll have to shut up shop or look overseas.

Then what?