As coal industry declines, some states may see dramatic demographic changes

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The days of coal production meaningfully contributing to state economies appear to be numbered, according to a report released Tuesday by Fitch Ratings.

This is going to pose a drag on state gross domestic product, employment and revenues on some coal-producing states and contribute to weaker demographics.

“Coal production has declined steadily for over a decade, though direct mining's contribution to U.S. states' economies has remained fairly steady. Notable outliers include West Virginia, where mining's contribution to state GDP gradually descended from 11.4% in 2008 to 7.2% in 2017,” Fitch said. “Wyoming is another notable outlier with mining's importance slightly growing over this timeframe from 12.2% of state GDP in 2008 to 13.4% in 2017. However, this reflects Wyoming's 0.8% annual loss in total GDP over this time reflecting contractions in multiple industries.”

As the coal industry continues to retract and the secondary impacts of employment and economic loss are incorporated, states unable to replace this economic engine have and will continue to suffer weakening demographics, according to Fitch Senior Director Marcy Block.

“Some coal producing states are seeing declines in population and a greater proportion of aged residents, although these trends can be felt more acutely at lower levels of government,” Block said. “Most coal-producing states have also seen significant losses in coal mining-related employment since 2011, particularly in those states where the industry was heavily labor intensive.”

Fitch Senior Director Marcy Block.
Fitch Senior Director Marcy Block.

A total, 41,773 coal mining jobs were lost between 2011 and 2018 with the largest job losses occurring in Kentucky (12,939 jobs) and West Virginia (10,807). For those states with the largest coal mining presence, retraction in this industry has been a drag on overall growth in non-farm employment, the report said. Conversely, coal-related employment has grown in Montana and North Dakota since 2011.

Of the top 10 coal-producing states, West Virginia's demographic trends are among the least favorable, Fitch said.

Weak trends in population levels, aging residents and unemployment are also common among Kentucky, Montana and Wyoming, whereas strong growth in oil and gas development (Colorado, North Dakota, and Texas) in addition to other sectors (Colorado and Texas) have strengthened trends in these states' population, GDP and employment.

Under the Paris Climate Change Agreement of 2015, signature countries agreed to cut greenhouse gas emissions and attempt to limit the rise in global average temperatures. The pact pushed for a rise in renewable energy sources and a decline in fossil fuel production and consumption.

And many U.S. states and cities have been taking a hard look at their investments in coal since America has backed out of the agreement.

In January, after losing some of its member co-ops, Colorado-based Tri-State Generation and Transmission Association said it was accelerating retirement of coal-fired power plants and replacing them with renewable energy sources.

The move came amid a rapid decline in coal-fired power nationally and a Kansas utility’s decision to abandon the only new U.S. coal plant on the drawing boards. Sunflower Electric Power Corp. is allowing its permit for a proposed $2.2 billion plant to expire in March. Tri-State was the plant’s largest partner. No new coal plant has opened in the United States since 2015.

The share of renewables in the utility-scale U.S. power generation mix will rise to 22% in 2021, up from 17% in 2019, as coal continues to fall, according to the U.S. Energy Information Administration.

On Monday, Los Angeles Mayor Eric Garcetti signed an executive order on investing in a low-carbon future.

“The City Administrative Officer shall research and report back on financing instruments and mechanisms, including executed deals, currently available and occurring in the municipal market which have positive climate and environmental impact by December 2020.”

He also focused in on pensions.

The order “requests the boards of the city’s retirement systems to evaluate the risk factors associated with fossil fuel investments, the opportunities associated with low and zero carbon-based and renewable energy investments, and, consistent with its fiduciary duties to its members, incorporate findings into the system’s policies."

In January, New York State Comptroller Thomas DiNapoli said the state’s Common Retirement Fund was reviewing 27 thermal coal mining companies to determine whether they are taking steps to transition to a more sustainable business model in line with the growing low-carbon economy. The review of coal companies is part of DiNapoli’s plan to decarbonize the state's $225.9 billion of pension fund investments.

In New York City, the trustees of the New York City Employees’ Retirement System (NYCERS), the Teachers Retirement System (TRS) and the Board of Education Retirement System (BERS) have set a goal to divest city funds from fossil fuels within five years. NYCERS, TRS, and BERS represent 70% of the total assets of the city’s $215.5 billion pension funds. The other two funds are not involved in the divestment action; they are the Police Department and Fire Department pension funds.

Last month, Mayor Bill de Blasio and Comptroller Scott Stringer announced the funds have picked advisors to help them divest from fossil fuel firms. The advisors will develop and implement an orderly divestment process. The Comptroller’s Office also released a notice of search to find managers that will help the funds make investments in climate solutions.

The city also filed a lawsuit against the five largest investor-owned fossil fuel companies as measured by their contributions to global warming.

Fossil fuel equities are coming under increasing pressure from individual investors as well as fund managers.

“I’m done with fossil fuels. They’re done,” Jim Cramer of CNBC-TV said last month. “We’re starting to see divestment all over the world. We’re starting to see … big pension funds say ‘Hey, we’re not going to own them anymore. It doesn’t matter how good they are.’ ”

He added that the investing world had changed demographically.

“There are new managers and they don’t want to hear whether these [stocks] are good or bad. ... This has to do with new kinds of money managers that frankly just want to appease younger people who believe that you can’t ever make a fossil fuel company sustainable. So we’re in the 'death knell' phase … these stocks don’t want to be owned by younger people.”

He also noted that disinvestment was growing among different funds — and it was gaining momentum.

“You can see the world has turned on them and it’s actually happened very quickly. We’re seeing divestiture by a lot of different funds. It’s going to be a parade — a parade that says ‘These are like tobacco and we’re not going to own them.’ ”

Over 100 U.S. and European banks have been divesting from coal investments. BNP Paribas Asset Management, UBS Asset Management, BlackRock and Goldman Sachs have been making commitments to cut down on their investment in coal and other fossil fuel producers.

BlackRock CEO Larry Fink
BlackRock CEO Larry Fink

In a letter to clients last month, BlackRock CEO Larry Fink announced the firm would be exiting thermal coal producers.

“Thermal coal is significantly carbon intensive, becoming less and less economically viable, and highly exposed to regulation because of its environmental impacts. With the acceleration of the global energy transition, we do not believe that the long-term economic or investment rationale justifies continued investment in this sector,” he wrote. “As a result, we are in the process of removing from our discretionary active investment portfolios the public securities (both debt and equity) of companies that generate more than 25% of their revenues from thermal coal production, which we aim to accomplish by the middle of 2020.”

He said as part of the firm’s process of evaluating sectors with high ESG risk, it would also be looking at businesses that are heavily reliant on thermal coal to see whether they are effectively transitioning away from this reliance.

“In addition, BlackRock’s alternatives business will make no future direct investments in companies that generate more than 25% of their revenues from thermal coal production,” he said.

Looking at new investments to replace the old, the green bond sector has been growing by leaps and bounds in the past few years.

Jean-Yves Fillion, CEO of BNP Paribas Americas
Jean-Yves Fillion, CEO of BNP Paribas Americas.

Over $1 trillion of sustainable green bonds have been issued around the world since the first one was sold only a few years ago, Jean-Yves Fillion, CEO of BNP Paribas Americas, said last month on CNBC-TV.

“And this is only on the issuer side,” he said. “If you look at the investors’ side, last year U.S. investors allocated over $21 billion in sustainable assets, which was four times more than they did in 2018 and will probably be growing exponentially in 2020. That is the reality.”

Starting in January, BNP Asset Management executed its Global Sustainability Strategy, a further step contributing to a sustainable future, in line with its focus on delivering long-term sustainable investment returns for clients.

The firm has now excluded companies that derive more than 10% of their revenue from mining thermal coal and/or account for 1% or more of total global production. The global production limit will capture those companies whose share of revenue from coal is below 10%, but which nonetheless account for a meaningful level of production.

BNP also excluded power generators whose carbon intensity is above the 2017 global average and will follow the Paris-compliant trajectory for the sector as determined by the International Energy Agency in its Sustainable Development Scenario.

“We are at a crossroads: Now is the time for decisive action by the financial community to play its part in helping to achieve the sustainable future we need, as laid out by the Paris Agreement and the Sustainable Development Goals,” said Frédéric Janbon, CEO of BNP Paribas Asset Management. “We believe it is in the interest of our clients and is central to our fiduciary responsibility. The Global Sustainability Strategy and related investments in our team and our systems, reflects our increased ambition and outlines a blueprint to mainstream sustainability in all that we do — through our investment processes, but also engagement with our staff, companies, policymakers and wider society.”

And ESG investing can make good financial sense when data backs it up.

“I believe 2020 will be the year of ‘ESG definition and discovery,’ in which major advances are made,” Sheila Patel, chair of Goldman Sachs Asset Management, wrote in a recent report. “Specifically, I think we will begin to see more success in defining the alpha-generating capabilities of ESG. Unless ESG impact — both on society and on the risk/return profile of portfolios — can be measured, the shift will remain a movement rather than a revolution. … The key to making this happen is the data that companies are expected to provide. It is in this area that I believe we will see major breakthroughs next year.”

She said her own firm had taken the first steps.

“At Goldman Sachs, David Solomon recently announced new sustainability targets and priorities that will define our own mission in terms of sustainability,” she wrote. “Over the next decade, we will target $750 billion of financing, investing and advisory activity to nine areas that focus on climate transition and inclusive growth.”

Sheila Patel, Chair of Goldman Sachs Asset Management
Sheila Patel, Chair of Goldman Sachs Asset Management.

She added that old jobs would take on new importance.

“I can see a new role emerging for investment firms — that of mediator between corporates and regulators, helping to fine-tune the ESG data that companies need to provide, how this is presented and the range of considerations that should be factored in to avoid inadvertent false positives and negatives,” she said. “We are at the early stages of a long journey, but 2020 promises to be a year when the global investment industry will take meaningful steps forward.”

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ESG Green bonds Divestiture State of New York City of New York, NY New York City Pension Funds BNP Paribas Goldman Sachs BlackRock