The future for coal and your super

In 2021 we excluded most coal-focused companies from our active share investments both locally and globally because we are pessimistic about the long-term future of the coal industry.

For our MySuper option, we went one step further, biasing investments towards companies that have a smaller carbon footprint compared to their business size. This means your investments in smartMonday MySuper contribute to a better world while aiming for a great investment return.

So why have we taken these actions? After all, coal remains a huge market, its price has rocketed up in the past year, and it is still Australia’s second-biggest export.

Source: YCharts

Well, the best way to explain this is to focus on the COP26 climate change conference held in Glasgow in November 2021. No doubt you heard of it, no one could have missed the blanket media coverage of the conference at the time.

The purpose of that United Nations conference was to bring countries into agreement in taking action on climate change. It was the latest in a series of events bringing together world leaders to address this critical issue.

The result? Media reports made it clear there is a broad call to invest in companies and projects that contribute to a better climate. And then there’s the other side of this. Companies that could experience long-term decline in demand for their products and are becoming increasingly risky to invest in today: coal is at the centre of that group.

A key outcome of the COP26 summit was the Glasgow Climate Pact, where 197 countries agreed to “accelerating efforts towards the phasedown of unabated coal power and phase-out of inefficient fossil fuel subsidies”.

That word ‘phasedown’ was included in the pact at the last minute, replacing ‘phase-out’. It was a telling move, bringing home the unavoidable truth that coal will remain a power source for a number of countries for now. (This isn’t that surprising as we’ll need a dramatic increase in alternative energy investment for it to be a viable alternative to coal.)

For the Australian economy this means continuing demand for coal which generates demand for the Australian dollar, brings in tax revenue and jobs, not to mention supporting industries and communities connected to coal.

However, these benefits, while real, aren’t viewed by everyone as worthwhile compensation for the environmental challenges the coal industry poses.

Our negative view of coal is based on its risk as an investment. Unlike other business sectors that fail today’s environmental or social standards (such as tobacco) and continue to prosper, we see several key differences in coal.

Most significantly, improving clean-energy technology permanently lessens the need for fossil fuels. This means demand for coal is in long-term decline and companies focussed on that sector may struggle to grow their share prices and secure funding. It’s already the case that in some situations it is not economical to even extract coal reserves. And this dynamic could accelerate rapidly if China and India (the main consumers of coal for energy) change path.