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| Legal & General Investment Management (LGIM) Head of Sustainability & Responsible Investment Strategy Meryam Omi / Courtesy of LGIM |
By Nam Hyun-woo
Legal & General Investment Management (LGIM), one of the U.K.'s largest asset managers and a shareholder of Korea Electric Power Corp. (KEPCO), may take "investment action" against the state-run power distributor, in opposition to the company's continued efforts to invest in overseas coal-fired power plant projects, according to LGIM's head of sustainable investment strategies.
With KEPCO already facing growing criticism from global investors and international environmental groups for its planned investments into plant projects in Vietnam and Indonesia, LGIM's opposition is coming as additional pressure to compel the company to drop the plans.
"Unfortunately, KEPCO failed to address our concerns despite repeated engagements. Under our Climate Impact Pledge program, where we assess the climate strategies of circa 80 of the world's largest companies, it is the lowest-scoring company in its sector," LGIM Head of Sustainability & Responsible Investment Strategy Meryam Omi said during an interview with The Korea Times arranged by Solutions for Our Climate.
"Where we do not see companies step up in their sustainability efforts, we will continue to take voting and investment action."
LGIM is a FTSE 100 company having $1.5 trillion in assets under management (AUM) as of June 30. LGIM held around 40 million pounds worth of KEPCO shares as of mid-August, an approximate 0.5 percent stake in the company.
Omi's remarks came amid growing criticism of KEPCO's coal investment plans in the two Southeast Asian nations.
In recent years, KEPCO has been tapping into a $3.5 billion project to build the Jawa 9 and 10 coal-fired power plants near Jakarta, Indonesia. In June, the state-run Korea Development Institute (KDI) approved KEPCO's $51 million investment into the project, even though the institute calculated the investment would cause a $7 million loss for KEPCO. In Korea, a project worth more than 50 billion won ($42.15 million) by a public institution is required to pass a KDI feasibility study.
Similarly, KEPCO is attempting to make investments into a Vietnamese coal-powered power plant project ― building two 600-megawatt plants in Ha Tinh Province, Vietnam. This plan was also estimated to make $158 million loss in a separate KDI study, but the institute again approved it in March.
These triggered uproars from overseas environmental activists, who staged a series of protests in front of Korean embassies. In June, nine overseas civic groups ran an ad in the Washington Post questioning President Moon Jae-in, asking, "Is this Korea's idea of Green New Deal?" The Green New Deal is Moon's initiative to nurture the country's eco-friendly industries and accomplish net-zero emissions.
Along with civic groups, a number of global investors also raised not only ESG concerns but also profitability questions over KEPCO's plans, with Blackrock demanding the company reveal its "strategic reasons" for pursuing the projects in Indonesia and Vietnam.
Despite this opposition, the KEPCO board approved the Indonesia plan, June 30, and is expected to okay the Vietnam plan in a separate board meeting scheduled for later this month.
"Although independent feasibility studies have questioned the profitability of KEPCO's coal plans, the key point is broader than debating the financials of this or that coal project: it is in the interest of all investors to avoid market damage from coal-fueled climate change," Omi said.
LGIM has already taken action against KEPCO's coal investment plans. Last year, LGIM cut KEPCO from its ESG-themed Future World Funds, as the asset manager said the power company failed to meet environmental standards. And Omi dropped hints of further action by LGIM to oppose KEPCO's coal investments.
"Where companies fail to persistently meet our minimum environmental standards, we will exclude them from certain funds," Omi said. "Where we are legally obliged to keep our stake ― for example, because companies are part of major market indices ― we will use our shares to vote against the chair of their board, to send a consistent message. Importantly, we will call out publicly companies that fall short ― and have been very pleased to see a change as a result of our pressure."
As voices calling for KEPCO to drop its coal investment plans grow, Korean lawmakers tabled a pack of revisions July 28 prohibiting KEPCO and other domestic financial institutions from investing in overseas coal projects. If the revisions, proposed by ruling Democratic Party of Korea lawmakers, pass the National Assembly next month, KEPCO's investments in the coal projects will be halted.
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| Members of Greenpeace Indonesia stage a protest at the Embassy of Korea in Indonesia, June 30, calling for the Korea Electric Power Corp. to drop its investments in the Jawa 9 and 10 coal-fired power plants. Courtesy of Greenpeace |
Changing market trends
Not only LGIM but also a majority of big name asset managers no longer consider environmental value as something that they should pursue even if it compromises profits, as the low-carbon economy trend establishes itself while conventional high-polluting industries are facing growing risks.
Omi also presented a similar outlook, saying investors are finding the balance between profitability and ESG values.
"Though there is still a concern in the market that embracing ESG topics might require a sacrifice in performance, we are seeing quite the opposite, as ESG funds have demonstrated resilience ― including during the coronavirus pandemic ― and the deepening ESG integration helps our fund managers unearth investment opportunities and reduce risk," she said.
And she added that such a trend will likely affect not only LGIM but also other asset managers in organizing their investment portfolios.
"As long-term investors, we believe that environmental and financial sustainability ultimately converge, as high-polluting industries face pressure from regulators, competing technologies and the increasingly climate-conscious public. For the coal industry, we expect persistent difficulties in accessing capital, as a growing number of clients demand the low-carbon option for their pension or investments."
One of the low-carbon options is investing in companies joining the RE100 campaign, meaning running their operations at factories and offices on 100 percent renewable energy. More than 240 of the world's best known companies have announced their strategies to go 100 percent renewable within self-set timeframes, while some others proclaim they will pursue net-zero emissions.
This comes as a fresh risk for Korean companies seeking overseas investment, as they are lagging far behind their global rivals in terms of using renewable energy sources. Industry officials said this is largely attributable to the lack of a power purchase agreement (PPA) system here, a direct contract between electricity sellers and buyers, enabling the buyer to purchase electricity generated only from renewable sources.
"Building new coal plants is fundamentally at odds with the path that scientists tell us we need to be on to avoid dangerous climate change, and it is increasingly at odds with market trends," Omi said.
"In 2020, as coal demand saw its largest decline since World War II, renewables were the only energy source to keep growing. We believe that the world's growing energy demand ― including in Southeast Asia ― can increasingly be met from cleaner, cheaper alternatives, which are also vastly less costly to human health."
Omi added LGIM also recognizes that for many companies and sectors, the transition to a low-carbon economy will require time, but the asset manager wants to help them "succeed" through its voting, engagement and public policy advocacy.
"We need to see ambitious sustainability strategies today. Otherwise, as regulators have warned, companies which fail to adapt to a net zero world will cease to exist," she said.
