Source: Google

Coal India Limited’s massive ESG problem and stock price impact

Coal India Limited’s business performance has been disappointing and that is one of the reasons why the stock has been an underperformer. Apart from consistently missing production targets and its mine development plans, the company has also not done a great job on cost control. For a company that gets its resources for free as the mines get allotted to Coal India by the Government, Coal India has worked on a cost-plus model and the efficiency enhancement measures have not yielded desired results.

However, the ESG problem is much bigger for Coal India Ltd, and in recent times, that has been a big drag for the stock. There have been other factors involved but since late 2010 when it got listed, the stock price performance can be seen in two distinct phases: the first half (as shown in Figure 1) is when the business performance was more linked to stock price and the second half (as shown in Figure 2) when the ESG factors have played a big role.

There is, undoubtedly, a profound ESG movement going all over the globe right now. From countries to asset managers, from millennial investors to the old school stalwarts, everybody’s counting on the ESG chip for a better future and a better return on investment. The portfolio managers will need to ensure that their Assets Under Management (AUM) gets aligned with ESG benchmarks. This, as a result, has not been a great time for coal mining companies. Coal India Limited itself has not done a great job on ESG and has thus remained behind.

Environmental issues and Coal India Limited

According to The MSCI Net-Zero Tracker July 2021 edition, Coal India Limited is at the top of the list of The largest emitters that have not disclosed their greenhouse gas emissions, which shows the ten largest emitters based on MSCI emissions estimates that had not reported any of their greenhouse gas emissions as of May 31, 2021. What’s worse, Coal India Limited’s Total emissions (estimated in tonnes CO2e) is 1,020,007,692: almost five times larger than the next company on the list, SURGUTNEFTEGAZ PAO with 206,485,930. Interestingly, Coal India Limited’s emissions are higher than all the other nine companies combined which are as follows;

• COAL INDIA LIMITED – 1,020,007,692
• SURGUTNEFTEGAZ PAO – 206,485,930
• SHAANXI COAL INDUSTRY – 200,839,903
• CHINA STATE CONSTRUCTION ENGINEERING – 92,647,675
• SHAANXI COKING COAL GROUP – 82,534,966
• SDIC POWER HOLDINGS – 80,799,088
• PBF ENERGY – 77,406,962
• SHAANXI LUAN – 73,668,239
• GREENLAND HOLDINGS – 21,133,414
• ZHEJIANG CENTURY HUATONG GROUP – 5,384,905

Around 90% of Coal India Limited’s production comes from open cast mines. There have been several studies that highlight the adverse environmental impact of open cast mining. For example, Life cycle assessment of opencast coal mine production: a case study in Yimin mining area in China by Li Zhang, Jinman Wang, and Yu Feng says that opencast coal mining can lead to a large number of environmental problems, including air pollution, water pollution, and solid waste occupation.

There are other issues as well. For example, a few weeks ago, Coal India Limited Chairman and Managing Director Pramod Agarwal said that Coal transportation and evacuation causes far more damage to the environment as compared to coal production. Mr. Agarwal highlighted the company’s experience with lockdowns in India last year and said that during the last lockdown while the production was normal, there was reduced transportation and evacuation resulting in pollution decreasing substantially.

Social and Governance: No Less challenging

While it is the environmental issues that get highlighted much more, Coal India Limited has issues with Social and Governance factors too.

Social – During its production, transportation, and consumption, coal can cause significant damage to human health. It also has a serious negative impact on trees and crops. People living around mines and major consumption centers such as coal-based power areas face health issues due to the heavy concentration of small particles in the air. There have been higher than normal occurrences of breathing issues and diseases like Asthma.

There are also problems related to contract workers. Coal India Limited’s regular workforce has been declining as the company tries to control its massive fixed costs. Since the company is hiring more contract workers and these workers don’t get the same benefits as Coal India Limited’s regular full-time employees, there have been several reports on how these workers get exploited. From time to time, there have been incidents that highlight the pathetic working conditions for the contract workers employed by Coal India Limited.

Governance – Being a Government of India company, the chances of accounting frauds and other such misreporting practices are much lower, but that does not mean that governance is not an issue for Coal India Limited. The core issues are a lack of accountability, inefficient succession planning, and lack of continuity in the top management. For example, over the last ten years, Coal India Limited has not delivered even half of the annual production growth that it had committed to at the time of getting listed. The company keeps missing targets year after year on various performance measures.

There have also been cases of shareholder activism. Though the institutional investors understand that being a Government-owned company, Coal India Limited is being run with a deep ‘Social welfare’ motive, some investors have taken a more aggressive stance. For example, the UK-based hedge fund, The Children’s Investment Fund Management was a major critic of the government’s control in Coal India Limited’s functioning. The fund had bought 1.8% shares during the initial public offer in 2010 and after a bitter feud, completely exited in 2014. Primarily, TCI was critical of Coal India Limited’s decision to sell coal at subsidized rates to power companies under the fuel supply agreement.

Is Coal India Limited on a reform path on ESG?

Coal India Limited is trying to reform and has been aggressively talking about its ESG focus. For example, in its latest update released for FY20-21 performance, almost one-third of the presentation is dedicated to the company’s ESG initiatives. For example, Coal India Limited has highlighted in this presentation that for the Environment,

• Coal evacuation and FMC projects will help reduce air pollution and environmental impact.
• ~100mn trees planted since inception over 40,000 ha. Planted 1.98mn saplings in FY21.
• Mine closure plan is an integral part of the project report for Coal mines.
• All opencast mines have commissioned effluent treatment plants.
• To become Net-Zero, it proposes to execute Solar Projects to generate 3 GW of solar energy.

Similarly, there have been initiatives highlighted in Social and Governance areas. But they are hardly enough for an organization of the size of Coal India Limited. Also globally, coal companies have a major image problem and it’s difficult to eradicate that negative perception. The ESG focused institutional asset managers have a negative view of energy companies, in general, and that is unlikely to change any time soon.

While the environmental problem is the same for coal companies across the globe, the issue is more challenging for the companies which own more open cast mines. There are also social issues because of the serious impact on people’s health, who live close to the mines. The ESG situation becomes even more difficult for Coal India Limited on governance factors. All of these make Coal India Limited’s problems much more complex and challenging to getting resolved in the near term. This implies that the ESG impact on the stock price of Coal India Limited will continue to persist.

How EMAlpha can help Asset Managers

The popularity of ESG among asset managers and the cases like Coal India Limited shines a light on the colossal need of the hour: sector and industry-specific ESG disclosures. EMAlpha has long stressed the need to have sectorial related E, S, and G disclosures. As highlighted above, sustainability challenges vary from industry to industry. Thus it becomes imperative to gauge companies on sustainability metrics that are exclusive to the concerned industry. It is here that EMAlpha with its proprietary algorithm and AI-ML techniques becomes a key tool for the investors.

The recent developments in which ESG and asset managers had an interplay are very interesting and they have important lessons for the companies. These are also situations in which EMAlpha’s AI-ML analysis can help investors. For example, Can the local news flow collection pick up issues, earlier than the English media? Considering how important the Sustainability and ESG issues have become, the local language along with English news analysis can be tracked for the companies experiencing ESG issues.

Considering the sensitivities involved, especially when institutional investors have invested in the stock, the ESG issues could escalate quickly, thus impacting the stock price performance. In such cases, a regular analysis of social media (such as Reddit feed) can be used as input before taking an investment decision. Hence, EMAlpha’s analysis of unstructured data becomes a key tool for investors. The unstructured data analysis in other geographies can also be used to assess the potential impact on some of the larger companies.

The stock price performance of Coal India Limited over the last few years emphasizes the importance of ESG issues. It is also pertinent that predicting the behaviour of large institutional investors based on trading information can help forecast the stock price impact. This is one of the key features of the EMAlpha product as it combines technology with domain expertise. The news flow analysis provided by EMAlpha is useful in picking up the signals when the views change for institutional investors.