Coal use in energy generation is poised to decline over the next few decades as dozens of countries worldwide transition to clean energy. The green-energy transition is part of a global movement to reduce greenhouse gas emissions and combat climate change by adapting renewable energies such as solar and wind that produce minimal to zero emissions.
While individuals are encouraged to take steps to reduce their carbon footprint, such as avoiding plastic packaging and reusing bags, action by large institutions will be necessary to cut down on greenhouse gas emissions on a large scale and achieve net zero emission goals.
Studies have shown that only 100 companies have been responsible for more than 70% of global greenhouse gas emissions since 1988, underscoring the need for renewable energy policies at the institutional level.
In 2021, Harvard Business School professors Daniel Green and Boris Vallée decided to analyze coal divestment policies in major banking institutions to determine if they affected coal emissions. Given that coal is without a doubt the dirtiest fossil fuel and it accounts for over one-fifth of all carbon dioxide emissions, reducing coal use would ultimately have a major impact on global C02 emissions.
The professors published a report indicating that green-energy policies within the financial sector have contributed to a drop in greenhouse gas emissions. The report showed that banking institutions play a significant role in the transition to renewable energy sources such as solar.
As it stands, the global coal industry is heavily reliant on capital from the banking sector, with research published by more than 25 NGOs indicating that banking institutions funneled an estimated $1.5 trillion to the coal industry from January 2019 to November 2021.
Coal divestment policies are designed to address climate change by reducing the sector’s investment in coal. Coal companies tend to limit their borrowing when faced with solid divestment policies from lenders in the banking sector, forcing them to reduce their operations and ultimately leading to a drop in carbon dioxide emissions.
According to Green and Vallée’s research, coal firms struggle to secure alternative funding when their historic lenders institute divestment policies.
The number of banks that already serve the coal industry is extremely limited and the relationships tend to be “so deeply entrenched” that banks hold an inordinate amount of power over which company gains funding.
Vallée noted that coal-fired power plants are more likely to retire when their traditional lenders pass bank divestment policies. As such, reducing the supply of capital to the coal industry can help to reduce carbon dioxide emissions by decreasing the number of operational coal-fired power plants.
As more funders withdraw their support from coal companies, miners such as Alliance Resource Partners LP (NASDAQ: ARLP) may have to pivot to other commodities in order to remain relevant in the decades to come.
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