Prudential plc, the insurance giant based in the UK but focused on Asian markets, published a new coal policy in early May 2021 as part of a pledge to become a “net zero” asset owner by 2050. This first policy is a welcome first step for Prudential, which manages $516bn of assets, but it unfortunately remains insufficient to answer the climate emergency we face, simply catching up with recent developments in the sector. Prudential plc should go back to the drawing board and start by urgently excluding all coal developers from its investments.

1. What’s new

Prudential plc announced its plans to decarbonize its portfolio of assets held on behalf of its insurance companies with a new goal of becoming “net zero” by 2050.

One of the immediate actions to help deliver on this longer-term objective covers coal:

  • Divestment from all direct investments in businesses which derive more than 30% of their income from coal, with equities to be fully divested by the end of 2021 and fixed-income assets by the end of 2022.

The portfolio covered by this new policy has a value of $128 billion as of 31 December 2020. It excludes unit-linked funds and assets held by joint venture businesses, as well as assets held by Jackson Financial and certain externally-managed collective investment scheme balances.

Prudential plc finally mentions in its press release that it will join the Net Zero Asset Owner Alliance and that it will “accelerate the transition to a low-carbon economy by engaging with the companies responsible for 65 per cent of the emissions in its portfolio”, but it does not detail how it will concretely do so.

2. Our analysis: only the beginning

The exclusion of companies deriving more than 30% of their revenues from coal will exclude 529 companies of the Global Coal Exit List from Prudential PLC’s investment universe. Yet, the insurer could still invest in 406 other coal companies.

With this new policy, Prudential PLC aligns with AXIS Capital and Chubb in the US, Munich Re in Germany, and QBE in Australia, which have all adopted a similarly weak exclusion threshold in the past few years. Prudential PLC’s policy is even weaker: it uses the share of coal revenues, while the other insurers use the share of coal power generation to screen out some coal power companies. This latter metric is more relevant to identify the real impact of coal companies on the climate.

Since Prudential plc is focused on Asian markets, where it has 20 million customers, it would have done better to follow the lead of AIA, which adopted a solid coal phase-out strategy last March, including divestment from all coal mining and coal power companies by the end of 2021 for equities, and by the end of 2028 for bonds.

But the biggest gap in the policy lies in the absence of the exclusion of coal developers, those companies still planning to expand the coal industry globally. 115 of them remain below the 30% exclusion threshold.

Prudential plc should follow the lead of AXA, which already excludes companies planning new coal projects around the world. AXA also committed to phase-out coal entirely from its portfolio by 2030 in Europe/OECD and 2040 globally, the relevant deadlines according to the latest climate science from Climate Analytics. Prudential plc must follow this approach and require the remaining coal companies it is invested in to adopt, before the end of 2022, a coal phase-out plan by the same deadlines.

Another gap in the coal policy is the scope to which it applies. If $128bn of direct investments are covered, this is not the case for assets held in unit linked funds, which represents a major loophole. It will be crucial for the UK-based investor to cover these assets in its approach, something that AXA is also already doing.

Prudential’s Scores in the Coal Policy Tool

This table presents the coal scores of Prudential based on five criteria of the Coal Policy Tool

3. Our conclusion

Prudential plc joins the growing group of financial institutions that are committing to align their investment portfolio with a net zero target and a 1.5°C trajectory but fail to even stop supporting the expansion of the dirtiest energy source, coal. It’s a missed opportunity for Prudential plc, which has adopted a policy that is less ambitious than its Asian competitor AIA and is a shame for the UK’s pretension to be a green finance market. This first step must quickly be followed by other ones to improve this coal policy and fully align it with the climate objectives of the Paris Agreement, starting with the immediate exclusion of all coal developers. Prudential plc will also need to start tackling the oil and gas sector if it wants to really “decarbonise its portfolio”.

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