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- Our investment approach towards thermal coal
In line with our previously stated commitment to drive towards net zero emissions in our portfolios well before 2050, DWS has published a new policy governing our investments in thermal coal related activities – the DWS Coal Policy.
In the DWS Coal Policy, “coal” refers to unabated thermal coal, i.e. coal used to generate electricity and coal used for heating, but does not refer to metallurgical coal or coking coal used to produce steel or cement.
The following is a high-level description of the DWS Coal Policy that is intended to outline the major principles of the policy and the timeline for its implementation. For the detailed requirements please see the actual DWS Coal Policy (please see download link below).
Actions mandated by the Coal Policy
The content of the DWS Coal Policy is informed by the science-based timelines for the phase out of thermal coal under the International Energy Agency (IEA) net zero pathway.
The portfolios in scope of the DWS Coal Policy will undertake the following specific actions:
- Investment restrictions in portfolios:
- Exclusion of investments in coal developers
- Exclusion of investments in companies with excessive coal exposure (coal share of revenues >25%)
- Phase-out of investments in companies with coal share of revenues > 5% by 2030 for companies headquartered in the EU/OECD and 2040 for companies headquartered outside of the EU/OECD, especially in developing countries
- Engagement:
In addition to the above investment restrictions, DWS – for the respective DWS legal entities and products that are in scope of the action 4 as described in the DWS Coal Policy – will engage with coal companies with more than 5% coal-share of revenues that remain investable until the phase-out by 2030/2040 to demand transition plans for their exit from coal.
Regarding passive products, DWS is committed to, and already engaging with index providers on excluding coal developers and phasing out coal companies from climate, ESG and, wherever possible, mainstream benchmarks, improving disclosure and expanding net zero index solutions.
Application of the Coal Policy
Whilst this Coal Policy comes into effect immediately for new products in scope, the execution of specific portfolio actions follows a phased approach, as certain portfolios and mandates require approvals of third-parties such as clients, regulators and fund boards. Taking this into account, the policy implementation is anticipated to occur as follows:
- New products: with immediate effect new products in our Active, Liquid Real Assets and Illiquid Alternatives businesses will apply the DWS Coal Policy. In cases where client, independent fund board or regulatory approvals are required (also referred to as “third-party consent”) prior to the product launch, application of the DWS Coal Policy is subject to such approvals.
- Existing products:
- For existing products (except for example physically replicating passive funds and US domiciled products) where such changes do not require specific third-party consent, the applicable DWS Coal Policy requirements will be incorporated into the relevant documentation at the next iteration of prospectus updates, with most of these changes anticipated to be implemented by mid 2023.
- The DWS Coal Policy will be applicable only to existing “synthetic” passive ETFs offering swap-based exposure to benchmark indices. These products will apply any Coal Policy related investment restrictions to their respective substitution basket.
- The DWS Coal Policy will not be applicable to existing funds issued by the Illiquid Alternatives business.
- For other existing products such as institutional mandates that require third-party consent the implementation timeline of the DWS Coal Policy is subject to obtaining these requisite approvals.
- Client engagement: It is our ambition to apply the DWS Coal Policy requirements to products where prior third-party consent is required (to the extent consistent with DWS´s obligations to act in the best interests of its clients as well as regulatory and legal obligations). DWS will initially focus on engaging with those clients who are also committed to Net Zero to encourage the implementation of the investment principles of this Policy into the investment guidelines and / or agreements for their respective product.
The DWS Coal Policy will be reviewed annually, and we anticipate that it will evolve over time to enhance both its scope and requirements.
This DWS Coal Policy is a critical pillar of our net zero approach, and its implementation marks an important step towards our net zero commitment.
Q&A
- When and how will clients and investee companies be informed about the DWS Coal Policy?
- DWS will initially focus on engaging with clients who are also committed to net zero. Our Client Coverage Division will set-up a process to ensure appropriate communication in line with the DWS Coal Policy.
- Investee companies earmarked for immediate divestment from portfolios (coal developers and companies with coal share of revenue >25%) will not be contacted. Companies in-scope for phase out by 2030 will be engaged with over the coming years with ongoing dialogue on their coal exit plans.
- The Coal Policy states that all companies with more than 5% of coal share of revenues and below 25% are not excluded until 2040 – isn’t that a too long period? Why not 2030 like all companies headquartered in EU/OECD?
- The extended deadline of 2040 is specifically for coal companies operating in developing countries. This should give such coal companies continued time to operate in countries that do not have the means to change their energy mix quickly while those countries transition away from coal for their energy needs. Not giving them time to do so risks imposing undue economic damage on such countries with corresponding high social/human costs.
- Will portfolio managers still be able to invest in coal developers if they have good reason to do so?
- Portfolio Managers are expected to comply with the restrictions of the DWS Coal Policy. Approvals for holding coal developers in affected portfolios can be granted in exceptional circumstances. Government-mandated actions to address short-term energy or social security challenges in rare and exceptional circumstances, for instance war, may supersede the overarching longer-term goals of this Policy. Under these exceptional scenarios, there may arise a need to suspend the applicability of this Policy to specific investee companies or geographical regions temporarily.
- What effects do we expect on CO2 emission reduction on the portfolios in scope year on year?
- Coal developers and coal companies tend to have higher carbon intensity. Excluding these companies from our portfolios, is expected to contribute to a reduction in the overall carbon intensity of DWS portfolios and hence help us in our progress towards our net zero interim targets. We report progress on our net zero interim targets annually in our Climate Report.
- Where is the relevant data coming from to assess investee companies?
- Data points and signals pertaining to the coal activities of companies are provided by our DWS ESG Engine. The information is sourced from commercial data providers (MSCI, Trucost, etc.), NGOs (urgewald), and company disclosures.
- Specifically, the assessment of coal developer status will rely on an in-house analysis carried out by DWS taking into account data points including, but not limited to, companies’ coal capex spend, coal production and processing capacity, and published coal exit plans. Combining data from these various sources is designed to improve data quality and coverage, as reliable data on the coal developer status of a company may not be readily available from a single source. Due to this limitation, the quantitative application of the qualitative criteria is on a best-effort basis, subject to our internal data governance.
