The National Pension Service Fund Management Committee approved the "Coal-Related Companies Energy Transition Investment Strategy" (the Coal Investment Restriction Strategy) on December 19. The decision has faced criticism for justifying the National Pension Service (NPS) to act as a "free rider" amid the escalating climate crisis.

In particular, the establishment of a quantitative criterion of 50% average coal sales proportion over the past three years for identifying coal companies was criticized as the "laziest and most complacent figure." Critics called for its revision to reflect concerns about the exacerbation of the climate crisis and the risks of stranded assets. Additionally, given that oil and gas are increasingly at risk of becoming stranded assets, they emphasized that the NPS must take a comprehensive approach by calculating financed emissions, setting reduction targets, and implementing measures to achieve a net-zero asset portfolio by 2040.

The Korea Sustainability Investing Forum (KoSIF), a non-profit advocacy and research organization, issued a statement on the 19th, criticizing the Coal Investment Restriction Strategy as a failure. They pointed out that it took the NPS a lengthy 3 years and 7 months since its "coal divestment declaration" in May 2021 to finalize this strategy. They argued that the decision-making process wasted precious time without acknowledging the urgency of the climate crisis or mitigating risks of reduced returns from stranded assets.

As evidence to support its critique, KoSIF pointed to several key issues: the adoption of the internationally unaligned 50% quantitative standard for identifying coal companies, the limited scope of coal investment restrictions resulting from this standard, the excessively long engagement period with South Korean coal companies, energy transition plans that risk enabling greenwashing, and a clause permitting extensions of engagement periods beyond 2030.

The Fund Management Committee finalized on December 19 the quantitative standard for identifying coal companies (power generation and mining) as those with an average coal revenue ratio of 50% or more over the past three years. The ‘Guidelines for the Investment Strategy for Energy Transition in Coal-Related Companies’ were established to impose investment restrictions, which will be applied to overseas assets starting in 2025 and to South Korean assets from 2030.

For South Korean coal-related companies, the NPS plans to engage in confidential discussions over five years to encourage the establishment of energy transition plans and the reduction of coal revenue and capacity ratios to below 50%. If companies fail to establish or improve their energy transition plans during this period, the Committee will decide on investment restrictions through formal resolutions. However, a clause allows extending the dialogue period if the Committee recognizes the company’s efforts toward energy transition.

Core Issues with the NPS Coal Investment Restriction Strategy:

1. 50% Quantitative Criterion for Identifying Coal Companies

• KoSIF strongly criticized the decision to set the quantitative criterion for identifying coal companies at 50% as out of step with international standards.
  : Global standards such as the "Global Coal Exit List" provided by the NGO Urgewald recommend 20%. Moreover, leading global pension funds and financial institutions such as ABP, AP, GPFG, BlackRock, Allianz, and UBS use thresholds of 20% to 30%. South Korean civil society had also proposed a 30% threshold. The 50% criterion gives companies with coal sales or capacity ratios of 49.99% a free pass, raising concerns that this decision may delay energy transition efforts in domestic coal industries
• KoSIF urged the NPS to revise this criterion to align with global standards, taking into account the severity of the climate crisis and the risks associated with stranded assets. The NPS should revise the quantitative standard for identifying coal companies from 50% to 30% in the future to ensure a more effective and globally aligned approach to addressing coal-related investments.

2. Limited Scale of Investment Restrictions

• According to the NPS, its coal investments as of 2023 amounted to 24.4 trillion KRW domestically and 9.2 trillion KRW overseas. However, only 2.1 trillion KRW domestically and 200 billion KRW overseas would be subject to restrictions under the 50% criterion, totaling a mere 2.3 trillion KRW.
• This limited scope raises questions about the efficacy of the strategy. KoSIF criticizes that, for example, investments in subsidiaries of coal companies like Korea Electric Power Corporation (KEPCO) are excluded from restrictions despite the parent company’s significant influence. This exclusion creates a loophole that could perpetuate coal-related investments under indirect channels.

3. Energy Transition Plans and Potential Greenwashing

• The strategy includes provisions for “engagement activities” with domestic coal companies until 2030, during which they are expected to develop energy transition plans and reduce coal sales or capacity ratios to below 50%. However, KoSIF raised concerns about the lack of strict evaluation criteria for these plans. Without clear and stringent standards aligned with the 1.5°C target of the Paris Agreement, the plans risk becoming mere greenwashing exercises.

4.Extension of Engagement Periods

• The strategy allows for the extension of engagement periods if companies demonstrate “efforts” in energy transition, even if they fail to meet the 50% reduction target. KoSIF argued that this clause undermines the credibility of the restrictions and could be misused as a catch-all excuse to delay decisive actions.
• Such extensions may send the wrong signal to companies, fostering complacency and weakening the urgency of energy transition efforts. KoSIF argues that removing this clause is essential to maintaining the integrity and accountability of the strategy.

KoSIF concluded its statement by emphasizing that the NPS must go beyond coal to address the risks associated with oil and gas, as these too are likely to become stranded assets. A holistic approach that integrates the principles of net-zero asset management is urgently needed. Through this, the NPS must play a leading role in combating the climate crisis while safeguarding the long-term returns of its investments.

Statement from the Korea Sustainability Investing Forum (KoSIF)

Regarding the National Pension Service’s
Restriction on Coal Company Investments

The National Pension Service Fund Management Committee finalized the "Investment Strategy for Energy Transition of Coal-Related Companies" today (December 19).

The Fund Committee has decided to classify coal companies (power generation and mining) based on a quantitative criterion of "a coal sales proportion of 50% or more on a three-year average." A "Guideline for Investment Strategies on Energy Transition of Coal-Related Companies" has also been established, which will restrict investments in overseas assets starting in 2025 and domestic assets starting in 2030. For domestic coal companies, the NPS plans to conduct non-public dialogues over a five-year period, during which companies are expected to establish energy transition plans and reduce their coal sales or facility capacity proportions to below 50%. If companies fail to develop or improve such plans despite the dialogue, the Fund Committee will decide on investment restrictions. However, if companies' energy transition efforts are deemed satisfactory, the dialogue period may be extended.

1.Overall Assessment

The preparation of the NPS’s coal investment restriction strategy ("Investment Strategy for Energy Transition of Coal-Related Companies") comes a staggering 3 years and 7 months after the NPS declared its "coal divestment" in May 2021. This decision has been criticized as "the worst possible outcome after prolonged deliberation." The strategy lacks awareness of the climate crisis and fails to address concerns about the potential decline in NPS returns due to stranded assets. The 3 years and 7 months spent on this issue now seem like wasted and meaningless time.

2.Quantitative Standard for Identifying Coal Companies: 50%

KoSIF strongly criticizes the decision to set the quantitative criterion for identifying coal companies at 50%, describing it as "the laziest and most complacent figure" in the era of a severe climate crisis and out of sync with international standards. One key approach to addressing the climate crisis is reducing greenhouse gas emissions, and the early phasing out of coal—the largest source of greenhouse gas emissions among fossil fuels—should be a top priority. Urgewald, a non-profit organization that publishes the annual "Global Coal Exit List," recommends a threshold of 20%. The final report submitted to the Fund Committee in April 2022 on coal-related investment benchmarks also referenced leading global pension funds (ABP, AP, GPFG) and financial institutions (BlackRock, Allianz, UBS), which use thresholds of 20% or 30%. South Korean civil society had proposed a 30% threshold for the NPS. However, by setting the threshold at 50%, the Fund Committee and the Ministry of Health and Welfare have essentially granted companies with coal sales or facility capacity proportions of 49.999% a free pass. KoSIF warns that this decision may delay energy transition efforts across domestic coal industries. Considering the severity of the climate crisis and the risk of stranded assets, KoSIF insists that the 50% threshold must be subject to future adjustments. It is important to note that the 20% or 30% thresholds used by overseas pension funds and major global financial institutions are not only environmentally motivated but also aimed at risk management, given the potential for coal investments to become stranded assets.

3. Scale of Investment Restrictions under the 50% Criterion

As of 2023, the NPS has invested a total of 24.4 trillion KRW in domestic coal companies (5.8 trillion KRW in stocks and 18.6 trillion KRW in bonds). Of this, investments in companies with a coal sales proportion of 50% or more amount to only 2.1 trillion KRW across six public power generation companies. For overseas coal companies, the NPS has invested a total of 9.2 trillion KRW, with only 200 billion KRW in companies meeting the 50% criterion.

This means that the total scale of investment restrictions is a mere 2.3 trillion KRW, raising suspicions that this is more about appearances than substantive action.

KoSIF raises two critical questions: 1. Does a coal sales proportion of less than 50% eliminate the possibility of stranded assets? 2.While the strategy includes plans for "engagement activities" with coal companies, why are subsidiaries controlled by parent companies such as Korea Electric Power Corporation (KEPCO) excluded from the scope of investment restrictions?

KoSIF believes that direct investment exclusions or restrictions should only be a last resort and that engagement activities are a more practical and effective way to facilitate energy transition. However, "investment exclusion or restriction" remains an important tool to achieve results from engagement activities.

4. Engagement Activities and Energy Transition Plans (Until 2030)

Under the 50% criterion, the NPS will select domestic coal companies for engagement activities until 2030. These engagements will focus on "developing energy transition plans" and "reducing coal sales or facility capacity proportions to below 50%."

The key issue here is the quality of these energy transition plans. KoSIF demands that the plans align with the 1.5°C target of the Paris Agreement and that engagement activities be significantly strengthened to achieve this. Without strict evaluation criteria, there is a high risk of greenwashing.

5. Clause Allowing Extension of Engagement Periods

The strategy allows the Fund Committee to extend the engagement period if companies' efforts in energy transition are deemed satisfactory, even if they fail to meet the 50% reduction target.

KoSIF warns that this clause could send a complacent signal to coal companies and be misused as a blanket excuse to delay decisive action, citing market disruptions or economic conditions. If the "last resort" of investment restrictions is rendered ineffective, engagement activities are unlikely to yield meaningful results and could be similarly undermined.

The NPS’s coal investment restriction strategy, finalized after 3 years and 7 months of deliberation, appears to justify the NPS’s role as a "free rider" in the era of climate crisis. To offset this, the intensity of "engagement activities" with companies must be significantly increased. The Fund Committee, Ministry of Health and Welfare, and NPS currently seem focused only on "coal." However, oil and gas companies are also highly likely to become stranded assets.

In this regard, KoSIF urges the NPS to adopt an approach centered on achieving ‘Net Zero for the Asset Portfolio.’ Specifically, the NPS should calculate the financed emissions of its asset portfolio, set reduction targets, and work toward reducing these emissions through various means, including engagement activities, restrictions and adjustments on fossil fuel investments, and increased investments in renewable energy companies. KoSIF strongly advocates for the NPS achieve portfolio net zero by 2040.

KoSIF’s Demands

1. Adjust the 50% quantitative criterion for identifying coal companies to 30% in the future.
2. Ensure that energy transition plans developed by coal companies are evaluated based on the 1.5°C target to prevent greenwashing.
3. Shorten the five-year engagement period with domestic coal companies and strengthen the intensity of engagement activities.
4. Declare a commitment to achieving a net-zero asset portfolio by 2040 and establish a comprehensive reduction and implementation plan, including the calculation of financial emissions, setting reduction targets, limiting fossil fuel investments, reallocating investments, and increasing renewable energy investments.

December 19, 2024
Korea Sustainability Investing Forum (KoSIF)