Bank of America Corp (NYSE:BAC) just announced that it's quitting coal. With over $2 trillion in assets, this represents an unprecedented pull-out from one of the financial sector's biggest players. Here's what you need to know.
A clean cut?
Bank of America Corp held its annual shareholder meeting last week, updating investors on the usual performance and operations metrics of the past year. But the company did something else, something entirely unexpected: It released its first-ever coal policy, a three-pager outlining the company's moral and financial musings on coal. In brief, here's what the bank had to say:
- Climate change is real and risky.
- Bank of America Corp. has a role to play in moving America from high-carbon to low-carbon energy sources.
- Fossil fuels are and will continue to be important to our energy supply...
- ...but dirty coal doesn't have to be.
- Coal extraction companies are risky investments, and Bank of America will continue to reduce its credit exposure to these corporations.
- The bank will not finance coal mining companies that face serious environmental, health, or safety violations.
- The bank will continue to reduce its credit exposure to mountaintop removal in the Appalachian region.
- Bank of America Corp. will invest in potentially promising carbon-reducing technologies for coal, such as carbon capture and storage (CCS).
- It will continue, as it has since 2008, to consider the long-term costs of carbon in its financing decisions for new power plants.
While Bank of America Corp. is hardly divesting to the degree that Stanford University or 10 U.S. cities, from Ithaca to Seattle, have agreed to, this statement is a bold move for such a big company.
According to The Rainforest Action Network, one of the environmental groups pushing hardest for Bank of America to cut back on coal, the bank used to be the biggest coal financier in the country. But this latest move did a lot to change the Network's perception of Bank of America from naughty to nice. In the Network's recently released 2015 Coal Finance Report Card, Bank of America earned a BBB grade on coal mining, the highest score ever given to a bank.
Natural resources have historically always been an important piece of any balanced portfolio. Despite some ups and downs, people continue to do one thing through thick and thin: consume energy.
Bank of America won't be dumping other fossil fuels anytime soon, so much of its portfolio adjustment will simply be switching from coal investments with no future to natural gas or oil stocks with more positive outlooks. In its own coal policy statement, Bank of America Corp notes that the "proliferation of natural gas" has been a major driver behind coal's lack of competitiveness.
Speaking at the annual shareholder meeting last week, Bank of America Corporate Social Responsibility executive Andrew Plepler noted his company's growing interest in another industry:
Today, our renewable energy portfolio is more than three times as large as our coal extraction portfolio. The transition from high-carbon energy to low-carbon energy will continue. At Bank of America, we will continue to do our part to accelerate this transition for our customers, clients and communities.
Bank of America isn't alone, either. The U.S. Energy Information Administration recently released a report estimating where our electricity will come from over the next 25 years. While natural gas' share is expected to increase from 27% to 31%, and renewables' from 13% to 18%, coal's share of electricity is predicted to drop from 39% to 34%.
The end of coal?
Bank of America is reducing its exposure to coal, but this dirty fuel is far from finished. While the United States is moving on to greener power pastures, the International Energy Agency predicts that global coal demand will grow at an average annual rate of 2.1% through 2019, due primarily to China, the world's biggest coal user, producer, and importer. But just like Bank of America, China has embarked on its own diversification mission, ramping up natural gas, nuclear, and renewable energy investments.
For investors, the days of pure coal plays may be over. If coal companies carry too much risk for one of the largest corporations and the largest country in the world, you can bet your bottom dollar they're not helping to balance your own portfolio. Divest today, and you'll be well on your way to a progressive, promising, and profitable stock pile for the years to come.