Insights

The NPS’s Coal Investment Exclusion Strategy: A Test of Its Commitment to ESG

ㅣ Jong-oh Lee, CIO, KoSIF ㅣ

The National Pension Service, or NPS, announced its coal exit policy at the end of May last year, shortly before the P4G Seoul Summit, a major national event.

By then, most leading international pension funds regarded by the NPS as benchmarks had already announced coal exit policies. The number of Korean public and private financial institutions that had committed to coal phase-out financing had also reached 100.

In that sense, the NPS was effectively one of the last passengers to board the coal exit train.

Nevertheless, its announcement was an important development and received extensive media coverage both in Korea and abroad. This was because of the NPS’s symbolic importance and considerable influence in the capital market.

The Korea Sustainability Investing Forum and the Korea Federation for Environmental Movements, which had consistently called on the NPS to end coal financing, immediately welcomed the announcement, although both noted that it had come long overdue.

We believed that the NPS’s participation in the coal exit movement could strengthen the ability of Korean companies and financial institutions to respond competitively to the climate crisis.

     Five Months Wasted—and Grounds for Reasonable Doubt

A review of what has happened since the announcement, however, raises serious concerns.

More than one year and five months after the NPS declared its coal exit, it had still not established detailed criteria for its coal investment restriction strategy.

The NPS has stated that, based on the final research report, it has been developing a phased implementation plan since May, covering asset classes, regions, timing and implementation methods, and that it intends to disclose the plan by the end of the year. I do not doubt that this process is under way.

In my view, however, the criteria could have been established under the previous administration.

The NPS did not commission research on the scope and criteria for defining the coal mining and power generation industries until November last year—five months after announcing its coal exit policy.

An interim public hearing was held on March 17 this year, and the final report was submitted to the National Pension Fund Management Committee at the end of April.

Why did the NPS wait five months before commissioning the research?

Some have suggested that the NPS may have been waiting to assess the position of the new administration after the presidential election. I share this political suspicion.

The five-month delay may also reflect the NPS’s broader attitude toward the climate crisis.

The tipping point for preventing catastrophic climate change is 2030. This is why countries, local governments, companies, financial institutions and individuals are all being urged to take immediate and maximum climate action.

The delay suggests that the NPS still lacks this sense of urgency.

Put simply, it is complacent.

     Excluding 20% While Including 50%: A Selective Set of Options

More important than speed is the question of how the coal investment restriction strategy will be designed, how stringent it will be and how it will be applied.

If my concerns about political considerations and the NPS’s awareness of the climate crisis are well founded, then the standards it adopts will reveal its actual commitment to addressing climate change.

Deloitte Anjin, which conducted the research, identified several key decisions the NPS would need to make in designing its strategy.

These included:

• - Scope of application, including industry coverage, types of coal and whether subsidiaries should be included
• - Selection of quantitative indicators, including revenue share, production volume or production share, and generation capacity or capacity share
• - Thresholds for quantitative indicators, including coal exposure criteria of 30% or 50%
• - Qualitative criteria, including whether investment in green bonds or companies with energy transition plans should be permitted

Based on these considerations, the research proposed three options:

• - Option 1: A 30% coal revenue threshold without an exemption based on an energy transition plan
• - Option 2: A 30% coal revenue threshold with all qualitative criteria applied
• - Option 3: A 50% coal revenue threshold with all qualitative criteria applied

     A 50% Threshold Is Greenwashing in Itself

Two questions immediately arise.

First, why was a 20% coal revenue threshold not considered as a quantitative criterion for determining whether a company should be classified as a coal company?

Second, why was a 50% threshold included at all when it could effectively nullify the purpose of the coal exit announcement?

The widely referenced Global Coal Exit List applies a 20% threshold.

Admittedly, adopting a 20% threshold would result in more companies being classified as coal companies, increasing the burden on the NPS to restrict or withdraw investments.

However, as the climate crisis intensifies, financial institutions responsible for allocating capital are highly likely to face growing demands from stakeholders for stronger climate action by 2030.

Given this context, a 20% threshold should at least have been included among the options. Its complete exclusion is difficult to understand.

The NPS is a large pension fund with the status of a universal owner, holding equities and bonds across virtually every domestic industry.

This means that its investment returns are closely linked to the performance of the national economy as a whole.

For this reason, the NPS should focus not only on the performance of individual companies but also on patterns of economic growth and the structural transformation of the economy.

In other words, it must work to improve the long-term competitiveness and value of the companies across its investment portfolio. Only by doing so can it secure sustainable long-term returns.

The world is now engaged in a critical transition from a high-carbon economy to a decarbonized one.

The NPS must therefore act as a strong catalyst, encouraging coal companies that are at risk of becoming stranded assets to transform rapidly into renewable energy companies with greater climate competitiveness, even if the process causes short-term pain.

This does not conflict with the NPS’s mandate to secure the retirement income of the Korean people through stable, long-term investment returns.

That is the significance of a 20% threshold.

By contrast, a 50% coal revenue threshold would effectively grant immunity to companies that are clearly engaged in coal-related business.

It would lead to the absurd conclusion that a company deriving 49% of its revenue from coal is not a coal company.

Who could reasonably accept such a threshold?

     Energy Transition Plans: The Devil Is in the Details

If the NPS establishes its coal investment restriction criteria and revises its fiduciary responsibility guidelines by the end of the year, the strategy is likely to be applied from 2023.

The research report analyzed projected changes in the NPS’s coal-related investments under the three options, assuming implementation from 2023.

Under Option 1, the NPS’s investment in coal companies, estimated at approximately KRW 4 trillion in 2023, would disappear entirely after 2026.

This is the result of not applying the qualitative exemption for companies with an energy transition plan.

Under Options 2 and 3, which apply all qualitative criteria with coal revenue thresholds of 30% and 50%, respectively, the NPS would continue to hold approximately KRW 1 trillion and KRW 3 trillion in coal-related investments in 2026.

If the NPS were to select Option 3, the fundamental question would be why it announced a coal exit policy in the first place.

It would inevitably face serious criticism, both domestically and internationally, for greenwashing.

It would be the worst possible option.

Although it was reportedly designed to reflect the realities of Korea’s electricity market, it is difficult to understand why such a meaningless option was included.

One cannot help wondering whether the intentions of the Ministry of Health and Welfare or the NPS were reflected in the proposal.

Could Option 3 be a form of misdirection intended to soften the criticism that might arise if Option 2 were selected?

It could create a psychological response along the lines of, “At least they did not choose Option 3.”

Option 3—the 50% coal revenue threshold—is so unreasonable that it invites this kind of conspiracy theory.

Option 2 also presents a potentially serious problem through its qualitative criterion allowing investment in companies that have stated an energy transition plan.

Under this criterion, the NPS may maintain existing investments or permit conditional new investments if it determines that a company is likely to meet the quantitative threshold of 30% in the future, either through its own energy transition plan or through a plan aligned with government policy.

The standard used to recognize such an energy transition plan is therefore critical.

Does the plan align with the climate science-based objective of limiting global average temperature rise to 1.5°C?

Does it aim for carbon neutrality by 2050, reduce carbon dioxide emissions by at least 45% by 2030 and provide concrete and realistic measures for implementation?

The central question is how stringent the criteria will be.

Without rigorous standards, Option 2 would also remain vulnerable to accusations of greenwashing.

The devil is very likely to be hidden in the details.

If the NPS is sincere about its coal exit declaration, it must establish strict criteria for recognizing corporate energy transition plans.

     A Bureaucratized NPS That Responds Only After Being Pushed

It remains unclear what criteria the NPS will ultimately adopt for its coal investment exclusion strategy.

It may select one of the three options discussed above or create an entirely different framework.

The situation remains opaque because the NPS has remained completely silent.

Meanwhile, some media reports have openly promoted the idea that the NPS is leaning toward the 50% threshold. I can only hope that these reports are inaccurate.

Still, I remain deeply concerned.

In my experience, the NPS has consistently made conservative choices on ESG matters.

The NPS may characterize these decisions as cautious. However, when compared with developments in Korea and abroad, they have generally been conservative choices disguised as prudence.

Moreover, these decisions have rarely been proactive or self-directed.

More often, the NPS has ignored or resisted external pressure until it was eventually forced to accept change.

This pattern can be seen in the processes and substance of its major ESG-related decisions:

• - Joining the Principles for Responsible Investment in June 2009
• - Adding responsible investment provisions to its voting guidelines in December 2009
• - Revising the National Pension Act in 2015 to require ESG consideration and disclosure
• - Engaging with companies responsible for the humidifier disinfectant disaster in 2016
• - Adopting the Stewardship Code in 2018
• - Announcing measures to promote responsible investment in November 2019
• - Declaring a coal exit in May 2021

As a result, nearly every policy announced by the NPS has lacked boldness.

The organization itself has become bureaucratized.

Admittedly, this bureaucratization is largely attributable to the NPS’s unusually complex governance structure.

The coal exit declaration is a clear example.

It should have been framed from the beginning within the broader objective of achieving carbon neutrality consistent with the 1.5°C pathway.

The NPS should have announced its coal exit as part of a wider strategy to reduce the financed emissions generated by its investment portfolio and achieve portfolio-level net zero.

It should then have developed a coal exit roadmap and, ultimately, a comprehensive fossil fuel exit roadmap.

Yet the NPS’s coal exit declaration contains no reference to portfolio net zero.

This demonstrates the extent of its lack of awareness and understanding of the climate crisis.

It is also an inevitable consequence of the absence of institutional leadership and self-direction.

In a bureaucratized organization and culture, it is enough merely to create the appearance of action.

There is no need for ambitious vision, broader strategic thinking or institutional initiative.

The organization simply reacts to external pressure—and only to the extent required.

     A Strong Coal Investment Exclusion Strategy Is Essential for Net Zero

Even now, however, the NPS has an opportunity to make amends.

First, it must establish a clear and sufficiently stringent coal investment exclusion strategy.

Otherwise, the NPS’s future efforts to achieve carbon neutrality and portfolio-level net zero will become confused from the outset.

It would be a serious mistake to assume that the NPS does not need a net-zero strategy simply because the fund is projected to face depletion after 2040.

In the era of carbon neutrality, portfolio net zero is a task that no financial institution can avoid or postpone indefinitely.

If a “green swan”—a destructive economic and financial crisis triggered by climate change—becomes reality, the stable, long-term returns repeatedly emphasized by the NPS will evaporate.

I have engaged with the NPS on climate change and other ESG issues since 2007.

That is now 16 years.

Every encounter with the NPS has felt like confronting an enormous wall.

There have been some small achievements, but there have been far more major frustrations.

The accumulation of those experiences may have shaped my views of the NPS in ways that are uncomfortably critical or even biased.

Nevertheless, I have never abandoned hope that the NPS can change.

I believe that if the NPS integrates ESG more actively into its investment practices and engages more assertively with its portfolio companies, our society can move even one centimeter closer to becoming greener and more inclusive.

The NPS has that power.

Only by using it properly can the NPS also secure stable, long-term investment returns.

The NPS must demonstrate the sincerity of its coal exit declaration—and of its broader commitment to ESG—by adopting a strong coal investment exclusion strategy.

It must show the boldness needed to dispel the widespread perception that it has become bureaucratized.

If my view of the NPS is indeed a deeply entrenched prejudice, then this is its opportunity to shatter that prejudice through decisive and self-directed climate action.

If it fails to do so, the NPS will remain burdened for years with the reputation of being one of Korea’s leading perpetrators of greenwashing and ESG-washing.