Swiss Glencore's decision to retain coal business sparks debate on some trends

As the debate over environmental, social, and governance (ESG) issues continues to evolve, major mining companies are grappling with how to balance profitability and sustainability. Swiss Glencore company’s recent decision to abandon plans to spin off its lucrative coal division has sparked intense discussion, reflecting shifting investor sentiments and broader questions about the future of ESG commitments.

At the height of the environmental, social, and governance (ESG) movement in 2021, as investors flocked to green assets, Anglo American chose to demerge its South African thermal coal mines, Caliber.Az reports citing the foreign media.

Then-CEO Mark Cutifani cited a commitment to "acting responsibly" as the rationale behind the decision.

In the subsequent two years, Glencore—now the world's largest publicly listed coal producer—enjoyed a boom in core earnings, reaching $51 billion, and returned a record $17.4 billion to shareholders. This surge was driven by soaring coal prices following Russia's invasion of Ukraine, which disrupted global energy markets.

As coal prices cooled last year, Glencore announced plans to follow Anglo American's lead, proposing a separation into a New York-listed coal producer and a metals company, aligning with its bid to acquire Canada’s Teck Resources, which was also considering a similar split.

However, on Wednesday, the FTSE 100 company reversed course, abandoning its plan to spin off the coal division. This decision marks one of the most significant strategic shifts in the company’s recent history and reflects a notable change in investor sentiment towards fossil fuels over the past year.

Gary Nagle, Glencore’s South African CEO, noted, “The pendulum on ESG has swung over the last nine to twelve months.” He acknowledged that while investors continue to prioritize cash flow, there is an understanding that energy is essential during the transition to a decarbonized future, and in many cases, it must come from fossil fuels.

Glencore’s decision highlights a critical dilemma faced by the world’s largest miners and investors: how to navigate the shift away from coal’s substantial returns, which have historically funded significant shareholder payouts and supported future investments in minerals crucial for clean technology, such as copper and cobalt.

Richard Buxton, a former fund manager who held Glencore stock for a decade, remarked, “The proposed coal divestment would have left an odd rump company unable to provide the substantial distributions to shareholders that Glencore had previously delivered. Abandoning the plan makes the company much more attractive again.”

In 2023, Glencore emitted 433 million tonnes of CO₂—more than entire countries like the UK or France—aligning it with energy giants BP and Shell, which have also reversed their ESG strategies to focus more on oil and gas. Glencore has long contested the environmental activists’ push for fossil fuel divestment, arguing that coal assets are better managed by responsible operators. Developing nations in Asia and Africa still rely on coal to fuel their economies, according to the company.

Despite this stance, coal remains highly controversial for Glencore and other miners, facing increasing pressure from investors and banks to reduce exposure over the past decade. Fossil fuel combustion for energy and heating is a major contributor to greenhouse gas emissions, with coal being the largest single source.

Thermal coal, used for power generation and seen as having viable alternatives in gas and renewables, is particularly contentious. In contrast, metallurgical coal, used in steel production and with ongoing infrastructure demand and fewer alternatives, is more acceptable.

Rio Tinto was the first major miner to fully exit coal in 2018, and Anglo American will follow suit after selling its metallurgical coal mines as part of a major portfolio overhaul. BHP also reversed its position in 2022, choosing to run down a thermal coal mine rather than sell it, as it focuses on developing a portfolio of high-quality steelmaking coal assets.

The burning of fossil fuels for energy and heating accounts for the majority of greenhouse gas emissions driving global warming, with coal being the largest single source. Among fossil fuels, thermal coal—used for power generation and seen as having readily available alternatives like gas and renewables—is particularly contentious. In contrast, metallurgical coal, used in steel production, remains more acceptable due to ongoing infrastructure demand and limited alternatives.

Rio Tinto became the first major miner to fully exit coal in 2018. Anglo American is set to follow, having announced plans to sell its metallurgical coal mines as part of a significant portfolio overhaul. In 2022, BHP also reversed its position, opting to run down a thermal coal mine rather than sell it, as it seeks to build a portfolio of high-quality steelmaking coal assets.

“There are quite a lot of similarities between what BHP and Glencore are doing,” noted James Whiteside, head of metal and mining corporates at Wood Mackenzie. “The difference is the scale of Glencore’s coal business.”

If Glencore maintains its current payout ratio, it could offer an average dividend yield of nearly 20 per cent from 2024 to 2026, significantly outpacing rival miners. This potential return highlights the financial impact for those who choose to move away from coal, as the substantial profits generated by the coal sector will be missed.

“Around Anglo, the question is how they will fund their future growth projects with a significantly reduced portfolio, absent coal and diamonds,” Whiteside added.

Glencore CEO Gary Nagle has been vocal in his criticism of ESG investors, describing them as “box-tickers.” Last year, he attributed increased dissent towards the company’s climate change strategies to what he referred to as “some ESG person in the basement in office number 27.”

In June, Legal & General Investment Management announced plans to divest some of its shares in Glencore due to concerns about the company's coal production and its commitment to reducing carbon emissions. Despite this, some investors, including Barry Norris, fund manager at Argonaut Capital, view ESG as a passing trend. “Glencore has probably realized that ESG is a fad, which is why they decided not to spin off their highly profitable coal business,” said Norris, whose firm does not hold shares in Glencore.

Evidence of a shift in ESG sentiment came when support for Glencore’s climate strategy increased to over 90 per cent at its annual shareholder meeting in May, up from around 70 per cent the previous year. However, critics argue that this shift may be misleading. “Existing shareholders are those who are comfortable with coal,” said one investor. “When asked whether to retain or spin off coal, they face greater uncertainty with the latter.”

This has led some skeptics to question whether Glencore’s decision signifies a genuine change in investor attitudes toward climate issues or if CEO Gary Nagle is using ESG concerns as a cover for the company's strategic reversal. Initially, Nagle's proposal to spin off the coal business was part of a strategy in a takeover bid for Teck Resources, which was also planning a split into coal and metals divisions.

In November, Glencore reached an agreement to acquire a majority stake in Teck’s steelmaking coal business for $6.9 billion, and the Swiss company announced that its planned break-up would proceed as planned.