At the end of last year, members of the Toxic Bonds initiative sent letters to 71 major investors urging them not to purchase bonds in KEPCO, South Korea’s largest utility company, until the company adopts a 1.5°C aligned energy transition plan.

Although not a household name across the world, KEPCO presents a useful case study in how global investors can use bond markets to positively influence companies who lag behind on climate commitments. Here’s why:

KEPCO is currently going through the worst financial crisis in its history, it is forecasted that KEPCO will experience a growing deficit this winter, with soaring energy demand and fuel prices.

Without a Paris-aligned coal phaseout plan, KEPCO recently issued USD 800 million worth of green bonds. This comes after issuing a steep USD 8 billion in corporate bonds in the first quarter of 2022 after reaching a net debt of 40 trillion won (USD 31 billion) at the end of last year.

According to newest GCEL data KEPCO has installed coal capacity of 74358 MW, with a current output of 97.5 million metric tonnes in coal production, with expansion plans of 20840 MW in total. A fossil fuel company that still has plans for expansion in coal, cannot be Paris aligned, no matter the green or SLB-linked bonds they generate.

In short: KEPCO is in financial strife because it has failed to invest in transition to renewable energy and is now relying on global bond markets to fund its operations. This gives bond investors a powerful opportunity to engage the company over its transition policies. And if KEPCO fails to deliver them - deny debt.

Here are the responses from the handful that engaged:

• abrdn do not commit to deny dent to KEPCO.

abrdn has absolutely no coal policy in place and confirms they will keep financing KEPCO.

Many thanks for your letter of 25 August 2022. I am very happy to reply on behalf of abrdn regarding our holding in KEPCO but before doing so it may be worth providing some wider context. As a global investor we manage and administer approximately £508bn (as of September 2022) of assets for clients. We undertake this activity based on investment mandates set by our clients who seek exposure to a specific asset class or a combination of assets as part of a diversified portfolio which meets their investment horizons and risk/return requirements (such as institutional investors or pension funds).

Emerging Market Debt (EMD) is a widely used asset class in strategic asset allocation and portfolio construction. It is also a key source of finance for developing countries which require private sector capital to invest in economic and social infrastructure and other assets essential to long-term economic growth and stability.

As stewards of our clients’ capital we have a fiduciary duty to ensure such investments are aligned to their requirements but also to our own values as a responsible investor and the Environmental, Social and Governance (ESG) considerations which are integrated into our decision making.

As part of our investment processes we research and analyse sustainability and other risks regardless of where an investment is located. We apply these principles to all asset classes in four ways:

1. Our investment processes – we integrate and appraise ESG factors in our investment processes to seek the best long-term outcomes for our clients.

2. Our investment activities – we actively take steps as stewards to deliver long-term, sustainable value.

3. Our client journey – we clearly define and report on how we act in our clients’ interests in delivering our stewardship and ESG principles.

4. Our corporate influence – we actively advance policy, regulation and industry standards to deliver a better future for our clients, the environment and society.

In relation to our holding in KEPCO, we have continued engagement with KEPCO, please see the attached Global ESG Investment Stewardship report for more detail. We remain in frequent contact with KEPCO on ESG matters including climate and energy transition.

I hope this reply addresses the points you have raised in your letter. I can also give you an assurance that we will continue to act in accordance with our ESG principles and stewardship responsibilities.

• Union Investment commit to deny debt to KEPCO.

Union Investment divested from KEPCO, because KEPCO is still expanding in coal power plants and engagement with the company turned out to be ineffective and fall of stalling by KEPCO.

As part of this coal policy, Union Investment has decided to completely divest from all coal producers within five years. Since February 2020, we have no longer been buying securities from companies that regularly generate more than five per cent of their revenue from the extraction of thermal coal.

In addition, Union Investment decided in February 2020 to withdraw from financing coal-fired power generation. To achieve this goal, Union Investment entered into dialogue with all relevant electricity suppliers in our investment universe to find out how these companies intend to achieve climate neutrality by 2050. Some of these companies were able to present us with a credible plan for phasing out coal-fired power generation and are therefore still investable for our funds. On the other hand, companies that generate more than 25 per cent of their energy with thermal coal and companies that have not been able to present a clear plan or have not achieved milestones in their transition to carbon neutrality have been excluded from our investment universe. We will regularly review the universe of eligible power generators and gradually reduce the allowable cap on coal-fired generation to zero by 2035.

In this context, we have also initiated a corporate dialogue with Korea Electric Power Corporation (Kepco) and engaged with the company several times in 2021.

Although Kepco has committed to carbon neutrality, the company does not intend to phase out coal-fired power generation. Furthermore, Kepco is currently involved in the construction of new coal-fired power plants, which contradicts Union Investment’s coal policy. Unfortunately, Union Investment does not consider Kepco’s decarbonisation plans to be credible and therefore decided to exclude the company from our investment universe in January 2022. This exclusion also applies to all of Kepco’s subsidiaries, such as bonds issued by Korea Hydro & Nuclear Power.

• SEB commit to deny dent to KEPCO.

SEB does not have any KEPCO bond holdings and would not as it generates energy from fossil fuel sources and its transition plans aren’t Paris 1.5°C aligned.

SEB’s response relies on vaugueries like “clear goals” and “ongoing active conversion” to renewable energy sources. SEB’s coal policy updated in February 2021 is still insufficient, because it does not apply to underwriting.

Neither SEB’s asset management division SEB Investment Management nor the bank have any holdings of KEPCO bonds.

*In addition, here is a statement from SEB Investment Management:

SEB’s asset management division, SEB Investment Management, does not hold any bonds or other financial instruments issued by companies in the KEPCO group. According to its Sustainability Policy,*

SEB Investment Management’s funds do not invest in companies which generate energy from fossil fuel sources, unless the company has clear goals and can refer to ongoing active conversion to renewable energy sources, in line with the Paris Agreement. This, among other things, also means that SEB Investment Management would refrain from investing in bonds issued by KEPCO.

• HSBC AM commit to deny dent to KEPCO.

In spite of their non-committal written response to our request to deny debt to KEPCO. On a call, attended by senior executives HSBC confirmed that they won’t provide new finance, including via debt to companies involved in expansion. Including KEPCO, but even going beyond KEPCO. We welcome HSBC’s announcement and continuing dialogue with them.

Through our stewardship and engagement team, we engage with companies in our portfolio on various aspects of ESG risks, opportunities and impact, on behalf of our clients.

Our climate change policy is aimed at increasing the climate resilience of our clients’ investments, as well as contributing towards financing the transition to a net zero economy. We aim to:

*Deliver lower-carbon investment solutions that meet our clients’ investment criteria while meeting their risk and return objectives

identify and integrate climate-related risks, opportunities and climate policy in our investment portfolios, using relevant data and analysis – including scenario analysis – to inform our investment decisions

Engage with investee companies to better understand and support their disclosure and management of the risks and opportunities presented by climate change and climate policy. We engage directly and collaboratively, using our voting decisions to escalate issues where appropriate*

Today, HSBC Asset Management also announced its policy to phase out coal-fired power and thermal coal mining (‘thermal coal’) from its listed holdings.

HSBC Asset Management will actively work with company boards to support the transition away from thermal coal in the EU and OECD markets by 2030, and globally by 2040.

Those companies who do not show credible plans to transition away from thermal coal within the timeframe will lose the support of HSBC AM, including voting against company chairs at AGMs or, ultimately, divesting.

We are actively reviewing our policies that are critical to achieving our net zero goal. This includes a commitment to issue a refreshed and science based Energy Policy to address conventional and unconventional oil and gas, methane emissions, and potential impacts on environmentally critical areas such as the Arctic and the Amazon.

• Eurizon did not rule out denying debt to KEPCO.

Whilst they currently don’t have KEPCO bond holdings, they don’t rule out future purchases because their coal policy is riddled with loopholes.

They must urgently adopt more robust exclusion thresholds to exclude all coal developers, there should be no criteria for developers, just a straight up exclusion.

Thank you for your letter in which you urge us not to purchase any bond, including green bonds, issued by South Korea's Electric Power Corporation (KEPCO) and its power generation subsidiaries until they adopt and publicly disclose a 1.5°C-aligned energy transition plan.

Eurizon Capital SGR S.p.A., the asset management arm of Intesa Sanpaolo group, as a participant in the financial markets, integrates Environmental, Social and Governance (ESG) factors into its investment process and has a fiduciary duty towards its Clients, Investors and, more in general, its stakeholders that requires it to address sustainability-related issues. In that regard, Eurizon believes that issuers adopting high ESG standards and practices shall generate sustainable performance in the long term.

Therefore, in addition to the financial analyses on the risk - return profiles of the issuers in which the managed products are invested, our investment process relies on specific methodologies to select and monitor financial instruments aiming at integrating sustainability risks. In this regard, Eurizon's Sustainability Policy foresees specific restrictions for issuers considered "not socially responsible" that derive at least 25% of their turnover from mining or electricity production activities linked to thermal coal (so called "SRI Binding screening").

Furthermore, as signatory of the Net Zero Asset Managers Initiative, Eurizon is committed to engage with investee companies to ensure that they adopt cleaner business models and decarbonize overtime in line with a 1.5°C-aligned transition plan.

That said, with specific reference to KEPCO, Eurizon appreciates your detailed analysis and note that, based on our records as of 15 September 2022, Eurizon holds no bonds issued by KEPCO.

• BNP Paribas commit to deny dent to KEPCO in active holdings, but not passive.

BNP Paribas does not hold any active funds in KEPCO, nor do they plan to purchase any because they do not meet the requirements of their coal policy.

They do however hold KEPCO within passive holdings; (minimal according to our research).

Thank you for reaching out to us about KEPCO’s business strategy and transition plans. As you may be already aware, sustainability is at the heart of our business and investments strategies and so we read your letter with particular interest.

We do not hold any positions in KEPCO in our open-ended funds, nor do we have plans to purchase any at this point, as KEPCO does not meet the requirements of our coal policy, which you will find within our Responsible Business Conduct Policy.

We hold relatively insignificant amounts of KEPCO within certain client mandates, where we do not have full discretion over the investments. This amounted to 5.2 million euros at market close on 22 September** out of a total of approximately 500 billion euros of assets we manage, depending on market fluctuations.

If through your research, you have found a higher figure, it could be related to the custodial services division of our parent company.

I encourage you to learn more about our approach to sustainable investment in our Global Sustainability Strategy and how we have embedded sustainability in our business and investment strategies in our latest Sustainability Report. We are also a signatory to the Net Zero Asset Managers initiative and we will be releasing our targets and plans by year’s end.

We appreciate your efforts in moving the needle on the topic of climate change and the transition to a low/no carbon economy.

• APG commit to deny dent to KEPCO.

In 2020 they sold their remaining holdings in KEPCO because of KEPCO’s expansions plans.

Our answer to your question below is simple: On behalf of our clients, we do not have any holdings in KEPCO. In 2020 we sold our remaining holdings in KEPCO due to the fact that the company- despite our strong objections – continued to plan for new coal-fired power plants.