Most investors did not respond to Toxic Bonds when they were asked to rule out financing future KEPCO bonds.
Over the last couple of months, letters were sent by members of the Toxic Bonds initiative to 71 major investors urging them not to buy bonds issued by KEPCO, South Korea’s largest utility company, until it adopts a 1.5°C-aligned energy transition plan. Although we received encouraging responses from some – 58 of them failed to reply.
KEPCO’s green bonds have been described by analysts as“tokenism” and whose failure to plan for the energy transition will not only harm the client but the Korean public who will ultimately foot the bill. KEPCO is currently going through the worst financial crisis in its history, reporting its highest operating loss of 7.8 trillion won (USD 6 billion) in the first quarter of this year, which has since grown to US$12 billion as of 1H 2022. This loss mostly comes from the company’s over-reliance on coal and gas, with over 60 percent of its electricity generation capacity coming from fossil fuels.
It is forecasted that KEPCO will experience a growing deficit this winter, with soaring energy demand and fuel prices. Questions remain as to the buyers and the price that these soon-to-be stranded assets could fetch, while KEPCO’s capability to decarbonize remains uncertain.
KEPCO is a climate laggard, still heavily reliant on fossil fuels
South Korea announced a moratorium on new public financing of overseas coal-fired power projects last year. Yet, KEPCO pursued coal projects in Indonesia and Vietnam, which were approved only weeks after issuing a $500 million green bond in 2020. With KEPCO’s domination of South Korea’s energy market and its overuse of fossil fuels, South Korea now has the second-highest coal power emissions per capita in the world. Meanwhile, KEPCO’s energy transition plan still falls far behind global standards, according to the Climate Action 100+ investor group’s assessment. For example, the power company does not have any decarbonization strategy to viably meet its long and medium-term greenhouse gas reduction targets. Instead, KEPCO has supported a prolonged role of fossil fuels, with its subsidiary Southern Power even opposing a coal phase-out by 2050.
KEPCO has an ongoing track record of using its green bond proceeds towards projects with no clear positive impacts on the energy transition. Over 40 percent of the 5.2 trillion won (USD 6.8 billion) green bonds that KEPCO and its subsidiaries issued this past year also have no meaningful impact on emission reduction. In fact, 430 billion won (USD 327 million) was issued toward the construction of new LNG plants, which would hinder South Korea’s carbon neutrality through carbon lock-in.
A new report by IEEFA uncovers KEPCO’s green bond issuances for what they are in reality; “To this date, KEPCO’s negligible renewable generation assets and questionable future generation mix suggest that its green bond issuances were merely tokenism.”
KEPCO’s high exposure to fossil fuels is a massive financial risk
While fossil fuel prices have continued to skyrocket, renewable power generation costs have steadily decreased, becoming the cheapest source of power. But KEPCO sources most of its energy from imported coal and gas, exposing it to price volatility. In fact, 90 percent of KEPCO’s electricity generation cost hike during the past year came from coal and gas.
Globally, governments are imposing higher carbon taxes and environmental costs, and fossil fuel companies are facing countless litigations. KEPCO’s continued pursuit of fossil fuels against global trends, especially coal, is causing the company huge losses. Recently, KEPCO lost in a landmark case in Australia, where the High Court stopped the company’s Bylong coal project from moving forward, costing the company over 800 billion won (USD 615 million).
Considering KEPCO’s plunging profitability, S&P recently downgraded the company’s stand-alone credit rating to a sub-investment grade. While its long-term credit rate remains at AA, based on the assumption of governmental support, this does not correctly reflect KEPCO’s risk profile.
Recently, both the Prime Minister and Minister of Economy and Finance publicly criticized KEPCO’s lax financial management and signalled that reforms in public corporations will be needed. There are clear precedents in bond markets of the financial risks associated with holding bonds that lose implicit government support, generating substantial losses for bond holders. We expect KEPCO to keep bleeding losses as the cost and risk of fossil fuels continue to rise across the globe.
The Dutch pension investor APG and Norway’s sovereign pension fund GPFG have even dropped KEPCO due to its fossil fuel dependency and many of its major shareholders are already criticizing KEPCO’s lack of climate action. BlackRock, LGIM, and the Church of England have publicly opposed the company’s new overseas coal projects.
The following investors and banks have failed to deny debt to KEPCO’s bonds:
Aegon, NVAIA Investment Management, HK Ltd, AllianceBernstein LP, Amundi, AXA Investment Managers, BANCO SANTANDER, Banque Degroof Petercam, Barclays, BlackRock, BNY Mellon – Insight Investment, Brinker Capital, Canadian Imperial Bank of Commerce\ Citi Country Insurance & Financial Serv, Credit Suisse Group AG, Deutsche Bank AG, Doubleline Capital, Equitable Holdings Inc, Fidelity International, Fisch Asset Management AG, Generali Investments, Hartford Financial Services Group, Horizons ETFs Management Canada In, Insurance Co of the West, Invesco, JP Morgan Asset Management, Kiwoom Investment Asset Management, Korea Investment Management Co, LGIM, Loomis Sayles & Co, M&G Investments, Mediolanum International Funds Ltd, MetLife, Morgan Stanley, New York Life Insurance Co, Nordea AM, Nuveen (TIAA), Ohio National Life Group, Ostrum Asset Management, Pimco, Principal Financial Group, Prudential Financial (US), RiverNorth Capital Management, Royal Bank of Canada, Schroders, SIF, Swiss Investment Funds SA, Standard Chartered, State Street Corp, Sumitomo Mitsui Trust AM, Temasek Holdings Pte Ltd, TIAA, Transamerica Investment Services, Truston Asset Management/Korea UBS AG, Van Eck Associates, Vanguard Group Inc/The Western & Southern Financial Group, WisdomTree Investments