Fortum failed yet again to address the concerns of civil society and environmental organisations in this year’s AGM. The Finnish state-owned company did not properly comment on its subsidiary Uniper’s new coal plant, its emissions in Russia or other fossil fuel investments, which will lock Fortum and Uniper into polluting energy production for a decades.
The Finnish state-owned energy company Fortum held its Annual General Meeting on 23 April with special arrangements. The purpose of the AGM is to allow for a discussion between shareholders and the leadership of the company; however, this year Fortum’s shareholders were not able to share their views in an adequate manner because of the way the meeting was organised.
Proper discussion was sorely needed, since Fortum recently purchased more Uniper shares, making Uniper a subsidiary company to Fortum. It would have also been important to discuss in depth the shareholder proposal by WWF Finland to include the 1.5 degree target in Fortum’s Articles of Association.
AGM rejects WWF motion as recommended by Fortum
The AGM included a vote on a shareholder proposal by WWF Finland, demanding that the 1.5 degree target to be included in Fortum’s Articles of Association. If accepted, the proposal would have forced the board of Fortum to assess the climate risks of company operations and to create a plan to adjust activities to the 1.5 degree target. Among other things, the proposal would have required phasing out coal power by 2030.
Fortum’s board opposed the proposal since it would have required the company to deal with more difficult emission reductions regarding gas and operations in Russia. Fortum’s shareholders could have still supported the proposal, which required ⅔ of votes to pass. However, already before the AGM it was clear that the proposal would not pass: Fortum’s biggest shareholder, the Finnish state, opposed the proposal with weak arguments.
In the vote, 46 million shares, or 8.05%, supported the proposal. This demonstrates that a significant portion of shareholders wants to act responsibly. At the same time it is disappointing to see that many institutional investors portraying themselves as responsible actors did not support the proposal.
This was the first time in Finland that a shareholder proposal was used to promote climate action at an AGM. Even though the proposal was rejected, it prompted an important discussion and compelled Fortum to explain why it refuses to support science-based targets. The arguments against the proposal also indicate that Finland’s Limited Liability Companies Act must be updated. Companies should be able to add sustainability clauses into their Articles of Association without raising questions about the company potentially turning into a non-profit.
Fortum hides behind ETS
In the AGM Fortum’s CEO Pekka Lundmark presented a review, which defended Fortum’s climate record. Lundmark’s main message was that coal should be phased out by reducing emission allowances in the EU Emissions Trading System (ETS) rather than by closing individual power plants. This is what Lundmark said:
“It is very important to understand that from a climate standpoint it does not matter who uses emission allowances, i.e. the carbon budget. This is why individual power plants, companies or states do not influence emissions because the carbon budget does not change.”
Fortum is calling for tightening the ETS emissions cap and broadening it to new sectors. The company says it is trying to influence policy to ensure this happens. The European offices of environmental organisations have also been working hard for a more ambitious ETS and EU climate policies. This is one thing we agree on with Fortum.
Unfortunately ETS alone is not enough to guide a shift to an energy system entirely based on renewables. We need to tighten ETS as well as reach national decisions on phasing out coal. According to a report by Carbon Market Watch, a rapid phase-out of coal by 2030 requires us to strengthen the Market Stability Reserve (MSR), to remove emission allowances created by coal phase-out and to adopt complementary policies to phase out energy use of coal by 2030.
Closing down coal plants is an important part of the transition. It is misleading to claim that the closure of individual plants doesn’t matter. We have answered Fortum’s arguments in a blog, in which energy market analyst Dave Jones, with 13 years’ of experience at power company E.ON, points out that recent improvements to ETS have greatly diminished the so-called waterbed effect, i.e. emissions shifting from one place to another through ETS.
The phase-out of coal in Germany will have the greatest impact on ETS. Germany is planning to cancel the allowances released by the phase-out. Fortum is exaggerating when it claims that MSR will have no impact on the waterbed effect. Even if MSR cannot entirely remove the surplus of allowances in ETS, it will nevertheless remove a large amount of allowances, which will be canceled after a few years.
It is very likely that MSR and ETS will be rendered stricter in the coming years. The phase-out of coal will also increase the amount of allowances that are permanently annulled from MSR, even if MSR is not able to remove all surplus allowances from the market.
Moreover, it is incorrect to claim that reducing emissions in one place automatically leads them to rise in another place as someone else purchases the released emission allowances from ETS. This is evident in the fact that ETS emissions decreased by 26.4 % in 2005–2017 despite considerable surplus of allowances in ETS since 2009.
Relying solely on a strategy based on improving ETS is no enough to guarantee a rapid phase-out of coal. It is vital that companies also commit to a clear science-based coal phase out plan and later include phase out plans for the gas assets as well. Ultimately, Fortum can make decisions concerning its own and Uniper’s power plants. This should be reflected in the common strategy of Fortum and Uniper, which must present a scheduled plan to close down all coal plants by 2030, instead of shifting the responsibility to the EU level.
Another reason why ETS is not a fix-all solution is because a considerable portion of Fortum’s and Uniper’s emissions are created outside of it. The majority of Fortum’s and Uniper’s direct emissions are created in Russia, which is not part of EU ETS. Instead of fixating on ETS, Fortum should focus in the future on reducing emissions in Russia.
Fortum tries to polish its image
In his review Lundmark emphasised the work Fortum has done to move past coal. The use of coal in district heating will end in Espoo in 2025 and in Stockholm this year. A coal-based unit in a power plant in Naantali will be closed in 2020, while a coal plant in Inkoo has nearly been demolished.
It should be noted, however, that the new multi-fuel unit in Naantali will still use coal (the other main fuel being biofuel) and peat, which is even more polluting than coal. It is also somewhat questionable to celebrate the closing of the coal plant in Inkoo as a climate victory, since it was built in the 1970s and was anyway at the end of its lifespan.
In the AGM Fortum tried to polish its public image by stressing the low emissions of its electricity production in Europe. Most of the company’s emissions are created outside Europe and in heat production. Only 10 % of Fortum’s heat production is based on renewables. 85 % of direct emissions (Scope 1) are created in Russia. In total, Fortum’s emissions in 2019 were 25,2 Mt CO2e (Scopes 1–3).
This means that it is not enough for Fortum to merely focus on reducing emissions in electricity production in Europe. The company must also deal with difficult questions, such as the fossil fuel investments of its subsidiary Uniper and the emissions created in Russia.
Fortum and Uniper’s strategy must respect the 1.5 degree target
Lundmark stated in the AGM that Uniper’s new strategy is a good starting point for the process of creating a joint strategy for the two companies. However, reading between the lines, it seemed that Fortum did not consider Uniper’s strategy to be adequate.
Uniper’s objectives are indeed insufficient. Even though the company’s goal to be carbon neutral by 2035 sounds good, in reality it only covers 47 % of the direct emissions of Uniper’s power production, without any inclusion of indirect emissions, which are created for example in energy trading.
Moreover, Uniper is planning to reach its goal with questionable methods: by selling power plants, switching from coal to gas, compensating emissions and carbon capture and storage (CCS). What is lacking is a meaningful change of direction, since the phase-out of coal does not take place quicker than set out by national schedules, new fossil fuel projects will not be stopped and emissions created in energy production outside Europe are not reduced.
The inclusion of Russia is significant, as Fortum usually talks only about reducing emissions in Europe.
Fortum has promised to publish a joint strategy for the companies by the end of this year, including goals for both Europe and Russia. The inclusion of Russia is significant, as Fortum usually talks only about reducing emissions in Europe. In the AGM, Lundmark stated that Fortum and Uniper must reach carbon neutrality much sooner than the EU, which is aiming to be carbon neutral by 2050.
Fortum and Uniper’s joint strategy must align their business operations with the 1.5 degree goal. Anything less than that would constitute an evasion of responsibility. This means that coal power must be phased out by 2030 in a controlled manner that takes workers’ rights into consideration, and that no more investments are made into fossil fuel projects, such as LNG-terminals.
Pressure on Fortum from the state and investors
In the future the state’s ownership steering as well as institutional investors, such as VER, Varma, Ilmarinen and Elo, have a responsibility to ensure that Fortum aligns its operations with the 1.5 degree target.
There have been promising signs of responsible ownership steering. The Finnish government recently accepted a new decision regarding ownership steering, which says that state-owned companies must take into account the goals of the Paris Climate Agreement to limit climate change to 1.5 degrees. Minister of the Environment and Climate Change Krista Mikkonen has invited Minister for European Affairs and Ownership Steering Tytti Tuppurainen to discuss the execution of the new decision in the ministerial group on climate policy. Mikkonen also stated on Twitter that opening new coal plants is not sensible and encouraged Fortum to seek for a solution.
Moreover, important European asset managers expressed their concerns to Fortum’s leadership prior to the AGM. Finnish investors have also sent messages in Fortum’s direction even though Finnish financial institutions usually do not try to publicly influence companies.
We understand that the 1.5 degree objective is difficult to fulfil, but Fortum must do its best to reach it. The company has made significant investments into renewable energy, and now it must ensure the phase-out of coal both in Europe and Russia by 2030.