Asset owners and managers encouraged to turn up the heat as banks prove slow to withdraw from historic relationships.
When UN Secretary-General António Guterres urged an end to the international financing of coal plants and a shift in investment to renewable energy projects, he referred to a “deadly addiction to coal” of governments, private companies and local authorities. Phasing out coal from the electricity sector would be “the single most important step to get in line with the 1.5-degree goal of the Paris Agreement”, he said at a March summit held by the Powering Past Coal Alliance (PPCA).
It is not only the UN that has coal firmly in its sights; activist groups, asset owners and managers are all putting the heat on the banks and insurers that are financing the continuation of coal projects. At the recent AGM of Deutsche Bank, asset managers Amundi and Nordea Asset Management publicly expressed their concerns over the German bank’s continued involvement in financing thermal coal, pointing out it is Europe’s second largest financier of coal mining and the region’s eighth largest financier of coal power.
Ahead of its AGM, Munich-based insurer and asset manager Allianz introduced a more restrictive coal policy. To be eligible for insurance with Allianz from 2023, companies cannot build new coal-fired power plants. In March, insurance giant Swiss Re announced it was moving ahead with a full phase-out of thermal coal, exiting the sector in treaty re/insurance by 2030 for OECD countries and by 2040 for the rest of the world.
Banks continue to finance the coal industry
Banks have a vital role to play in supporting the global transition of the real economy to net-zero emissions, according to the Net-Zero Banking Alliance, an industry-led, UN-convened group of more than 45 banks from 24 countries with over US$29 trillion in assets, which was launched in April 2021. The member banks have committed to aligning their lending and investment portfolios with net-zero emissions by 2050.
But banks have a long way to go. Since the adoption of the Paris Agreement in late 2015, banks have provided a total of US$2.7 trillion in lending and underwriting to the fossil fuel industry, according to a March 2020 report. A joint effort of NGOs Rainforest Action Network, BankTrack, Indigenous Environmental Network, Oil Change International, Reclaim Finance and the Sierra Club, the report found while many of the 35 banks profiled had tightened restrictions on financing coal plants, “coal power financing overall is not dropping nearly fast enough”.
Why are some institutions taking so long to implement effective coal phase-out plans? Jeanne Martin, Senior Campaign Manager at non-profit organisation ShareAction, says a number of are “reluctant” to cut ties with existing clients, even when those clients engage in activities that are “grossly misaligned” with the Paris climate goals and, often, the institution’s own net-zero commitment.
“Investors’ interest in banks’ coal policies is also a relatively recent phenomenon which might explain why some have taken so long to implement effective coal phase-out plans,” she says.
Moreover, passive asset managers often complain that they cannot phase out from specific companies because these are included in mainstream indices. “Yet these managers are often the same ones that are reluctant to use their shareholder rights – such as voting – to effect change,” she says, pointing to a joint report by Reclaim Finance and Urgewald.
There are, however, examples of good practice on coal investment among financial institutions, adds Martin. ShareAction’s 2021 leading practice report identified Amundi, Axa Investment Management, and La Banque Postale Asset Management as leading performers. Reclaim Finance’s coal policy tool identifies Credit Agricole, Credit Mutuel, and Canada’s Desjardins Group as having leading practice coal policies in the banking industry. The tool also singles out a group of asset owners with leading practice coal policies, including AG2R La Mondiale, MACIF, and SCOR.
Katarina Hammar, Head of Active Ownership at Nordea Asset Management, says it takes time for banks to structure lending and investment portfolios in line with the targets of the Paris Agreement and to operationalise these commitments to curb the exposure to coal. “There is a need to track exposure, change systems and access data,” she says. “It also takes time to address the issue for existing clients and agreements, but should be possible to do more proactively when onboarding new clients. It takes time to adjust and it might even require a cultural shift to implement the changes needed.”
Feeding Australia’s coal addiction
A country with a particularly deadly addiction is Australia, the world’s largest exporter of coal, accounting for 37.5% of the market in 2019 at a value of US$44.4 billion. Coal is not only Australia’s biggest export earner, it also dominates domestic power generation, with more than 80% of electricity generated by coal-fired power stations.
But as the devastating bushfires that raged through the country in the summer of 2019/20 showed, Australia is a country particularly at risk from the impact of climate change. Analysis by scientific partnership World Weather Attribution showed the risk of intense fire weather in the country has increased by 30% since 1900 as a result of anthropogenic climate change.
Jack Bertolus, Australian Campaigns Coordinator at NGO Market Forces, says it is “reprehensible” that Australia’s banks continue funnelling billions of dollars into projects and companies expanding the fossil fuel industry. “Despite their coal phase-out and exclusion commitments, NAB and Westpac remain lenders to the likes of Whitehaven Coal, which is actively pursuing A$2 billion of new and expanded coal projects,” he says.
The fossil fuel industry has donated millions to Australia’s major political parties in recent years, observes Bertolus, and federal and state governments continue approving new and expanded coal projects that are “completely incompatible with Paris”.
The Institute for Energy Economics and Financial Analysis (IEEFA) notes that the value of shares in Whitehaven Coal has collapsed 77% during the past decade as the company has set a “strategic direction on the implicit assumption that the world would fail to deliver on the Paris Agreement. Its investor communications and Board strategies have largely ignored and more recently downplayed this key financial and strategic risk,” says IEEFA.
Another coal enterprise in Australia that has caught the eye of IEEFA is the Carmichael thermal coal mine in Queensland, owned by Bravus Mining & Resources (formerly Adani Australia). An open pit mine that was originally intended to represent a A$16.5 billion investment, it was downsized to a A$2 billion enterprise in 2018. Despite that, an IEEFA research note found that the mine was set to receive over $4.4 billion of tax exemptions, deferrals and capital subsidies from Australian taxpayers.
Laura Hillis, Director of Corporate Engagement at the Investor Group on Climate Change, and Australia Director for Climate Action 100+, says the Carmichael mine is “just one of a number of new coal projects in Australia, albeit a high profile one. But the size and profile of Carmichael has made many financial institutions in Australia, including the banks, consider more deeply their risk appetite for funding and investing in thermal coal in particular, which is leading to most ruling out involvement in the project and others.”
In April, it was reported that India’s largest bank, State Bank of India, was dragging its heels over extending a funding line of as much as US$1 billion to Adani Enterprises for the Carmichael mine.
“A clear majority of Australians do not support the coal industry,” says Bertolus. “The Lowy Institute’s 2021 Climate Poll shows that 63% of Australians support a ban on new coal mines opening in Australia and the same number support reducing Australian coal exports to other countries. This presents serious reputational risks to financial institutions that continue to lend to coal companies like Whitehaven Coal and New Hope Group.”
Hillis notes that Australia is not isolated from the global trends towards cleaner and more sustainable investments and assets. “In recent years we have seen an acceleration of capital market flows towards companies, industries and infrastructure with stronger climate risk profiles such as renewable energy. It is also notable that Australia’s largest export markets for coal – China, Japan and South Korea – have all recently committed to net zero emissions by or near mid-century,” she says.
What asset owners and managers can do
Financial institutions, including asset owners and asset managers, can help drive action and momentum in the lead up to COP26 by urgently moving capital away from coal. “Coal-phase out announcements have been identified as a priority action for the private finance sector by the COP Presidency, Mark Carney’s Private Finance Hub and the High-Level Climate Action Champions,” according to a spokesperson for the PPCA Secretariat.
The direction of travel was further emphasised recently with the Group of Seven pledging to end international financing of coal and the International Energy Agency asserting that no new coal facilities should open after this year, in its recent net-zero roadmap.
Nordea’s Hammar says the manager engages both individually and through collaborative initiatives, with “the expectations that banks should expand their policies to exclude coal developers, commit to phase out from coal by 2030 in OECD countries and by 2040 for the rest of the world”. The manager also encourages banks to sign up to the UN supported Principles for Responsible Banking to align their business strategy and be consistent with the Paris Agreement and Sustainable Development Goals.
Hillis also cites the importance of engagement – banks should examine where the long-term risks are and remain aware of rapidly emerging opportunities in areas such as the green bonds market, transition finance opportunities and sustainability linked loans.
Financial institutions can have a great impact by helping end coal finance and expanding the range of clean energy options available to countries, says the PPCA Secretariat. “The number of private sector financial institutions around the world committed to ending emissions from coal power is growing fast, as the sector increasingly considers climate risks in their spending decisions.”
Bertolus says investors should engage banks, calling for them to align their financing activity with their stated commitments on climate change. “For banks that support the Paris Agreement, this means no funding for expansion of the fossil fuel industry, and phasing out fossil fuel exposure in line with 1.5°C. This engagement can include supporting shareholder resolutions calling for these outcomes.”