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Financiers talk of their coal divestment plans, but more is required for decarbonization: analysts

27 December 2021 Max Tingyao Lin

Financiers have been denouncing coal in droves in recent years to showcase their efforts to counter climate change. But the question is how has this helped the world phase out the most carbon-intensive fossil fuel, exactly?

According to the Institute for Energy Economics and Financial Analysis (IEEFA), at least 187 banks, asset managers and owners, insurers, and reinsurers had unveiled various plans to divest coal assets as of the end of December.

Analysts and climate campaigners say those announcements did contribute to limiting coal usage, even though they admitted much more needs to be done on the financing front to put the world on track to meet the Paris Agreement's goal of capping global warming at less than 2 degrees Celsius.

"Coal is becoming a global pariah—and those who continue to fund it or insure it are putting themselves at rapidly escalating financial and reputational risk," nonprofit Market Forces' UK Campaign Lead Adam McGibbon told Net-Zero Business Daily.

Katrin Ganswindt, head of financial research at nonprofit Urgewald, said coal is now "toxic" among investors after "the avalanche of divestment commitments" started in 2014.

Thinktank E3G estimated the global pipeline of proposed coal-fired power plants collapsed to 482 GW this September from 1.553 TW in 2015, the year when the Paris Agreement was signed.

"For new coal-fired capacity it will be very difficult to get 100% financing," said Peter Gardett, executive director for climate and cleantech at IHS Markit.

"There will be some attempts to combine new coal capacity with carbon capture, utilization and storage (CCUS), the technology that captures the emissions. [This is] potentially plausible … but that's a long road ahead," said Gardett, as such projects are not yet commercially viable.

King Coal is alive

But the widespread censure by financiers has barely put a dent in coal demand.

The International Energy Agency (IEA) estimated that the world's coal consumption is on track to exceed pre-pandemic levels this year and could set a new record in 2022, driven by high demand from the power sector.

Observers believe coal's resilience can be attributed, at least in part, to limited efforts from Chinese and Indian financiers to exit domestic coal projects.

China and India, which together account for nearly two-thirds of global coal usage, have refrained from committing to a coal phaseout as they seek energy security and economic expansion.

Of the 187 financiers on the IEEFA list, only two are based in China and one in India.

In a recent analysis of 56 major commercial banks globally by the ASEAN Center for Energy (ACE), researchers found that just eight of them do not have a divestment plan for thermal coal. ACE said the eight include some Chinese banks that are the world's largest funders for coal power; although it did not name them.

"Bank financing policies can substantially influence the business of coal companies, which will result in movement towards more coal-fired power plants if financing is readily granted," the researchers said.

According to Urgewald figures, the top 10 underwriters of thermal coal projects in the two years to October 2020 were all Chinese.

While China has pledged to stop building new coal-fired power plants abroad, the country's financiers—generally state-owned—are still funding the continued expansion of domestic projects.

At the annual Central Economic Work Conference in early December, Chinese government officials concluded the country will remain a "coal-based" economy while sufficient renewable energy is being secured.

Policy integrity questioned

Moreover, campaigners complain that financiers' divestment plans can be full of exemptions and lack urgency even if there is a general trend toward withdrawing from coal.

"When it comes to exiting coal, many financial institutions boast policies and plans, but in this area talk is especially cheap," Ganswindt said.

Nonprofit Reclaim Finance ranks the robustness of financiers' policies from one to 10 in five categories: whether a financier promises full exclusion of coal mines, plants, and infrastructure; if it excludes companies developing new coal projects or buying coal assets without clear commitments to close them at a later date; if a bank excludes companies with high exposure to coal; if the institution excludes coal mines or power firms of certain sizes; and whether the entity has adopted an exit strategy to support the closure of existing coal assets globally by 2040, the phaseout deadline set by the IEA to avoid climate disasters.

The nonprofit's researchers have analyzed 486 financial institutions globally, and only 28 of them are deemed to have a robust coal policy. The high performers generally receive a mark of seven or above in at least three of the categories.

"This raises the issue of the quantity of coal policies vs the quality of these policies," Reclaim Finance Senior Policy Analyst Yann Louvel said.

There have also been calls on regulators to examine whether financiers are implementing their divestment proposals.

"Ideally the state should play a role in enforcing effective coal policies that bring coal to a swift end," McGibbon said. "In the absence of that, we need investors and shareholders to step up."

The HSBC case

Backed by 15 institutional and 117 individual investors, activist group ShareAction in January filed a shareholder proposal calling on HSBC to reduce its exposure to fossil fuels with a timeline consistent with the Paris Agreement.

This led to a board-backed resolution passing at the UK bank's annual general meeting to phase out financing of coal-fired power and thermal coal mining by 2030 in the EU and the Organisation for Economic Co-operation and Development (OECD), and by 2040 elsewhere.

In mid-December, HSBC fleshed out some details on how it will turn off the liquidity tap, which received mixed responses from campaigners.

"We welcome the progress HSBC has made since our engagement began … However, there are a number of disappointing loopholes in this policy," said Jeanne Martin, senior campaign manager at ShareAction.

"For example, HSBC's definition of coal expansion allows it to continue financing companies building new coal projects, as long as these projects were announced before January 2021, while its corporate finance restrictions do not apply to existing clients outside the OECD, where it has the most exposure."

HSBC also said it will request its clients present a plan for a transition away from coal by 2023, which must align with the bank's target to have a net-zero portfolio by 2050.

But Ganswindt said there are no firm commitments. "HSBC does not explicitly state the requirements for these plans. It is not clear if clients can persist [on using or mining] coal after 2030 or 2040," she said.

Energy transition

While financiers are gradually withdrawing from fossil fuels like coal, clean, low-carbon energy supplies have not always received more funding.

The IEA estimates global spending on new coal-fired capacity totaled $49 billion in 2020, down from $75 billion in 2015. In the five-year span, investment in fossil fuel production and logistics fell to $621 billion from $1.01 trillion.

Funding for renewable generation rose to $359 billion from $308 billion. But investment in low-carbon fuels, such as hydrogen, dropped to $8 billion from $9 billion.

While there is a clear trend favoring low-emission energy sources, Gardett said financiers ultimately care about the rates of return when considering their investment targets.

"The payback on cleantech has to go up … The numbers need to work out for private institutions to" invest in low-carbon energy, he said.

Experts have warned of energy security issues in the coming years, with the fall in investment in fossil fuels not matched by as quick an expansion of funding for green energy sources.

Some campaigners suggest governments should intervene to divert resources from fossil fuels to low-carbon supplies.

"States should mandate massive investment in clean energy … not just for climate reasons, but for energy poverty reasons and health reasons," McGibbon said.

Posted 27 December 2021 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability

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