coal

Asian banks are now adding to the growing number of financial institutions and governments exiting coal, says The Institute for Energy Economics and Financial Analysis (IEEFA).

Asia has witnessed five major financial institutions announcing coal-fired power plant exit policies over the last six weeks, signalling an acceleration away from coal financing into renewable projects in the Asia Pacific region.

Singapore’s big three banks - DBS Group Holdings, United Overseas Bank and Southeast Asia’s second-largest lender, the Oversea-Chinese Banking Corporation have each announced they are ceasing financing for new coal-fired power plants in the last month.

This builds on the move by State Development & Investment Corporation (SDIC) as the first major domestic Chinese financial institution to completely exit the coal industry during March 2019, while Japan’s Mitsubishi UFJ Financial Group – the biggest bank in the world outside China – announced a coal exit in April 2019.

Echoing an originally largely European phenomenon, the recent Asian financial exodus highlights growing regional concerns with the increasing stranded asset and air pollution risks for the thermal coal power industry.

The move to renewable energy

Recent announcements also highlight the shifting position of government intervention in leading Asian economies, through the necessary strategic transition away from coal into increasingly cheaper, domestic, sustainable alternative energies to meet the growing energy needs of burgeoning local populations.

Indeed, on 16 April 2019 Oversea-Chinese Banking Corporation CEO Samuel Tsien said he hoped the bank’s decision to exit coal would encourage governments to make arrangements for countries to accelerate the move from coal to renewables, consistent with their global obligations under the Paris Agreement.

Asian countries including India, Japan, China, Singapore, South Korea and most recently Thailand are all increasingly providing global leadership to ‘ratchet-up’ ambition to deliver on the Paris Agreement – both through the movement of their financial institutions and leading corporations away from coal, as well as through top-down government policy – to transition economies away from the over-reliance on increasingly expensive imported thermal coal into zero emissions, lower cost domestic renewable-energy options.

Peak coal-fired power capacity is on the horizon in India, a concept impossible to fathom at the start of this decade.

By targeting 275 gigawatts (GW) of renewable energy installed capacity by 2027, the Government of India is moving the country away from a reliance on imported coal through targeted measures to encourage industry investment of now least-cost renewable energy whilst progressively taxing the externalities of coal use.

India leads by example

Leading Indian corporations are exemplars in leading the transition to low cost renewable technologies.

Tata Power, the largest private integrated power company, is now one of India’s leading renewable energy investors, underpinning the electricity sector transition through its recent withdrawal from building new coal-fired power plants.

India’s shift away from new coal-fired power is moving faster than anyone had predicted, driven by the economics of renewables moving well below grid parity.

Strongly growing electricity demand will be served by better utilising existing domestic coal power capacity, complemented by the rapid expansion of 20-40 GW annually of new renewable energy capacity.

Japan is emerging as a new global leader in promoting the Paris Agreement.

A growing list of leading Japanese trading houses have already completely exited thermal coal mining and new coal-fired power plant development, recognising the rapid cost decline and increased uptake of renewable energy sources.

Over the past six months leading Japanese trading houses (Marubeni, Sojitz Corp., ITOCHU, Mitsui and Mitsubishi) have stated they will no longer own, nor invest in new thermal coal capacity.

Leading Japanese financial institutions are also rapidly re-assessing their business models, with partial coal exits and/or restrictions announced by Sumitomo Mitsui Trust Bank, Nippon Life Insurance, Dai-Ichi Life Insurance and most recently MUFG.

Legislative changes

Japan’s government is also examining its position, with Japan’s Environment Minister Yoshiaki Harada releasing a policy initiative in March 2019 stating the Ministry will not sanction the construction of new thermal coal plant facilities nor upgrade existing coal plant facilities in line with Japan’s international pledges to tackle global warming.

In South Korea, the Ministry of Trade, Industry and Energy recently tabled a new draft energy master plan that increases the nation’s ambition to move away from coal and nuclear towards renewable energy and gas, paving the way for financial and economic domestic transition.

Asia’s increasing ambition to invest in new and increasingly lower cost domestic renewable energy technologies is reflecting the impact of a changing climate in terms of the regional energy security and pollution dialogue, and the growing environmental and reputational concerns of institutions and governments alike.

Countries and companies are increasingly building in measures to meet their Paris commitments, recognising the economic, environmental and social costs of continuing fossil fuel extraction, including the potential for expensive and obsolete stranded assets and reduced domestic energy and geopolitical security.

A recent IEEFA report titled “Over 100 Global Financial Institutions Are Exiting Coal, With More to Come” calculated the number of significant global banks and insurers (holding more than US$10 billion worth of assets under management) retreating from coal financing at just over 100 in late February 2019.

Ten weeks later, and 112 global financial institutions have announced a coal exit.

Putting this into perspective, every week to-date in 2019 another globally significant financial institution has announced its exit from thermal coal.

The situation in Europe

In addition to the five recent major coal exit announcements in Asia, two leading European insurers, UNIQA of Austria and MAPFRE of Spain, and one French asset manager, BNP Paribas of France, brought in new restrictions on thermal coal financing, insurance and/or investments during March 2019.

More countries follow suit

In April 2019, Australia’s QBE Insurance announced the cessation of investment in and insurance for thermal coal projects, while Switzerland’s UBS announced an updated coal power exit policy.

Moreover, Norway’s Government Pension Fund Global confirmed it is investing in unlisted renewable energy infrastructure and tightening its criteria for divesting from companies invested in coal mining and coal-fired power generation; and major German insurer Hannover Re announced it is scaling back its thermal coal exposure over the long term.

While Hannover Re’s initial May 2018 coal policy proposal was mostly an effort in ‘greenwashing’, the institution has now revisited and tightened their policy last month.

A reoccurring theme

IEEFA says that while it has found that initial global coal exit measures vary in effectiveness, the trend is for financial institutions to over time ‘ratchet up’ the strength of policies once they are put in place, consistent with Paris.

Investors are increasingly aware that global thermal coal forecasts are dour, with renewables inevitably emerging as the low-cost economic solution. Renewable technology and financials have moved on, and climate-energy policy shifts are increasing.

Environmental and reputational concerns are also driving factors for capital fleeing coal, particularly in Asia where air pollution issues are key.

With cheaper renewable energy uptake gathering pace across Asia, the likelihood of investors having to wear billions of dollars in stranded assets banked in fossil fuels is impossible to ignore.

Singapore, South Korea and India are moving, and Japan has recently signalled an intention to transition its national energy plan to accelerate decarbonisation, although a formal policy announcement is yet to come forth. March 2019 saw Thailand surprise all with its updated power development plan 2018-2037 halving their target for coal to just 12% by 2037, down from the previous 25% by 2036 target.

And while it is encouraging that SDIC has now fully divested from coal, a suite of policy ambitions by the Chinese government relating to their international investment programmes coupled with significant announcements from industry and the banks would provide the necessary leadership to regional laggards that are yet to move.

Meanwhile, the global financial industry is continuing its capital flight from thermal coal and the coal power sector – a trend we expect to continue to accelerate, says IEEFA.