Climate pledges mask banks' real carbon footprint

IFR 2317 - 25 Jan 2020 - 31 Jan 2020
6 min read
Gareth Gore

Banks are sending out contradictory messages when it comes to thermal coal, with many phasing out lending to miners as a central part of their climate change policies while at the same time continuing to lend to companies that burn the fuel and send carbon into the atmosphere.

Power companies, which burn about 80% of all thermal coal taken out of the ground, contributing to about a third of all carbon emissions globally, have largely been absent from the recent flurry of announcements from banks keen to show they are taking action against global warming.

While a handful of European banks such as BNP Paribas, Credit Agricole and ING have committed to reducing their lending to coal-burning power producers down to zero or almost zero over coming years, most others will continue doing business with the heavily polluting industry.

Under the Paris Agreement in 2015, the global community agreed to try to limit the rise in temperature to 1.5°C above the pre-industrial average, which could require an almost 80% reduction in coal use by 2030. Most banks have supported that aim, but many have failed to back that with action.


Indeed, many have continued to fund an expansion in coal use. Banks have provided US$745bn to building new coal-fired power plants in the past three years alone, according to pressure group Urgewald, with the big three Japanese banks, Citigroup and BNP Paribas the worst offenders.

"The UN Secretary General, the IPCC and climate scientists worldwide have time and again called for a speedy phase-out of coal-based energy production, but most financial institutions are still turning a deaf ear," said Heffa Schuecking, director of Urgewald.

Money is one reason. In Europe, just five power producers – RWE and Uniper in Germany, PGE in Poland, EPH of the Czech Republic and Enel of Italy – are responsible for half the continent's coal-linked emissions, pumping over 300 million tonnes of carbon into the atmosphere every year.

But all are lucrative clients, collectively paying more than €120m of fees a year to investment banks for underwriting and advisory services, according to Refinitiv data, plus many more millions in fees related to trading, hedging and transaction banking.

As a result, banks have been slow to walk away from such companies, even though many will still be heavily exposed to coal as late as 2030.


Some, though, are starting to back away from coal-fuelled power producers even if there might be a hit to the bottom line.

ING was the first to act - saying in 2017 that it would cut out financing to such producers entirely. Similar announcements followed from Credit Agricole last June and BNP Paribas and Societe Generale late last year.

Standard Chartered also announced late last year that it would rapidly reduce financing for coal burners, despite coal being a major source of power in many of its main markets.

"We felt that it wasn't right to just focus on the coal miners," said Amit Puri, head of environmental and social risk management at Standard Chartered. "The world doesn't need coal for power. It was never really a debate from our side to exclude power generation companies."

It plans to slowly wean itself off clients, transitioning to only working with clients who generate less than 10% of their earnings from thermal coal by 2030. The ban will apply across the whole bank – from lending and bond underwriting to transaction banking.

"We are not pre-emptively applying the limits," said Puri. "So if we know that in 2025 a client is going to trigger a limit but they are coming to us for financial services, and they have a credible transition plan, we are not turning them away. But we are having robust conversations."


Amid all the talk of pulling back from coal, no major banks have made any commitments about withdrawing support for oil or gas, the burning of which are also major causes of climate change.

"The ability to switch from coal to natural gas is fairly straightforward," said Ben Nelson, an analyst at Moody's. "A lot of what you're seeing in coal is carbon-to-carbon. You move from burning coal to generate electricity to burning natural gas and you get about a 50% reduction."

But the oil and gas industry is many times larger than the coal industry - and much more lucrative. Clients such as Exxon Mobil and Royal Dutch Shell have each generated more than US$1bn of investment banking fees for banks over the last decade.

"The coal industry is not very big today – there are some individual industrial companies out there that have more rated debt outstanding than the whole US coal industry," said Nelson. "The oil and gas industry is much, much larger and the story is much more complicated; transitioning away from that is much more challenging."


Greenpeace International used the annual meeting of the World Economic Forum in Davos to call out the banking industry on its continued financing of oil and gas. It said the biggest 24 – led by JP Morgan, Citigroup, Bank of America and RBC – provided US$1.4trn to oil and gas companies in the three years after the Paris Agreement.

"Despite environmental and economic warnings, they're fuelling another global financial crisis by propping up the fossil fuel industry," said Greenpeace International executive director Jennifer Morgan. "They say they want to save the planet but are actually killing it for short-term profit."

And yet banks may be forced to act before long, even on lucrative oil and gas clients. Risk managers and regulators are starting to wake up to the concept of stranded assets and the very real impact of climate change – or government policy – on the creditworthiness of clients.