As the economic crisis linked to Covid-19 grips the world, banks, insurers and asset managers have even more reasons to exit from the riskiest investments in fossil fuels – starting with thermal-coal mining and coal power plants.
The shift away from excessive reliance on coal power has continued at pace, despite the pandemic, and Southeast and South Asian financial institutions risk getting left behind unless they too move towards the sustainable clean energy industries of the future. Putting aside the climate issues, the economics are increasingly compelling.
This week, CIMB announced the positive news that it is developing a coal policy – and stated that this coal guideline will be available by the end of this year or early 2021, which will be a first for Malaysian banks.
On the proviso its policy is robust, this will position CIMB as a leader on sustainable finance in Southeast Asia, building on its position as the first bank in the region to sign the UN Principles for Responsible Banking. Other Malaysian banks – such as Maybank – should now follow to avoid the clear and increasing climate risks.
The financial risks of continued investment in new coal have been demonstrated during the economic crisis this year. Research by the Institute for Energy Economics and Financial Analysis (IEEFA) has shown that more than 138 globally significant financial institutions have already exited from coal, making coal plants harder to finance and a rising stranded asset risk.
The trend continued this year despite Covid-19, with Japanese megabanks Sumitomo (SMBC), Mitsubishi UFJ (MUFG) and Mizuho each announcing an end to new finance for coal plants in April.
The moves followed Japan’s first shareholder climate resolution by investors, which targeted Mizuho, putting coal finance in the spotlight. But the most surprising announcement was by Japan Bank for International Cooperation, which also committed to ceasing new coal financing in April. In the last five years JBIC has been the largest provider of government-subsidized capital for new coal globally.
The first half of 2020 marked the first ever six-month decline in global coal power capacity, according to Global Energy Monitor, as well as showing a global collapse in coal power plant utilization rates to decade lows, according to Ember research.
Meanwhile, investments in sustainable funds have remained strong during the Covid-19 crisis. Blackrock research shows this is because stronger environmental, social and governance (ESG) performance is a proxy for good management factors such as the long term effectiveness of the company’s board. Certainly, sustainable investments have been more resilient in the current crisis.
The trend of Japanese banks shifting away from coal follows similar moves by the Singaporean bank leaders DBS, OCBC and United Overseas Bank (UOB) in April last year – meaning that by now, most of the largest commercial banks in Asia have already exited from finance to new coal power plants. Other Southeast Asian banks should not risk ending up as the “last ones standing” with bad debt in risky coal projects.
While the last remaining financiers of coal might potentially be able to charge more for their finance, these projects entail significant capital risk. Project delay risks, reduced competitiveness against lower cost alternatives, reputational risks, cancellations and postponements all mar such projects globally.
And most important, with South Korea focusing on a Green New Deal and Japan announcing plans to close 100 coal plants last month, both countries’ commitment to providing long dated public Export Credit Agency (ECA) capital support to new coal power plants is rapidly being reassessed. Absent this capital subsidy, private capital risks for new coal escalate dramatically.
In Vietnam for example, nearly half of its currently planned coal capacity could be shelved as alternative sources of energy take up growing shares in its power mix, according to the Power Development Plan which will go into effect early next year.
August saw Bangladesh’s energy minister announce plans to review all but three of the country’s 29 coal-power-plant developments.
For the Malaysian banks, coal makes up only a small portion of their portfolio. The former chief executive of CIMB said it makes up only 1% of the bank’s portfolio. Maybank, which is the largest Malaysian bank by assets at home, estimates its exposure to coal financing at 0.2% of its total portfolio. This is a small and risky portion of the portfolio – both financially and reputationally – that they would do well to move away from.
Yet at the moment, none of the Southeast Asian banks outside Singapore have made a formal commitment to start the shift away from new coal. CIMB’s recent announcement is a step in the right direction, but its policy would be wise to cease financing and investment of new coal-fired power plants with no exceptions made, thereby matching the commitments made by its Singaporean peers.
Indeed, all Southeast Asian must avoid investing in an outdated and increasingly uncompetitive technology, which other major global institutions are moving away from.
Continued coal exposure makes these banks become less attractive to international investors. Following BlackRock’s landmark “Fundamental Reshaping of Finance” policy announcement in January, an increasing number of influential investors are actively engaging to shift their clients to align with the Paris Agreement, starting with coal.
Institutional investors holding assets worth $11 trillion have now pledged to divest from fossil fuel assets. This is being driven more by the economics than any moral argument. US oil and gas exploration and production companies have dropped 44% this year. Peabody Energy is down more than 70% and energy stocks now account for 2.3% of the benchmark S&P 500 Index, down from 16% as recently as 12 years ago.
The momentum is building because the costs of renewable energy are continuing to fall rapidly, making clean energy a much more attractive investment proposition.
Research by Carbon Tracker found that in Vietnam and Thailand, solar energy would be cheaper than operating coal plants by 2027-28. Given that it can take four to five years to build a new coal power plant, this means new coal plants would become uncompetitive by the time of commissioning.
In India, record-low solar-power tariffs are already half the cost of a new imported coal-fired power plant, and 30% cheaper than existing domestic coal power plants. And renewables are now the low-cost source of new generation in Pakistan as well.
Dispatchable renewable sources combined with energy storage are now being built – which is further undercutting the economics of coal plants. And more than half of coal plants operating today cost more to run than building new renewables.
More broadly, energy demand is uncertain as the world enters a recession. The International Energy Agency has projected that power investment this year may fall by 10%, with conventional fossil-fuel energy investments hit hardest.
Some governments continue to provide a type of fossil fuel subsidy known as export credit guarantees to coal plants, but these are become scarcer. South Korea’s government committed recently to end overseas financing to coal plants, while Japan also promised to restrict such finance.
Financiers of coal plants cannot rely on these subsidies for much longer at a time of falling profitability. As leading insurance firm AXA pointed out, coal is “very much a commodity of the past,” and Southeast Asian banks should avoid getting left holding the bag in this accelerating global energy transition.
Tim Buckley is the director of energy research at the Institute for Energy Economics and Financial Analysis in Cleveland, Ohio.