Global capital flees thermal coal: report

Institutions divesting at rate of one every two weeks

By Sophie Boot

Global capital is fleeing the coal sector, and it’s not a passing fad, according to the Institute for Energy Economics and Financial Analysis.

In IEEFA’s new report, released this morning, it found that since January 2018, one new bank, insurer or financial institution had announced divestment from or restrictions on thermal coal every two weeks.

IEEFA’s director of energy finance studies for Australasia, Tim Buckley, said a domino effect was being created by tightening policy and new lending restrictions “resulting in a progressive strangulation of the thermal coal industry”.

“Stranded assets are a clear financial risk for any institutions left funding the coal sector,” Buckley said. “With environmental and reputational concerns certainly driving factors for capital fleeing coal, investors are also increasingly aware that coal industry forecasts are increasingly dour.”

In Australia, IEEFA points to superannuation funds UniSuper and QSuper, which last year moved their combined A$147 billion in funds under management away from coal. It also notes that Australia’s domestic banks will no longer fund new coal plants, though the Morrison government was open to bids for new coal projects through its underwriting program, which Energy Minister Angus Taylor said yesterday was progressing quickly to a shortlist of projects which could get government backing.

Emma Herd, chief executive of the Investor Group on Climate Change - which represents institutional investors with total funds under management of about $2 trillion - says Australia’s various financial institutions have taken different approaches to the financial risk of climate change.

Large banks including Westpac and ANZ have capped the emissions intensity of projects they’ll finance, while IGCC’s members have opted either to divest wholly or partly from thermal coal investments, set thresholds for the amount of thermal coal investments they’ll hold, or lobby high emitters in their portfolios to reduce their carbon emissions, she said.

Other Australian banks noted in the IEEFA report are Bank Australia, which excludes all fossil fuel lending, and Bendigo Bank, which ruled out lending to coal or coal seam gas projects in 2014.

“It’s a complicated landscape, but the common thread is all aspects of the financial services sector are actively looking at carbon risk as a financial risk,” Herd said. “Particularly in the last 12 months we’ve seen a real shift forward in terms of how they’re thinking about integrating active consideration of carbon risk into their risk processes.”

Pressure to do so, Herd says, is coming from all directions - regulators, customers, shareholders and “basic credit risk 101”.

“This is not just campaign-driven, this is not just shareholder-driven, it is all constituencies saying ‘this is an area we really need to be managing better and doing that faster’.”

Julien Vincent, executive director and lead campaigner at Market Forces, says progress on the most important aspect of climate risk disclosure - publishing analyses of how companies perform in different climate change scenarios - has been “glacial”.

Market Forces monitors banks, insurers and superannuation funds to compare their funding of environmentally unfriendly projects. Its latest scorecard of the big four banks - published in June 2018 - shows the banks have collectively loaned A$21 billion to coal, oil and gas projects since December 2015, when the Paris climate agreement was signed.

While no bank is investing in line with the Paris goal of keeping global warming below 2°C above pre-industrial levels, it is possible to differentiate between them, Vincent says. He points to the ratio of fossil fuel investment to renewable energy investment between late 2015 and the end of 2017 - for ANZ, it’s A$7.70 to A$1; for NAB, it’s A$1.60 to A$1.

Shareholder pressure to divest from fossil fuels is increasing, but those investors are still the minority, Vincent says.

“You’ve got investors saying ‘I don’t think it’s in my interest’ to see information about climate risk disclosed to the market. It’s exciting to see the investor activity increasing but you have to put in perspective that we're still talking about the vast minority of investors taking action."

IEEFA, too, notes that “almost all financial institutions still fail to properly implement policies aligned with the Paris Agreement”. Greenwashing is still a real concern and ultimately, the report says, “progress is being made but… it is far from sufficient”.