By restricting financing for the coal industry, financial institutions’ coal policies play an important role in pushing companies to shift out of coal. However, once companies have decided to phase out their coal activities, they will likely require additional financing to shut down their existing assets at the pace required to align with a 1.5°C pathway. Large amounts of financing are for replacing coal with sustainable energy technologies. Coal policies must therefore act to both halt finance for coal expansion and for companies with no or inadequate coal phaseout plans, but also encourage the financing of early decommissioning of coal assets. To address this, Reclaim Finance has updated the criteria under our Coal Policy Tracker to incorporate a bonus for coal phaseout financing language.
Last year saw the highest net increase in operating coal capacity since 2016, despite the pledges and commitments of governments and financial institutions. Commercial banks provided a staggering US$470 billion in funding for the coal industry over the last three years (1). It is likely that the funds that went to companies and projects that helped to expand, or at least sustain, current levels of coal power generation, especially in developing countries. There is no evidence of any funding for the purpose of early retirement of coal plants, as is required to avoid fuelling the climate crisis.
Reasons for the lack of private finance for coal retirements in developing countries include the lack of well-designed and replicable coal phaseout projects, coupled with the reluctance of banks and investors to finance projects in which they do not feel they can make a sufficient return. The private finance sector, including the Glasgow Financial Alliance for Net Zero (GFANZ), claims that a key reason for its lack of funding for coal phaseouts is that its members are prevented from doing so because of their existing policies that restrict their financing of the coal sector (2).
Strong coal policies should promote coal phaseouts
Strong coal policies from private financial institutions are essential to the energy transition. A study by Harvard Business School suggests that bank coal exclusion policies have a significant impact on coal firms’ ability to raise capital, which in turn discourages further investments in coal expansion. They also found that coal plants owned by companies receiving finance from banks with coal exit policies were more likely to be retired, and the authors estimate a reduction of a staggering gigaton of carbon emissions due to these coal exit policies (3).
While strong coal restrictions are crucial, they should not be used as an excuse for impeding responsible investments in the phaseout of coal — and the need to finance coal phaseouts should not be used as an excuse to weaken coal policies. To provide clarity on this, we have updated the criteria under the Coal Policy Tracker (CPT), a database that assesses the quality of financial institutions’ coal policies, to include a bonus for coal phaseout financing and demonstrate how coal phaseout financing can be incorporated into coal policies.
Rewarding policies that include provisions for phaseouts
Financial institutions will now receive a bonus to their CPT score when they include explicit language in their coal policies that allows for the “participation in the early phaseout of coal assets, which must be consistent with a 1.5°C pathway.”
We explain below the key implications of this new language:
- The ‘early phaseout’ means that the assets must be shut down. They cannot continue to operate using ineffective or unproven technologies such as carbon capture and storage (CCS) or co-firing with ammonia. These technologies risk prolonging a reliance on coal power (4).
- The “consistency” with a 1.5°C pathway refers to the timeline for the decommissioning of the coal asset to be in line with no or low overshoot emission pathways with a limited reliance on negative emissions, such as those described by the International Energy Agency (IEA).
- To ensure consistency, bonuses will only be awarded to financial institutions that have sufficient restrictions to exclude the financing of companies that continue to develop coal. Continuing to provide coal finance to developers is fundamentally inconsistent with the shift away from coal and the spirit of supporting coal phaseout transactions.
A handful of banks have already incorporated into their policies some form of an exemption for the funding of early decommissioning for coal assets, such as HSBC and Standard Chartered. However, both banks have not been awarded with the bonus in the CPT because both of their coal policies lack sufficient guardrails on the continued financing of coal developers (see Table 1 below). Reclaim Finance will continually review and add financial institutions’ coal policies as they are announced or updated.
| Name | Relevant policy text | Evaluation and explanation: |
|---|---|---|
|
Last updated: January 2024 |
“HSBC will not start a new relationship with a prospective client with one or more of the following characteristics: except for the purposes of materially reducing greenhouse gas emissions in line with HSBC’s Phase-Out Commitment timelines and HSBC’s targets and commitments, including by enabling the early retirement of existing thermal coal assets” |
Does not qualify for phaseout bonus. HSBC and Standard Chartered’s exceptions for the application of its coal policies to coal phaseout transactions are clearly stated. However, neither bank is awarded the bonus under the CPT because neither has put in place sufficient restrictions on the financing of companies that are planning new thermal coal mines, coal plants, or coal infrastructure projects. |
|
Policy effective: Q3 2024 |
“We may also support initiatives designed to assist countries to accelerate decarbonisation through the early retirement of existing Thermal Coal assets, such as the Just Energy Transition Partnership(JETP), provided they are aligned with credible structures and taxonomies. The provision of financial services towards the early retirement of existing Thermal Coal assets will be an exception to the criteria set out in this Position Statement.” | |
|
Last updated: March 2023 |
“State-Owned-Enterprises in Just Energy Transition Partnership (JETP) countries will be allowed to have trajectories for phase out from thermal coal business which are aligned with the country’s commitments under the JETP program.” |
Does not qualify for phaseout bonus. Deutsche Bank’s coal policy is not considered an exception for the early phaseout of coal and only applies to JETP countries and pathways. |
|
Last updated: February 2024 |
“General exceptions apply to our thermal coal power policy in the following circumstances: • In relation to any transition finance provided by Barclays to clients reducing their thermal coal portfolio including retrofitting of existing facilities; • Where Barclays is providing financing for decommissioning plants for those unable to transition.” |
Does not qualify for phaseout bonus. The way that Barclays presented its exception implies favouring retrofitting of existing facilities instead of prioritizing early phaseout or closures. |
Table 1
The capital is available, but regulators must step in
Global bank financing for coal fell by 20% between 2016 and 2023, but billions of dollars are still going to the coal industry every year – money that could have otherwise gone to improving energy efficiency, grid infrastructure, and sustainable energy projects. To ensure this, financial institutions need to upgrade and strengthen their policies, and policymakers need to establish ambitious international regulatory standards, in particular through the Coal Transition Accelerator.
Reclaim Finance’s updated Coal Policy Tracker criteria aims to incentivize financial institutions to incorporate well-designed coal phaseout financing into their policies. Alongside regulation and international standards, this will send an important signal that private capital is ultimately moving from sustaining the coal industry to retiring it, and towards sustainable energy investments instead.
