Paris Agreement - end of coal

$1.1 trillion from the banking sector to the coal industry

The Paris Agreement was adopted six years ago. Yet, coal remains one of the main sources of greenhouse gas emissions, the single biggest threat for the climat, putting the health of millions as well as our future in peril.

The financial sector is in large part responsible for a collective failure to organize a sector-wide exit. Their investments, financing, insurance underwriting, and other financial services are keeping this industry afloat, despite being outcompeted by low-cost renewables. Between October 2018 and October 2020 alone, banks handed out over $1 trillion to coal companies. In January 2021, institutional investors held more than $1 trillion in investments in those same coal companies.

Reclaim Finance urges financial institutions to adopt a public policy on coal, aiming to align their financial services with the target of limiting global warming to 1.5ºC above pre-industrial levels. This means (1) ceasing all financial services supporting sector expansion at once, and (2) adopting a strategy for shutting down the world’s existing coal infrastructure.

The problem with coal

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of CO2 from the energy sector
premature deaths a year
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new coal-fired power plants planned

There are currently around 6,600 units in existence and coal still accounts for more than one third of global energy production. A growing number of countries is committed to exit coal but the decline in coal production is too slow and we are far from shutting down coal at the rate needed to limit global heating to 1.5ºC.

Quite the opposite actually: Despite the IEA’s, United Nations’ and scientists’ repeated calls to stop building new plants, the global coal production capacity has continued to rise since the Paris Agreement was adopted and around 1,000 new coal-fired power generation units are currently in the pipeline, mainly in Asia. Such installations are not temporary: they have a lifespan of 40 to 60 years and if built, will remain in operation until well after 2060.

Limiting global heating to 1.5ºC will only be possible if we stop coal expansion now and ensure a complete end to coal power generation by 2030 in Europe and OECD countries and 2040 worldwide. The finance sector can play an important role in achieving this goal, by cutting off the taps for the coal industry.

Stopping coal expansion

According to the Coal Policy Tool, our tracking device for coal policies, nearly 300 global financial institutions now have policies limiting financial services to the coal sector. The problem is not the number of policies, but rather, their quality.

Firstly, too many of these policies still enable support for coal expansion. When policies exclude coal companies, they do it based on how much coal they produce or coal power they generate, but not on the basis of their future plans. This is a major loophole given that more than 500 companies are currently planning new coal projects worldwide, all incompatible with a 1.5°C carbon budget and breathable air.

Despite calls at COP26 to accelerate the coal phase out, none of the net zero alliances gathering banks, asset owners, insurers and asset managers require that their members stop supporting new coal. Our analysis shows that after COP26, the vast majority of the members of the Glasgow Financial Alliance for Net Zero (GFANZ) covered in the Coal Policy Tool still do not restrict support to coal developers.

Secondly, even when financial institutions adopt the right criteria to exclude coal giants and developers from their portfolio, many don’t apply them to all their activities. An iconic example of double-standard is how most asset managers apply their coal restriction policies to their “active’ investments but not to the growing share of “passive” investments. Quite hypocritical right?

Fortunately, some financial institutions are setting an example: there are now more than 30 players with robust coal policies and listed as best practices in the Coal Policy Tool.

Engaging or divesting?

We believe in doing both: It’s vital to have divestment to put pressure on the cost of capital, drive down fossil activities’ market value and free up additional capital for the green transition; and in the meantime, engagement is necessary to actually shift business models and deal with hard to abate yet essential sectors.

However, engagement has become a trendy buzzword, and a convenient excuse for financial institutions who want to avoid excluding companies that are miles away from transitioning.

We do believe that engaging in dialogue with companies can be an effective tool, but it needs teeths to operate changes: public meaningful time-bound demands and an escalation strategy with sanctions for the companies that don’t meet the requirements. The perspective of potential divestment is an essential pre-requisite to make engagement credible. Otherwise, engagement means nothing more than Business As Usual.

In a context of climate urgency after years of warning about coal, we believe that dialogue should be reserved for companies that are no longer developing new coal projects and are not among the sector’s biggest heavyweights.

Requiring credible coal phase-out plans

Planning the coal exit is critical to ensure a gradual and socially just transition away from coal. Yet, so far, less than 5% of the coal companies have adopted coal exit plans, and even less of those companies have credible coal exit plans.

A growing number of financial institutions recognise the imperative to exit the coal sector and are calling on coal companies to publish exit plans. Given the social and environmental stakes, financial institutions must make sure those plans are credible and exclude all companies headed in the wrong direction:

  • The companies that are still developing new coal;
  • The companies that haven’t yet committed to fully phase out coal;
  • The companies planning to phase out coal too late;
  • The companies which are passing on their coal assets, or converting them to unsustainable energy sources such as gas or biomass plants;
  • The companies which are not planning for a socially just transition for the workers and the local communities.

Reclaim Finance and Urgewald have identified 10 criteria that financial institutions must consider when assessing whether their clients have a credible coal phase-out plan. To prevent them from supporting companies with half-baked coal exit strategies, we have also assessed the plans of more than 40 coal companies.

Beware of greenwashing!

While more than 27 French financial institutions now have robust coal phase out policies, international financial institutions are still lagging behind, and are designing increasingly creative policies to avoid cutting off the taps for the coal industry. Any financial institution claiming to achieve net zero by 2050 and still financing coal developers is, by definition, greenwashing.

Here are three examples of ineffective policies: