THE COAL POLICY TOOL:
THE RATIONALE BEHIND EACH OF THE 5 CRITERIA
A growing number of private and public institutions have adopted coal-specific financing, insurance and investment policies to help achieve climate and health objectives.
Best practices consist of balance exclusion criteria with an engagement process: companies unable or unwilling to meet sector exit targets are excluded from portfolios; other companies are already engaged but their continued inclusion in investment portfolios and the reception of new investments depends on the achievement of specific, time-bound targets supporting their gradual exit from the sector. The complementarity of these criteria leads to policies that proactively support coal phase-out in a way that contributes to the achievement of the Paris Agreement objectives.
Currently, despite the sophistication of the policies adopted, a still too limited number of financial institutions have adopted such a policy. In order to accompany them, Reclaim Finance explains below the reasons behind the recommendations shared by a large number of international NGOs and puts online the Coal Policy Tool, an updated and detailed analysis of the policies adopted by financial institutions to frame their services to the coal sector.
No longer support new coal projects
Despite the adoption of the Paris Climate Agreement in 2015 and the countless reports by the United Nations, the IPCC and the IEA on the incompatibility of any new coal-fired power plant with the 1.5 or even 2°C targets, the global fleet of coal-fired power plants continues to grow. Since the signing of the Paris Agreement, the world’s installed coal production capacity has increased by more than 105 GW, an amount equal to the combined coal-fired power plants of Germany and Russia.
However, the implications of the UN Paris Climate Agreement for the coal sector are clear. In order to achieve the agreement’s objectives of limiting “the global average temperature to well below 2°C above pre-industrial levels and to continue efforts to limit the temperature increase to 1.5°C”, no new coal-fired power generation capacity can be built and existing electricity will have to be phased out over the next few years.
In 2015, Christiana Figueres, then head of the UNFCCC, warned: “There is no room for new coal”. And in 2015, OECD Secretary-General Angel Gurria called new coal-fired power plants “the most urgent threat to our climate”. Just last year, the UN Secretary General called on decision-makers to make 2020 the year in which the expansion of the coal industry would come to a halt.
Financial institutions have begun to heed these warnings. More than 40 banks and insurers have now ceased direct support for new coal projects.
Financial institutions must not provide or renew any type of support for new coal-fired power plants, mines and other associated infrastructure worldwide – including project finance and other specialized financial support, notably advisory mandates, insurance underwriting and direct investments.
No longer support companies that develop new coal projects
Any new carbonaceous power generation infrastructure such as new coal-fired power plants is incompatible with the 1.5°C target and the majority of coal reserves, including those already in operation, must remain in the ground to limit warming below the 2°C threshold. As a result, a growing number of financial institutions are increasingly excluding from their financial services companies with plans to expand the coal sector. By deliberately pursuing projects that fundamentally undermine the agreement’s climate objectives, companies are showing a clear lack of willingness to align their activities with the scientific objectives of the Paris Agreement.
Financial institutions must cease all financial services to all companies developing or planning to expand their activities in the thermal coal sector (mining, electricity, infrastructure and services), whether through the construction of new projects or the purchase of existing infrastructures, without a commitment to close them by some pre-established dates but always by 2030 in EU/OECD countries and by 2040 elsewhere. Companies that extend the life of existing coal-fired power plants following their modernization or that sell services and equipment supporting the expansion of the sector, should also be excluded.
No longer support companies with high exposure to coal
The exclusion of companies deriving more than a certain part of their activities from the coal sector is one of the most common methods used by financial institutions to filter out companies. Used prior to COP21 by investors before being used by banks and insurers, it allows those institutions to exclude companies considered to carry risks because of their high degree of dependence on coal.
The percentage of exposure is calculated based on the share of coal in revenues, electricity generated or installed coal-fired power generation capacity. The best metrics to better reflect a company’s climate impact is to measure the share of coal in its electricity generation for companies which produces electricity, and the share of coal in a company’s revenues for all other companies, whether in mining or service provision.
Initially, most financial institutions applied a high exclusion threshold, generally set at 50%. This threshold has been steadily lowered, and while the most widely used internationally is the one set at 30% of revenues and/or electricity generation from coal, there has been an acceleration of downward trends with many institutions adopting a 10% or 20% threshold in recent months.
Financial institutions must exclude companies that generate more than 20% of their electricity production from coal and commit to lowering their exclusion thresholds to zero to support an exit from coal by 2030 in OECD and European countries, and by 2040 at the latest elsewhere.
No longer support companies that are very active in the coal sector
Adopting an exclusion threshold based on the relative share of coal in a company’s activities does not take into account the real impact on climate and health nor its ability to withdraw from coal in time to achieve the objectives of the Paris Agreement.
Indeed, some companies do not reach the relative exclusion threshold, whether it is 20% or more, even though the size of their coal activities makes them significant coal producers and operators of coal-fired power stations. For this reason, the Global Coal Exit List also lists companies with annual coal production of more than 20 Mt and companies with an installed coal-fired power plant capacity of more than 10 GW. These thresholds will be lowered to 10Mt and 5 GW in autumn 2020 and some financial institutions have already adopted them.
With an annual coal production of more than 73 million tons in 2018, China’s Jinneng Group Co Ltd exceeds the 20 Mt threshold despite a coal share of revenue of less than 30%. This is also the case for EPH, BHP Billiton Group, Anglo American PLC, and South32 Ltd, known for its purchases of assets from Rio Tinto and other mining companies.
Absolute criteria are also useful in cases where the share of coal in electricity generation or the share of coal in revenues is not easily calculable/estimable (e.g. the Adani Group in India). It is also useful in a context where coal prices or revenues from coal-fired power generation are fluctuating and where the share of coal in revenues can be much lower than the share of coal in power generation.
Financial institutions must exclude companies that produce more than 10 million tons of coal per year or have more than 5 GW of coal capacity and commit to lowering these thresholds to zero in order to support an exit from coal by 2030 in OECD and European countries, and by 2040 at the latest elsewhere.
Adopt a robust strategy to support the closure of existing coal infrastructure
Meeting the objectives of the Paris Climate Agreement requires the phasing out of coal over the next few years. According to research by Climate Analytics, based on the latest IPCC report, all coal-fired power plants must be closed by 2030 in OECD and EU countries and by 2040 elsewhere. In addition, the P1 scenario of the IPCC report on warming limited to 1.5°C has shown that 78% of existing coal-fired power generation capacity must be shut down by 2030. There are more than 6700 power generation units operating around the world. The challenge is therefore huge, and the next few years are thus crucial.
A growing number of financial institutions recognise the imperative of exiting the coal sector. This is reflected in the emergence of increasingly sophisticated coal policies and in positions taken by French and international financial institutions in favour of closing existing infrastructures.
On 2 July 2019, the trade organisations and federations of the Paris financial Centre undertook to encourage their members to adopt a coal strategy including a global timetable for withdrawal, and to report on the policy in their extra-financial reporting from the 2020 financial year onwards.
Financial institutions must commit to reducing their financial services and exposure to coal in their portfolios to zero by 2030 at the latest in the European Union (EU) and Organisation for Economic Co-operation and Development (OECD) countries and by 2040 in the rest of the world. In order to achieve these objectives, they must exclude all coal developers and commit to progressively strengthen their criteria for excluding companies active in the sector.
Last but not least, they must immediately call on the remaining companies in their portfolio to adopt before 1 January 2021 a plan for the closure of their coal assets allowing an exit by 2030 or 2040, depending on the geographical area. It is imperative to request the closure and not the sale of the assets in operation and to require the adoption of such a plan before a certain date. Failure to act should lead to sanctions, such as the suspension of all new investment after 1 January 2021 and the opening of a new commitment period also limited in time. Failure in the adoption of such a closure plan before 1 January 2022 for all its coal assets, must result in the definitive exclusion of the company.