From coal financing to green lending: OCBC’s chief sustainability officer Mike Ng on the just transition

MIKE Ng still remembers working through the contractual structure and complications of a deal involving the financing of a coal-fired power plant when it was first commissioned more than 10 years ago. 

That same coal-fired power plant is now among the first few in South-east Asia set to be decommissioned, amid a growing momentum to phase out the most pollutive type of power generation in a global race to address the climate crisis. 

“That’s when I realised I have probably been in the business for too long. It has actually come one full circle,” said Ng, OCBC Bank’s first chief sustainability officer (CSO). 

His career evolution has taken quite an unexpected turn, considering that he had spent most of his 25-year career as a banker – with the last 13 at OCBC – raising funds for fossil fuel companies. 

Not exactly the profile one would typically expect in sustainable finance. 

“If you asked me 20 years ago whether I’ll become the CSO, I probably would have laughed. Because first of all, there wasn’t such a role in the first place,” said Ng in his first one-on-one interview since assuming this newly created role in August last year. 

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Yet, it is his experience in project financing for the power sector that has probably provided him the relevant skills needed to navigate the energy transition.

Ng estimates he has been involved in the financing of over 100 power projects, most of which were fossil fuel-based, over the course of his career.

It was only around 2017 when he started handling more solar and wind power projects, as the energy sector in South-east Asia saw the need to gradually shift from fossil fuel-based energy systems to renewable ones. 

He was then roped into sustainable finance, where he was tasked to ensure environmental, social and governance (ESG) considerations were integrated in the bank’s transactions, as well as to develop sustainable finance products, before taking on his current role as CSO. 

In a way, the global energy transition and increasing attention to ESG matters mirror his own career evolution.   

“If I look back, it is quite interesting how I have (got) to this current stage. In my career, I think I have seen two transitions. One was the energy transition… I think the second was the transition for myself, from a banker to a sustainability advocate,” said Ng.

In this role, Ng prefers a balance of idealism and pragmatism. This delicate balance, he believes, is what will enable more capital to flow towards decarbonisation efforts. 

Tweaks to coal financing policy

One such initiative Ng has undertaken, over the past eight months as CSO, is to tweak OCBC’s coal financing restrictions to accommodate coal phase-out projects, even though this move would increase the bank’s financed emissions. 

The bank, as well DBS and UOB, had committed to cease thermal coal financing in 2019; but did not make any exceptions for the purpose of phase-out then. 

OCBC’s policy adjustment comes after several initiatives over the last year had indicated a softening approach towards the financing of thermal coal within the industry.

This sentiment is reflected in the release of two taxonomies in the region that make the early closure of coal plants, before an original retirement date, eligible for sustainable financing. 

DBS made a similar announcement about a month ago, leaving UOB the only local bank that has not made public its decision on this matter. 

Market sentiment suggests good interest and appetite for the pilot coal phase-out projects currently out there, said Ng.

This means the financing costs of buying out these projects from the plant owners will be lower, which is key to ensuring the phase-out is a success.

HSBC, Standard Chartered and Bank of America are reportedly among the banks looking to participate in the early closure of the Cirebon-1 coal power plant, which would be Indonesia’s first coal retirement deal.

Challenges of renewable energy transition

While the financial sector has made progress in improving the credibility and viability of such transactions, Ng is applying his experience towards a long list of challenges. 

Replacing a coal plant with a renewable energy plant, for one, is more costly due to the latter’s intermittency – sun and wind are not always available. Coal power plants, on the other hand, are able to provide electricity round-the-clock. 

One industry estimate puts the cost for a solar plant that could provide that same stable state to be 10 times the cost of running intermittently. 

Also, renewable energy replacements typically take 10 to 15 years. In that intervening period, there are risks associated with currency fluctuations as well as policy and regulatory changes.

Governments may renegotiate electricity tariffs during an economic crisis, for instance.

Blended finance – a use of both public and private financing – is therefore an important structuring approach to coal phase-out.

The cost of capital can be lowered through the provision of grants or concessionary loans. The participating multilateral development banks (MDBs) and export credit agencies may also have access to the governments of these markets to work through any potential issues – access that commercial banks may not have, Ng said. 

“Generally, as a bank, we are quite good at assessing and mitigating certain risks. We can look at construction risk, make sure the construction contracts are watertight. We’re also quite good at looking at operating risks, whether this plant can operate without any issues.

”But what we are not very good at, as a bank, is (mitigating and managing) political and legal risks,” said Ng. 

Before MDBs are willing to participate in the transaction, however, they also want to see clear government commitments through the implementation of supportive policies and regulations that would help facilitate coal phase-out, as well as the wider energy transition of the country. 

Some examples include levelling the playing field between coal and renewable energy, structuring power purchase agreements that are bankable, or even providing a sovereign guarantee.

Another complication in coal phase-out transactions, and the broader energy transition, is the so-called “just transition”, which refers to how consideration must be taken to contain the potential negative effects of a transition to renewable energy.

Critics accuse financial institutions of using the just transition as a convenient justification to be less ambitious in a transformation of lending policies.

Ng, however, believes the point of tackling the climate crisis is to help people. 

“Even when you want to do things for the environment, you’re not doing it for the environment alone. You’re doing things for the environment to make it better for people; because people are the ones who have to bear the consequences of it,” he said.

“If the focus is on people, then what we have to look at is also not to deny people access to secure, reliable and affordable energy.”

Contrary to the accusations, he added, coal is no longer an asset a financial institution wants to associate itself with – a stark difference from the situation just four years ago, when banks were outbid on coal power projects by just a mere 10 or 20 basis points, said Ng. 

Furthermore, it is not just coal projects or companies that banks are moving against. OCBC, for one, is regularly having conversations with customers on carbon reduction strategies.

“You can drag your feet a little bit, but I think the direction of travel is clear. Our advice is that it’s not a binary decision. You don’t have to switch from zero to one immediately. You can take small steps,” he added. 

The decarbonisation of these companies is critical not just for the environment, but for OCBC to reduce its financed emissions and meet its net-zero targets. 

To achieve its target of net-zero financed emissions by 2050, the bank had, for a start, set decarbonisation pathways for six sectors in May last year. 

Ng hopes to replicate his own brown-to-green career transition across the bank. His hope is for sustainability to be so embedded within OCBC that everyone is a CSO in their own right.

“Sustainability is not so much a nice-to-have or good-to-have anymore. It’s not your job, my job, that guy’s job... it’s really everyone’s job,” he said.

How will he know he has succeeded? “Whether we are engaging our clients, we talk about sustainability. Whether we are assessing transactions, we are talking about sustainability, so much so that it’s just front and centre in everything we do.”