HSBC, StanChart explore ‘transition’ credits for coal clients

HSBC Holdings and Standard Chartered (StanChart) are working on a new kind of financial instrument that’s designed to monetise the shift away from high-carbon assets.

The so-called transition credits would represent the difference between the emissions that would have been, had a coal-power client continued its business as usual, versus the lower level of emissions achieved by retiring a coal plant early. 

The instruments would become an add-on to the wider market for carbon offsets, which remains controversial and unregulated. But both HSBC and StanChart say such instruments represent a realistic way to tackle the world’s dirtiest fossil fuel.

StanChart, which has a large client-base in emerging markets that still relies heavily on coal, is now working on how to structure such credits, Marisa Drew, the bank’s London-based chief sustainability officer, told Bloomberg. 

“In Asia, you have a lot of coal dependencies, especially in a market like Indonesia,” Drew said. The question becomes “how are we going to pay somebody to shut these plants down two decades before their natural life,” she said. 

But if StanChart and other banks “can create the right structure for it and get someone to buy the credit, that’s a new financial tool, and that’s 100 per cent what I would call a transition opportunity,” Drew said.

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How banks deal with coal is emerging as a dividing line for the industry. Some consider the fossil fuel, which emits roughly twice as much carbon dioxide as natural gas when burned, too dirty to touch. Others warn that exclusion policies only clean up bank balance sheets, not the wider economy.

HSBC, which recently announced that it isn’t planning to cut exposure to its large, carbon-intensive client base in Asia, is now focusing on bringing coal phase-outs from “policy to execution”, Surendra Rosha, the bank’s co-chief executive for Asia-Pacific, said at the Climate Business Forum held on Tuesday (Feb 27) in Hong Kong.

Against that backdrop, Rosha said transition credits have the potential to bridge some of the financing gap that exists for the phase-out of coal. “This is one area that we’re working actively with various stakeholders on,” he said.

How transition credits would work:

The instruments would each represent one tonne of CO2 emissions saved from shutting a coal plant earlier than would have been the case if its owners hadn’t had access to the financing provided through such credits.

The instruments are a type of carbon credit, and their value would be determined by the level of demand for securities that claim to help accelerate the phase-down of coal.

Transition credits are still in the developmental stage, Drew said, noting that they “haven’t been vetted by the most respected body that’s setting standards”, which is the Integrity Council for Voluntary Carbon Markets (ICVCM).

The instruments will need to live up to the broad principles published last year by the ICVCM, but “they’re working their way through each of the types of credits and creating the standard”, she said. 

Even though there aren’t yet clear principles or standards for transition credits, “that doesn’t mean that people aren’t working hard at saying, ‘let me put one forward to get vetted and then to start trading it,’ so it’s in process, but it’s early days”, Drew said.

A concrete example can be found in the Philippines, where Acen Corp is working on retiring the South Luzon coal plant in 2030, a decade earlier than the current plan envisages. Acen chief executive officer Eric Francia has said the accelerated pace of decommissioning would be challenging without the introduction of transition credits.

Such credits “would allow us to increase our ambition and accelerate the retirement and transition of the coal plant”, Francia said on Feb 16. They’re “a significant opportunity that we would like to leverage”.

Banks involved in any kind of coal financing increasingly face legal challenges from climate activists. On Thursday, Netherlands-based nonprofit BankTrack said it was among a group of civic groups filing a complaint over StanChart’s coal financing. 

For the finance industry, it’s still “early days” in terms of figuring out “how do we create credits, how do we ensure the integrity of credits and how do we get buy-in for that”, Drew said. 

If financial markets can bridge demand and supply, and there are standards and transparency, “we can have a really nice, liquid market that I have very high hopes for”, she said. BLOOMBERG