THE Asia-Pacific chapter of the Glasgow Financial Alliance for Net Zero (GFanz) has proposed a set of voluntary guidelines for financial institutions on how they can fund the early retirement of coal-fired power plants in a way that is “credible, financially viable, and inclusive”.

The proposed guidelines, which are open for consultation from Monday (Jun 5) till Aug 4, laid out 10 recommendations across a three-step process that financial institutions can apply to assess an entity’s plans to phase out coal, and to set clear expectations for plant owners and operators before providing the financing needed.

With coal power generation being the largest source of emissions globally, the accelerated phase-out of coal-fired power plants is “the mother of all transitions” and the “single most important step” needed to reach net zero by 2050, said managing director of the Monetary Authority of Singapore (MAS) Ravi Menon, who was speaking at the launch of the consultation paper.

However, there are only a handful of such deals in the market given the nascency of managed phase out and the complexities around it.

According to Tomohiro Ishikawa, MUFG’s chief regulatory engagement officer, there is a need to catalyse hundreds of transactions every year, in the future, to meet the International Energy Agency’s net-zero emissions scenario by 2040.

The proposed three-step process by GFanz, a global coalition of financial institutions, is intended to provide financial institutions with a common framework so that they may find it more feasible to participate in such transactions.

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The first step is to ensure that there are credible plans to phase out coal at the government, company and project level.

Secondly, financial institutions should optimise meaningful outcomes across climate impact, financial viability and socio-economic considerations. This would involve prioritising projects that are aligned with science-based pathways set by internationally-recognised bodies, ensuring that the phase-out plans have measures that support access to clean energy replacements, as well as measures that mitigate adverse socio-economic impact.

The third step is that financial institutions should provide transparency and accountability of their plans to phase out coal in line with the GFanz net-zero transition plan framework.

The draft guidance also laid out three financing mechanisms that could improve the economic viability of such projects. This would involve reducing the cost of capital through blended finance, developing alternative revenue streams and revaluing and repricing coal assets.

Menon, who is also chair of the GFanz Asia-Pacific network’s advisory board, said that the strategy to phase out coal in Asia-Pacific needs to meet all three objectives of reducing emissions significantly, meeting growing energy demands, and limiting any adverse impacts on jobs and communities.

With over 5,000 power plants in the region, coal accounts for about one-third of its total greenhouse gas emissions. It also makes up nearly 60 per cent of power generation.

Yet, energy demand in Asia is projected to increase as its economy grows. And with 150 million people in the region still having no access to electricity, the challenge of phasing out coal in this region is also most acute.

“Asia stands to suffer the most in terms of hundreds of millions of lives due to climate change, and yet the transition is going to affect them the most as well... This makes the economics of phasing out coal more challenging, especially as new plants continue to be built to keep pace with energy demand,” said Menon.

The report also acknowledged the challenges around managed phase-out. The guidelines are therefore offered on a “principles-based approach”, instead of a specific course of action.

It also expects the approach to evolve over time with more experience and as energy transitions, public policy, and other factors such as economics and technology, develop.

“The near-term objective is to establish an ambitious but practical foundation to support catalytic and pioneering coal phase-out transactions involving both public and private finance,” read the consulation paper.

The GFanz Asia-Pacific network aims to release a final report before COP28, the annual United Nations climate change conference set to take place from Nov 30 this year in Dubai.

“Please go through the consult paper very carefully. Give us your comments and feedback. Tell us what is wrong with it, but more importantly, tell us what can be done right,” Menon appealed to financial institutions at the launch event.

In response to queries from The Business Times, financial institutions said that the proposed guidelines provides a useful reference in a nascent area of financing, but recognised that it is not perfect and not a magic bullet to its complexities.

One key issue that has not yet been resolved is how a bank’s funding of early phase-out projects would be counted towards its financed emissions, said Eric Lim, chief sustainability officer of UOB.

“Stakeholder views on transition finance and how participation in the managed phase-out contributes to financial institutions’ Scope 3 emissions need to be managed,” he said.

Lim also said that governments could demonstrate their climate commitments by identifying coal power plants suitable for early retirement alongside the development and deployment of renewable energy.

“Additionally, it would be helpful for governments, in conjunction with the different stakeholders, such as philanthropic funds and multilateral agencies undertaking blended finance, to identify suitable candidates for managed phase-out and provide a prioritised list for financial institutions to further study the viability of financing,” he added.

The ability to scale coal phase-out transactions also depend on having clarity on policies and the specific standards required for such deals to be considered sustainable, said Kelvin Wong, deputy head of energy, renewables and infrastructure at DBS Bank. The bank, along with HSBC, are the two co-leads for the GFanz workstream on coal phase out.

Nonetheless, Wong expects the draft guidelines to pave the way for more such deals going forward, though he added that it’s not a blank cheque to finance carbon-intensive activities.

Beyond issues around scaling managed phase-out transactions, Mike Ng, head of sustainability office for global wholesale banking at OCBC, said that the framework and guidelines would be helpful in addressing the compatibility of managed phase-out projects with a bank’s internal financing policies and net-zero targets.