Momentum of coal phase-out deals to heat up with its inclusion in the Asean Taxonomy

SOUTH-EAST Asian bankers expect the pace of phasing out coal to heat up as recent changes to a regional sustainable finance framework potentially allow more financing of such projects.

Recent updates to the Association of Southeast Asian Nations (Asean) Taxonomy allow for coal power plants to access sustainable financing — on the condition that they are retired in a sufficiently timely manner.

The change brought some regulatory clarity to a controversial aspect of sustainable financing: How to transition away from thermal coal in a way that not only achieves climate goals but also meets the needs of communities that are highly dependent on the fossil fuel for power.

Bankers told The Business Times that banks typically take on significant risk, especially of the reputational kind, when financing such projects. However, the latest updates could help to mitigate some of that exposure by establishing clear standards for eligible coal phase-out transactions in Asean, said Kelvin Tan, head of sustainable investments at HSBC.

While some green advocates have called for the total exit of coal financing, others have recognised that a “just transition” approach would be more applicable to regions such as South-east Asia, which have much younger coal power plants than the European Union. The concept of a just transition seeks to achieve climate goals while also addressing the social needs of people affected by decarbonisation.

Helge Muenkel, chief sustainability officer at DBS Bank, said that he expects more momentum in coal phase-out deals, which was the intended outcome of the updated taxonomy.

Mike Ng, head of sustainability office and global wholesale banking at OCBC Bank, said that this move has the potential to pave the way for more energy transition efforts that were previously hampered by various constraints, including banks’ internal policies against such financing, and adverse public perception. 

The Asean taxonomy stipulates conditions — differentiated into three tiers based on how stringent they are — that coal power plants have to abide by to access sustainable financing, though they all cap a plant’s operational lifetime at 35 years.

Among other conditions, the top tier — labelled “Green” — requires that coal power plants are aligned with a global warming scenario of 1.5 degrees Celsius above pre-industrial levels; are consistent with the International Energy Agency’s (IEA) 2050 net-zero pathway; and will be phased out by 2040.

The second tier — “Amber Tier Two” — allows for alignment with regional or country science-based pathways. Retirement by 2050 is a must.

The third tier — “Amber Tier Three” — can only be applied to coal power plants that are either built no later than 2022 or, if they can meet technological and feasibility criteria, built between 2023 and 2027. 

Tan said that the multi-tiered approach provides flexibility that could lend credibility to coal phase-out in the region, while also allowing for practicality. For him, the “amber” classification in the taxonomy broadens the scope of eligible coal-fired power plants and could act as a catalyst for financial institutions to assess more coal phase-out transactions.

“However, any specific coal phase-out will still be dependent on the individual project’s transition credibility and viability,” he added. 

While UOB supports a just transition, Adrian Ow, head of business enablers and ESG solutions at the bank, said that it has committed to exit financing for the thermal coal sector by 2039, as an enhancement to its existing prohibitions on new project financing of greenfield or expansion of coal-fired power plants and thermal coal mines as part of the bank’s net-zero commitment.

In addition to a stronger momentum for such deals, Muenkel also expects a ramp up in various activities to strengthen ecosystems and partnerships that enable coal phase-outs.

He said that DBS is working with industry groups to flesh out detailed criteria, as well as the identification and classification of assets that would be considered “green” or “transitional” phase-outs in line with the updated taxonomy.

“Regulators are also building out country-level taxonomies to complement the Asean taxonomy. We also expect more activity by carbon credit registries to define criteria under which a coal phase could generate carbon credits, and associated research,” he added.

While banks welcomed the development to the taxonomy, Ng noted that more guidance and consideration could be given to address the issue of compatibility of coal phase-put financings with banks’ emissions targets, especially for banks that have undertaken net-zero commitments to decarbonise their portfolios.

Other considerations could include the type of assets selected for phase out, the availability of renewable or low-carbon energy sources to replace phased-out capacity while ensuring affordable energy to communities, as well as the social implications from phasing out coal plants including jobs lost, said Muenkel.

He also said that new industry guidelines and taxonomies could have an impact on the design of coal phase-put transactions, but declined to reveal further information except that DBS is in discussions with the Indonesian Investment Authority after being mandated as its financial adviser to the energy transition mechanism programme. 

Other banks also declined to share more details.

HSBC’s Tan said that they are seeing strong interest, while Ng said OCBC is aware of potential transactions in the market and will continue to monitor and assess the merits of these projects.

UOB’s Ow said that the bank is supporting its clients that are developing transition plans that are consistent with the IEA net-zero emissions pathway, regional or country-specific pathways.