Transition finance given the coal shoulder
ARE capital and regulations overly cautious when it comes to transition finance?
That seemed to be the message from India’s Adani Group at the Asian Development Bank annual meeting in Incheon, South Korea, last week.
Adani chief financial officer Robbie Singh shared during a panel discussion that European banks lacked the courage to fund coal phase-out projects that replaced coal with lower-emissions fossil fuel alternatives.
There is some truth to Singh’s take.
The early wave of coal-financing commitments by fund managers and banks started around 2015, then picked up around 2018 and 2019 and has continued since. The early adopters tended to be more binary about coal, which is the single largest source of global warming.
For instance, since 2019, OCBC has prohibited “asset-level project and corporate financing of coal-fired power plants, including refinancing and expansion of existing plants”. In 2020, the Singapore bank expanded the ban to thermal coal mines.
However, as South-east Asia’s banks and regulators began to confront the challenge of decarbonising the region, a broad recognition that a more nuanced approach might be necessary has emerged. Carbon-fired power is the largest source of power in much of South-east Asia, and simply withholding capital from anything coal-related has significant social implications on communities that depend on coal energy.
How to implement that nuanced approach is still being formulated. The Asean Taxonomy has only just come out with its criteria for sustainable financing of coal phase-out. The Asia-Pacific chapter of the Glasgow Financial Alliance for Net Zero is still working on its coal phase-out framework, as is the Green Finance Industry Taskforce, which is working on Singapore’s sustainable finance taxonomy.
Without a credible framework to rely on, it would have been difficult for banks and investors to feel confident about stepping into a controversial sector such as coal. That could change in the years to come as the rules begin to solidify, but in the meantime, it’s understandable that those with coal transition projects might find the financing scene frustrating.
Frustration exists in ample amounts on all sides of the transition debate, but caution could well be the less bitter pill to swallow.
Take Singh’s unhappiness about the challenges of raising financing for projects that replace coal with lower-emissions fossil fuels, for example.
Transition finance guidelines jointly developed by the Climate Bonds Initiative, the Climate Policy Initiative and RMI, discourage replacing coal plants with other fossil-fuelled power plants without significant carbon capture, utilisation and sequestration mitigation (CCUS). It should be noted that CCUS technology is still very nascent, so the CCUS requirement is practically a ban in most instances.
Such a policy might be sound from a purely environmental standpoint, but it’s far from a given that communities currently dependent on coal power can easily transition to renewables. This could be due to physical limitations or systemic issues such as power grids that cannot deal with irregular power supply. The reality is that for some communities, reaching net-zero emissions by 2050 might not be feasible without significant social cost.
At the same time, there are communities and companies that do not face those constraints, but are just as ready to excuse inaction in the name of a “just transition”. Some of the same companies that say accelerated decarbonisation is impossible because of a lack of capital have also been pulling in elevated profits because of a rise in coal demand.
There is therefore still good reason to be highly scrupulous about transition finance, especially when it comes to coal phase-outs.
What has become clear is that the initial convenience of a one-size-fits-all pathway may not be as effective with transition finance. That is because a just transition requires consideration for starting points and limitations, which can be vastly different across different geographies.
While there is a need for more granularity about pathways, there must also be high-level coordination because climate change is a global crisis. It’s all well and good to make allowances for transitions that need more time; but unless each allowance corresponds to an extra reduction somewhere else, the world will struggle to meet the global warming challenge.
