Thermal coal in Asia: The real risks for investors

Japanese project lenders are increasingly isolated globally in their exposure to coal power. Amid greater shareholder scrutiny on climate risk, their disclosure remains poor.

The Big Three Japanese banking groups have at least US$5billion in project lending exposure to thermal coal power plants

The Big Three Japanese banking groups (Mitsubishi UFJ, Mizuho and Sumitomo Mitsui) have at least US$5billion in project lending exposure to thermal coal power plants in emerging markets, with key Japanese trading companies owning billions of dollars more in equity.

Despite Japans push toward climate risk leadership under the Task Force on Climate-related Financial Disclosure (TCFD), disclosure of this exposure by these financial institutions, along with the associated risks, remains vague. These Big Three banks are isolated amongst the top project lenders globally in their willingness to continue financing coal, lagging behind the European peers like BNP Paribas, Natixis, ING and Credit Agricole.

As shareholder concern over climate risk escalates, it is likely that corporate Japan will face far more pressure to explain its continued financing of thermal coal.

These are the key findings of new research from London based think tank InfluenceMap, which examines the exposure of Japanese financial institutions to thermal coal power projects in three key emerging markets: India, Indonesia and Vietnam.

Japanese banks have financed 11 operational plants in these countries with another 10 planned or under construction, representing over 26GW of coal generation capacity.

Jan Erik Saugestad CEO, Storebrand Asset Management AS, said that Storebrand has long considered that thermal coal assets had no place in the Companys portfolios.

The IPCCs 2018 Global Warming of 1.5Co report has stated loud and clear the role of thermal coal in economies globally is limited, commented Mr Saugestad.

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Coal-fired power plant finance from Japanese Megabanks. Image source InfluenceGroup
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Image source InfluenceGroup

We are concerned that some of the worlds largest financial institutions are still lending to new coal power projects, particularly in emerging markets in Asia which are bearing the brunt of the physical impacts of climate change.

These emerging Asian economies are already experiencing the catastrophic impacts of climate change. At the same time, they are seeing renewable energy rapidly undercutting the cost of coal power, threatening the economic viability of existing and new coal projects. They are also seeing increasingly sophisticated and well-funded global campaigns targeting coal financing and the brands of banks involved are driving the stigmatisation of the fuel, generating unquantifiable reputational risks for the institutions still involved in coal power.

These trends have prompted more than 100 major financial institutions globally to make commitments to restrict or eliminate financing of thermal coal. These include many of the worlds top 10 global project lenders including Santander, BNP Paribas, Natixis, ING and Credit Agricole all of which have robust policies in place.

InfluenceMaps analysis finds that, in contrast to their European peers among this top 10, Japans Big Three banking groups stand out for their weak coal financing policies, which contain numerous loopholes and effectively enable business as usual scenarios.

As a global asset manager, we hold significant investments in Japan, said Shin Furuya, Impact Investment Strategist, Domini Impact Investments.

We are, however, increasingly concerned that companies in the region may not be taking full advantage of the opportunities presented by the rapidly growing low-carbon markets. We believe a key factor behind this is the continued financing of coal power by lenders and investors in Japan and in emerging markets.

Such financing inhibits global efforts to address climate change and may lead Japan to miss out on a major market transformation. The stability of the climate is critical to the stability and success of our global financial systems and is therefore relevant to the entire investment community, concluded Mr Furuya.

The IPCCs Global Warming of 1.5Co report implies the need for a global phaseout of coal power in the near term to achieve the goals of the Paris Agreement, of which Japan is a signatory.

Similarly, research from financial ratings groups S&P, Moodys and Fitch in the last six months has suggested an unfavourable future for thermal coal in Asia and the strong potential for asset stranding.

Investor-driven climate processes like TCFD are gathering steam in Japan, with the Ministry of Economics, Trade and Industry (METI) in particular promoting the countrys leadership on TCFD.

As the TCFD meets in Tokyo in October, it is likely there will be mounting shareholder pressure on Japanese financial institutions to explain their continued exposure to thermal coal, the full extent of risks to their balance sheets and brands and how they intend to manage these risks. Particularly, as they stand isolated among the worlds top project lenders who are exiting coal lending globally.

*Article published in the October-December 2019 issue of The Asia Miner