Asian FIs rapidly phase out coal investment

POWER UTILITY

Asia has shown a “swift progress” in coal divestment as the number of financial institutions (FIs) with such policies grew to 41 within the last three years from only 10 in 2019, a report found.

In its 200 and Counting: Global Financial Institutions are Exiting Coal, the Institute for Energy Economics and Financial Analysis (IEEFA) found that 41 out of the 53 FIs in the region have implemented coal divestment policies.

The report, however, flagged that most coal divestment policies either lack a formal coal exit plan or have “less stringent” policies in place.

Japan, for instance, has amongst the world’s largest financial industries, but only 14 FIs have formal coal exit plans.

IEEFA noted that some Japan FIs only cover project financing for their coal phase-out plans, leaving room for corporate financing. This paves the way for continued investments in coal companies. Similarly, FIs in South Korea and Australia lack commitments to completely phase out coal.

Coal divestment is also gaining traction in emerging markets with 22 FIs introducing restrictions for coal financing. In Asia, China and Malaysia each have three FIs that have established emerging markets, whilst India and the Philippines each have one.

Overall, the IEEFA found that globally, the number of FIs divesting from coal have doubled in the last three years. Whilst it took six years for the first 100 FIs to adopt policies to steer away from coal, the number of FIs has grown in over three years.

“We see two prominent trends which are redefining capital markets. First, we see more financial institutions committing to investment policies that are moving away from fossil fuel projects,” IEEFA’s debt markets leader for Asia Pacific Christina Ng said.

“And second, we are seeing many of these institutions revising their policies and strengthening them as the market increases its knowledge of climate risk as a source of systemic risk to the global financial system. Institutions are getting tougher on what they will finance, and they have identified coal as a risky investment. They see climate risk as a financial risk,” Ng added.

Ng also observed that more medium-sized FIs are leading in implementing coal divestment policies, compared to larger asset managers.

“This is a reflection that the market is learning fast amidst regulators getting tough on greenwashing. Collectively, the whole finance ecosystem is working together to find where the issues are,” she said.

Whilst coal divestment in Asia is rapidly increasing, European FIs outperformed other regions with policies that are stricter. The highest number of FIs with coal exit policies are in the US, France, the UK, Japan, South Korea, Germany, Australia, and the Netherlands. In total, there are 114 FIs in Europe, 53 in Asia[1]Pacific, 27 in North America, 6 in Africa, and 2 in South America.

IEEFA noted that more than half of the 87 banks on its list are members of the United Nations NetZero Banking Alliance, many of which have upgraded policies.

In particular, 47 of these banks have strengthened coal exit policies, whilst 16 announced plans to phase out coal. Ng noted that half of these new entrants are operating in Asia.

Meanwhile, 50 of insurance and reinsurance companies across the globe have likewise implemented coal exit policies. IEEFA noted this is more than double the 2019 figures.

Ng noted that commitments to coal divestment will likely continue growing with more FIs introducing strengthening existing policies, particularly in emerging markets. This will be driven by the strong momentum of coal divestments by global FIs as well as the risk of stranded assets.