Coal divest pressure on FIs harming transition efforts: study

Coal Insights Bureau

Financial Institutions FIs are being placed under increased pressure to divest or withdraw finance from high-emitting assets, which can impede their involvement with coal power assets outright, even where financial support is explicitly linked to managed phaseout, says a new study by RMI’s Center for Climate-Aligned Finance. There is also uncertainty on what a responsible role for FIs looks like in these transactions that can accelerate just, equitable, and climate-aligned coal plant retirements while also securing risk-adjusted returns.

While private FIs have signaled positive intent to contribute to the energy transition through climate commitments and sustainable finance targets, these same commitments can pose challenges for FIs seeking to finance the decarbonisation of high-emitting assets.

High-emitting assets like coal power plants must retire early to accomplish the goals of the Paris Climate Agreement. Operating the world’s current fleet of coal plants until the end of their economic lifespans would almost singlehandedly exhaust the world’s dwindling carbon budget.

Despite renewable energy alternatives being significantly more economically competitive than new or existing coal assets, asset owners are often shielded from competitive pressures and incentivized to continue operating coal plants. Solving this problem will require significant contributions from both public and private finance.

“The pace of phasing out coal assets around the world must significantly accelerate, and continued financing and support from financial institutions (FIs) committed to net zero can accelerate just and equitable outcomes. Yet, although FIs have stepped up with climate commitments and sustainable finance targets, many have become hesitant to finance high-emitting assets even when that financing could contribute to decarbonisation through early retirement,” the study says. In trying to explain the reasons behind this, RMI points out 2 of the main challenges include:

♦ Reputational issues: The first challenge stems from stakeholder pressure for FIs to divest or withdraw finance from high-emitting assets to meet their financed emissions targets and comply with policies designed restrict such exposure.

♦ Lack of understanding of the financial risks and returns: The second challenge stems from managed phaseout being a new field, with few examples available to demonstrate how different financing mechanisms can be used by private FIs to support climate-aligned outcomes while upholding their fiduciary duty.

Overcoming these barriers can help FIs pursue managed phaseout as a means of supporting the Net Zero transition and real-economy emissions reductions. “Pressure to withdraw coal power financing is high, but a blanket financial exodus by climate-conscious FIs risks undermining the financial feasibility of transitioning away from coal globally,” the report says.

Instead, financing provided for the managed phaseout of coal power assets with a robust managed phaseout plan in place must be differentiated from other coal asset financing, the paper suggests.

Withdrawing financing risks financially marginalising companies that have credible phaseout intentions, which may delay coal power asset retirement and ultimately undermine efforts to transition the global power sector in line with 1.5°C pathways in a stable and equitable way.

Financing mechanisms to accelerate managed coal power phaseout

Source: RMI, 2023

A handful of completed transactions show that managed phaseout is already financially feasible in both developed and developing countries and for both older and newer coal plants. These transactions rely on some combination of three financing mechanisms designed to adjust risks and returns for affected stakeholders in a way that enables coal plants to run for fewer years:

Helen Gibson, General Manager, India (Underground Soft Rock) at Komatsu Mining has taken over the role of leading the JOY brand of underground soft rock mining equipment in May 2022 to take an active role in the country’s rapidly evolving coal mining sector. A graduate of Camborne School of Mines, Helen has been closely associated with the country’s underground mining sector since 2018 as Komatsu Mining’s Strategic Alliance Manager for India. Sumit Maitra caught up during her visit to IMME 2022 exhibition and asked her about the opportunities that she sees in the country mining sector as it opens up to new investments and technologies and climate consciousness.

You took over as the General Manager in May 2022. But you have been in charge of strategic alliances for the Indian market for several years. How has been your experience of the Indian market so far compared to your overseas experience?

I first came to India in 2016 but have been coming regularly since 2018, and prior to that I was spending a lot of time with customers in the UK, Norway, Poland and Russia. The mining conditions might differ but the customer needs around safety, performance and lowest cost per tonne are common. Each customer is looking for a way to improve or enhance their operation in some way.

I would add one difference to the Indian market in that we are having relatively fewer people with experience in underground