ESG Issues Explored

The report explores the financial risks associated with long-term exposure to coal. Given the world’s transition to a low-carbon future, coal-related projects face serious questions around their long-term viability, and financial institutions must adapt to these changing realities. The report focuses on the need to create the necessary policies for phasing out coal investments to meet Net Zero goals as well as climate risk as a source of systemic risk to the global financial system.

Accelerating momentum in policy announcements

The report indicates that the momentum for coal withdrawal policies remains intact, even with rising fossil fuel returns. Global energy transition, along with stakeholder activism, are spearheading this shift.

Current landscape of coal exit policies

The report details the growing number of FIs that have established policies to gradually phase out coal, including banks, insurance companies, asset managers, pension funds, export credit agencies, multilateral development banks, and central banks. Among the 200 FIs included in the report are some of the world’s largest banks, collectively holding significant influence over the flow of global capital.

Restrictions beyond direct financing, underwriting and investments in coal

The report calls for FIs to establish formal policies for phasing out coal. It highlights that a well-rounded, robust exit policy will lead to decarbonising the FIs’ current and future portfolios. Criteria for such policies include coverage of the coal mining and coal-based power sector, investment/insurance coverage for new and expansion projects, a clear policy detailing coal phase-out targets of the FI with long-term and intermediate targets, and a determination of climate risks arising from exposure to coal assets.

Disconnect between size of firm and depth of policy commitments

The report details the opportunity for FIs to decisively shape the speed and character of the low-carbon movement, given that some of the world’s largest banks are included within the 200 FIs. It argues that an ambitious and robust exit policy by these entities can in turn help shift capital away from coal globally and provide headroom for lending towards low-carbon technologies.

Conclusion

The report concludes with a call to action for FIs to keep raising their ambitions, to completely diversify away from climate risks arising from exposure to coal assets. It argues that divestment is a defensive tool employed to protect investors from the loss of value, and the momentum on coal exit policies needs to increase further. The report highlights that the ultimate test for FIs is whether they implement a comprehensive exit policy and remain committed to their policy commitments.

Recommendations

The report calls for FIs to establish formal policies for phasing out coal and identifies the following key aspects of a robust coal exit policy:

• Threshold sector coverage, investments/insurance coverage, scope of coverage, climate transitional risk from coal, and disclosures
• To keep raising their ambitions, to completely diversify away from climate risks arising from exposure to coal assets and to implement a comprehensive coal exit policy