Coal mines and coal-fired power stations require huge investment, and despite US-led international policies against financing coal, banks’ appetites remain rampant. But for how long?

Where our energy comes from – now and in the future – is a constant problem for governments, industry and environmentalists. The use of fossil fuels, and coal in particular, is of course increasingly controversial. The arguments over coal are well worn – it is relatively cheap and available, but is highly carbon intensive.

Like all major projects, the processes of extracting coal and building power stations have required large amounts of investment over the years – and continued investment is essential if a new generation of coal-fired power stations is to come on stream. But there are now increasing questions over where the finance for these projects will come from, and a developing policy divergence between public and commercial finance.

Announced in June 2013 and then clarified in September, a new US government climate strategy involves a proposed regulatory framework that effectively bans new coal-fired power plants in the US. This US policy change was then given international heft later in 2013 when the US Treasury updated its guidance for the World Bank and other multilateral development banks, insisting they should no longer help finance new coal plants overseas, except in very limited circumstances.

Shortly thereafter, the World Bank announced a strategy along those lines, followed one day later by Export-Import Bank, the United States’ official export credit agency. Next came the European Investment Bank with its €72bn lending portfolio, and the European Bank for Reconstruction and Development.

These announcements deal a significant blow to the coal industry: over the past five years the World Bank has provided more than $6bn of funding for coal projects – mining and power stations. In the same period, Ex-Im Bank supported roughly $1.4bn, through investment guarantees and other financial backing, to coal-fired power plants in India and South Africa.

Private sector fills the gap?

Still, public finance accounts for only 10% of the backing that the 1,200 coal-fired power stationsbeing proposed globally will require, according to the World Resources Institute, a thinktank that works closely with the Obama administration on climate change policy. Commercial banks are still heavily investing in the sector.

The 1,200 projects the WRI refers to are spread across 59 countries, with the vast majority in China and India. Coal-burning plants have been proposed by developing economies worldwide, including Cambodia, Guatemala, Oman, Senegal and Uzbekistan.

“Never before has so much coal been mined on the planet as today,” says Heffa Schücking, director of Urgewald, a German environmental NGO, and author of Banking on Coal.

The Banking on Coal report, the fifth in a series co-published with the international NGO network BankTrack, shows the finance industry’s central role in the mining of coal and finds that in the past eight years, 89 commercial banks have poured a total of €118bn into the coal mining industry – a staggering 400% increase in coal investments since the signing of the Kyoto protocol in 2005.

Three US banks – Citigroup ($9.76bn), Morgan Stanley ($9.69bn) and Bank of America ($8.79bn) – were the top three investors. Among the top 20 are also Swiss, German, Chinese, British, French and Japanese banks, but it’s US banks that have led the way, accounting for more than a quarter of all worldwide coal finance.

“This is the fact that everyone is ignoring,” says Schücking. “US foundations such as the Sierra Club have waged great campaigns, and new regulations by the Obama administration are an important development. But what about the US private banks financing this huge expansion internationally? Where are the US foundations on that?”

US victories

Coal is undoubtedly still profitable, and seems set to remain a major global fuel, despite some changes in western public policy. According to the latest World Coal Association data, global coal demand could increase by 50% by 2035. Only in the US domestic market – where a glut of cheap natural gas has flooded the market – can one begin to speak of coal’s decline and fall as a fuel for generating electricity.

Still, campaigners are right in proclaiming 2013 a watershed year. It was the year they learned how to shift the focus of the climate movement on to finance.

Mindy Luber, president of Ceres, a US non-profit group focused on business sustainability, sums up the shift in thinking that has resulted from this change of focus. She writes in her blog: “Rather suddenly, concepts like unburnable carbon, carbon asset risk and stranded assets are now very real – and not only in the minds of Bill McKibben and 350.org, but also mainstream investors and Wall Street.”

Bloomberg terminals, for example, have quietly added a function called the Carbon Risk Valuation Tool, or CRVT, that for the first time allows investors to view the impact of, say, fluctuating oil prices due to carbon regulations, on companies’ stock prices, or how a carbon tax would affect the value of a portfolio.

“More and more investors are wanting to know how they manage these risks,” Ben Caldecott, a senior analyst at Bloomberg New Energy Finance, the Bloomberg market research firm that developed the CRVT, tells Atlantic magazine. “In the past, you had to commission bespoke analysis to stress-test your portfolio and that cost a lot of money and was cumbersome.”

Ben Collins, a research and policy campaigner with Rainforest Action Network’s energy and finance programme, says: “There’s no doubt you can make the spreadsheet analysis work out in favour of more lending to coal. It is profitable … but once you account for risk, those returns become much less appealing.”

So what’s driving all this interest? For starters, there’s the mountain of credible research by the International Energy Agency, the World Bank, the United Nations and others. The reports – backed up  recently by the likes of Goldman Sachs and HSBC – all point to one irrefutable conclusion: avoiding 4-5C of global warming requires substantial and immediate emissions reductions that would keep most of the world’s fossil fuel reserves in the ground.

A good portion of the credit for this change in discourse has to go to the prolific author Bill McKibben, a prominent environmentalist and co-founder of the activist group 350.org, who figured out how to make largely technical climate science comprehensible to non-experts.

Though many world governments have endorsed the scientific consensus that global temperature rise should be kept below 2C, before McKibben reframed the issue, most didn’t know how far down the path of global warming they had already gone – or how much further they could safely go. Today, it’s widely accepted that the fossil fuel industry has five times more carbon in its reserves than we can safely burn and still keep global warming below 2C.

That conclusion has since prompted the financial world to rethink the value of the world’s fossil fuel reserves. It also gave birth to, among others, the Fossil Free divestment campaign. Fossil Free’s strategy, in an echo of anti-apartheid campaigns of the 1980s, is to limit the flow of capital to the top coal, oil and gas companies by making their stocks morally and financially unattractive.

“What this really is,” says McKibben, “is an attempt to go on the offensive against the fossil fuel industry.”

In theory, that could lead to a slowdown in how much fossil fuel is burned and indirectly speed investments in renewable energy. When any of this will transpire, however, is unclear. The key will be to what extent and how fast investors adopt carbon risk as a standard part of their financial analysis. University endowment advisers, city pension fund managers and the public banking system are all now beginning to take those steps.

And it’s institutional investors and public banks that are shifting, says Heffa Schücking. Commercial banks are still deeply into coal.

Big banks

“This divestment campaign also has to be against key banks, and actually it’s a small group of banks – 20 worldwide – who are responsible for 71% of coal mining finance,” Schücking says.

In the Banking on Coal report the investments of the top 20 banks are contrasted with their own statements and policies on climate change. Bank of America claims to be “financing a low carbon economy”; Citi credits itself as the “most innovative investment bank for climate change and sustainability,” and Morgan Stanley assures customers that it will “make your life greener and help tackle climate change”.

“People who say ‘I don’t want to invest in Shell because of oil drilling in the Arctic or because of investments in fossil fuels’, may still be investing in the big banks that are bankrolling the fossil fuel industry or the coal industry,” says Schücking.

Schücking faults 350.org for not targeting commercial banks more publicly. “Carbon risk” is a concept that can work, she argues, but only with regards to investors making longer term decisions.

Of those who have more aggressively taken on the banks in the US, Rainforest Action Network is among the loudest. RAN has been going to shareholder meetings and taking members of affected communities with them, says Schücking.

The group also played a significant role in what’s been termed a “watershed moment” – the filing of a resolution asking PNC Financial Services Group, the fifth biggest investor in US coal production, to assess its exposure to climate change in its lending, investing, and financing activities. Though only 23% of PNC shareholders supported the controversial resolution, this was the first time such a vote had ever been granted.

Asked by Ethical Corporation whether PNC is beginning to strategically review its coal investments, PNC spokeswoman Marcey Zwiebel responds by noting the proposal’s “overwhelming” rejection. “We’ve taken no additional action on the proposal,” Zwiebel says, “and expect to have no further comment on it.”

Some believe shareholder activism of this sort would be far more effective than divestment. But confront the banks too forcefully and you create a slippery slope that precludes necessary dialogue, argue investors associated with the Carbon Asset Risk initiative – coordinated by Ceres and the Carbon Tracker Initiative.

Regardless, says Schücking, commercial banking policies need to be called out. She cites a fast-growing ethical banking movement in Germany as proof of what’s possible. “I see a beginning, but it’s slow,” she says. “The question is whether we can speed it up enough to really avert catastrophic climate change.”

Fossil Free’s divestment campaign

Fossil Free, a student campaign to press US colleges and universities to divest from fossil fuels, is entering a new phase because administrators at several top institutions have said they won’t change their investment portfolios.

Organisers say the refusals from US universities have been both a jolt and a catalyst for the campaign, which is active in cities across the US, as well as on more than 300 campuses. Most universities haven’t formally taken a position yet, but about 15 have said no, including Harvard, Brown, Cornell, Boston College, Middlebury College and Vassar.

While these high-profile institutions have declined to divest, other universities have said yes, including College of the Atlantic, Unity College, Hampshire College and Green Mountain College. A number of cities have chosen to divest, most notably Seattle.

“It’s been interesting to see things spread fast and then meet some resistance,” says Jamie Henn, a co-founder of 350.org, the group most involved in helping to organise the national effort across the US.

The divestment strategy seeks to take away the “social licence” of the fossil fuel industry, linking responsibility for the impacts of climate change more clearly to the industry’s financial backers, Henn says.

In the end, he adds, it’s the moral argument that carries the day. “The reason an institution is going to divest is because they come under moral pressure from their constituency, whether that’s the students at a university or the members of a church or the citizens of a city.”

The campaign has a five-year timeframe for “measured” divestment, which is linked to a period of further expected growth in fossil fuel production, says Will Lana, a senior vice-president with Trillium Asset Management, which is helping to advise Fossil Free.

Major foundations – including the Rockefeller Family Fund – have donated more than $8m to 350.org and the Fossil Free campaign.

“We have made the case,” says Henn. “Now we need to win the argument.”

coal  energy  Environment  extractives  fossil fuels  mines  power stations