Analysis: Westpac’s new climate change policy

30 April 2017

The most immediate impact of Westpac’s climate change policy announcement on Friday was that it took them out of the running as a potential lender to the Adani Carmichael coal mine, making Westpac the 19th bank to either distance itself publicly from Galilee Basin coal export projects, or introduce policies that prohibit financing the Carmichael mine.

But there’s more to Westpac’s new policy than the blow to Adani’s coal export plans, and here we examine more closely what Friday’s announcement means for Westpac’s future climate change action.

In December 2015, as the Paris Climate Change Agreement was signed off, Westpac’s CEO Brian Hartzer said this at the bank’s AGM in Sydney:

As a statement it was extremely important, as it was made on the record as a market disclosure, directly to shareholders, and was the most concrete of any of the big four banks’ two degree language.

The two degree commitment from Westpac wasn’t in itself a policy change. But it was a critical step in setting the parameters for how Westpac’s policies and actions would need to change.

We made it clear that this commitment meant that Westpac could no longer finance any project that expanded the fossil fuel industry, given that the limited carbon budget doesn’t even allow room for all of today’s fossil fuel industry. More on Market Forces’ advocacy on what two degrees means for bank policy is here. Westpac had a (painfully slow) process of research and policy development underway and after 18 months, last Friday’s announcement was the result of that work.

So, how does Westpac’s policy rule out Adani’s Carmichael mine without mentioning Adani? And what does it mean for other new coal mines?

Westpac’s commitment is to limit lending to any new thermal coal mines or projects to only existing coal producing basins and even then, only if the mine’s coal has an energy content of 6,300 kCal/kg (that’s kilocalorie per kilogram).

The good news is that Adani’s Carmichael mine fails on both those counts. The Galilee Basin is not an existing coal producing basin and despite Adani’s reassurances to the media that their coal would meet the quality criteria, Carmichael’s energy content was declared as 5,200 kCal/kg when the company presented evidence in the Queensland Land Court in 2014.

But what about the broader impact of this policy change beyond the Galilee Basin? It’s true that many new coal mines can’t meet the 6,300 kCal/kg threshold but if most of New South Wales’ Hunter Valley mines were being proposed as new today, they would sail through Westpac’s policy and be eligible for funding.

Westpac’s policy also fails to cover extensions to existing mines. Many of Australia’s current coal mines are seeking to extend their lives or expand their footprints. From a climate change perspective this has the same impact as opening up a new coal mine of the same scale and operational life. Failure to cover extensions and expansions of existing coal mines could keep Westpac involved in the expansion of the coal mining sector in Australia and overseas.

One final, and potentially positive point of Westpac’s climate change policy is that it refers to the “thermal coal sector”, also including coal handling terminals in this definition. This suggests that Westpac’s coal mining restriction could extend to new coal export terminals, but this element of the policy needs to be clarified.

Westpac also places new restrictions on lending to coal power stations, but the strength of these changes depends very much on where you are and how determined the company is.

The positive elements are that Westpac will be reducing the emissions intensity of their power generation exposure over time, and will “aim to” reach a power generation intensity of 0.3 tCO2e/MWh (that’s 0.3 tonnes of carbon dioxide equivalent per Megawatt-hour) by 2020.

Also, Westpac will “only finance new power generation if it reduces the emissions intensity of the grid in which the generator operates.”

Despite leaving the door open, we expect Westpac has financed its last new coal power station

Let’s unpack all that.

It’s good to see that no matter what, Westpac’s emissions intensity will fall over time. We expect the bank will continue to report its power generation portfolio’s emissions intensity each year, so their progress will be public for all to see. And if the bank reaches its goal of 0.3 tCO2e/MWh by 2020, down from 0.88 tCO2e/MWh in 2016, it will likely require shifting a lot of existing coal generators off their books and financing new renewable energy projects to lower the average.

The disappointing aspect of the 0.3 tCO2e/MWh is that the bank will “aim to” reach it, without making that commitment concrete.

Westpac’s other commitment to only finance new power generation projects that lower the emissions intensity of the grid in which it operates. How positive that is depends on the energy market you’re talking about.

Australia’s National Electricity Market’s emissions intensity is currently about 0.9 tCO2e/MWh, meaning that if most of Australia’s East Coast coal-fired power stations were being built today they would satisfy Westpac’s policy. For example the 850MW Millmerran plant in Queensland, which Westpac refinanced in 2015, has an emissions intensity of 0.83 tCO2e/MWh and would pass the test. However the 106MW Worsley coal-fired cogeneration plant in WA’s South West Interconnected System (SWIS), which Westpac financed on four separate occasions and remains exposed to,  is the 2nd most emissions intensive in that system and would be unlikely to attract Westpac’s finance if built today.

This may be a little harsh on the bank, given that the power station would still have to fit within a declining overall intensity for Westpac’s portfolio, but a clearer exclusion of new coal power stations would have avoided their leaving the door slightly ajar for new coal power lending.

Outside of Australia, this is much more a de facto coal power ban, as most countries already have emissions intensities of their grids well below 0.75 tCO2e/MWh, beyond what even the most ambitious coal power stations today can achieve.

Those unfortunate caveats aside, we would expect that Westpac will never again finance a new coal power station.

The biggest weaknesses of this policy are that Westpac has kept the door well and truly open to continued funding for existing coal power stations, if:

• The facility is required for system reliability and/or affordability, or is critical to the community in which it operates; and
• the lending is not for the purpose of expanding the capacity or extending the life of the facility, unless there is a reduction in the emissions intensity of the facility.

We support the need for energy system reliability and affordability, but without clear requirements as to how this must be demonstrated, and also no specific expectations on how much generators are expected to reduce emissions, we are concerned that many operators could continue to receive finance from Westpac based on argument without proof, and only need to reduce emissions at the margins.

Westpac also fails to address the financing of new gas power stations. If we are serious about holding global warming below two degrees, it is critical to note that this means we cannot expand the global capital stock of fossil fuels, and that means no new gas power stations as well as coal. More information on the rationale for ceasing the expansion of fossil fuels can be found here.

Westpac’s policy throws some impressive numbers around that look like the bank is about to invest in a renewable energy bonanza. That is not necessarily the case.

Westpac existing commitment was to make $6 billion available for clean tech and environmental services. Our understanding is that this is an exposure goal, and one that in reality has fallen from almost $8 billion in 2014 to $6.2 billion as at 30 September 2016. About a third of this amount is attributed to renewable energy projects, so Westpac’s renewables exposure more likely sits at just over the $2 billion mark, only slightly higher than where it was in 2014.

It’s also worth noting that “clean tech and environmental services” includes a range of sectors, such as green buildings and businesses, waste, water, energy efficiency, and land remediation.

Westpac’s new financial commitment is an impressive $25 billion, but how much will go to renewables?

Westpac’s 2017 policy update increases the lending exposure target to $10 billion by 2020, and $25 billion by 2030. this is good to see, but the scope of sectors covered, now called “climate solutions”, has also changed to include sectors such as “carbon abatement and sequestration programs, and adaptation infrastructure”.

The broad and rubbery nature of those terms make us reticent to praise Westpac here, especially after NAB last year reported it had delivered $7.3 billion of its $18 billion environmental financing target, only to reveal that nearly 80% of that financing was for mortgages, and less than 10% to renewable energy.

There is no doubt that this target, combined with Westpac’s coal power commitments, means the bank will need to get much more invested in renewables. But the bank would have made its policy more credible by carving our exposure targets for critical sectors like renewable energy, and more clearly defining the parameters for what “climate solutions” are.

Most of our attention will be focused on how Westpac’s policy translates to their involvement in polluting and clean energy projects from now on, but there are other important aspects of the policy that the bank is committing to.

Climate risk disclosure – at several points, Westpac’s policy refers to the physical and transition risks associated with climate change, terminology being made popular by the likes of the Financial Stability Board’s Task Force on Climate Change-Related Financial Disclosures. Westpac commits to disclose its approach to managing climate-related impacts in its governance, strategy, risk management, and reporting processes, while advocating for similar disclosures from its own industry and carbon-exposed sectors. This is most important in the context of Westpac’s wealth management arm, BT Financial Group, which is invested in many coal, oil and gas companies that are as yet not disclosing climate risks.

BT Finanical Group (BTFG). Related to the last point, it is not clear what additional steps will be taken by Westpac’s wealth management brand to reduce its exposure to greenhouse-intensive and climate risk-exposed investments. Westpac commits to disclosing the carbon intensities of BTFG’s portfolios, but the policy indicates no further action applying to this part of the Westpac Group.

Westpac’s emissions. While the bank’s financed emissions are vastly more important than the company’s own direct emissions, it is important to see the bank reducing its emissions by 9% by 2020 and 34% by 2030, although clarifying the benchmark year would have been helpful. We assume this is from a 2016/17 baseline.

Advocacy. It is important that Westpac remains in favour of strong policy action and advocates publicly for action across government, business and industry. Westpac’s policy reiterates the bank’s views on appropriate action, including carbon pricing, complementary policies and aiming for zero emissions, but these commitments are lacking in that the bank:

a) advocates reaching net zero emissions in the very broadly defined “second half of the 21st century”,

b) only commits to advocate for a broad market-based price on carbon, and

c) does not outline how it intends to advocate.

It is important that powerful institutions that are, in principle and in policy, committed to holding global warming below two degrees, commit themselves to be an active part of the public debate, promiting and defending the need to urgently transition Australia’s and the global economy to decarbonise, and avoid exceeding the remaining carbon budget.

Westpac likes to think of itself (and loves to market itself) as a sustainability leader. In recent years, this claim has become increasingly incredible, but where does Westpac sit on climate change now?

On coal mining, they are the first major bank in Australia to place any restriction on new thermal coal mines, and are the second of the big banks to restrict coal power station lending. The effectiveness of Westpac’s coal power restriction compared to ANZ’s depends very much on which country you’re in. For Australia, ANZ’s policy is overtly more restrictive, as well as in several overseas markets. But for most of the world, Westpac’s polluting power restriction is more effective than ANZ’s.

Internationally, you will find banks increasingly adopting policies that explicitly and completely ban lending to new coal mines and power stations, so while Westpac has put its nose ahead of its major competitors in Australia, it is still not in a position to be considered a leader globally. For more information on the policy changes of international banks on coal, see coalbanks.org

On clean energy lending, Westpac’s commitments are comparable with NAB and ANZ, both in terms of scale as well as definition and application, so while Westpac has caught up to several of their peers, it could not be considered as further ahead on clean energy financing.

The end result is always in what we see Westpac reporting, and where we see the banks lending to fossil fuels and renewable energy. In 2016, Westpac had fallen behind both NAB and Commonwealth Bank on renewable energy lending activity, and had also loaned more to fossil fuels than NAB. Market Forces will track and monitor how this changes over time.