Small steps in the race to save our climate

The effect of the coal policy changes of the Japanese megabanks

31 July 2020

Mizuho Financial Group (Mizuho) and Sumitomo Mitsui Financial Group (SMBC Group) have made changes to their coal power lending policies, stating they will no longer fund coal power projects, with very broad exceptions. Mitsubishi UFJ Financial Group (MUFG) has released a new policy in 2020, but seems to add further exceptions to its 2019 policy to rule out support to new coal power.

In July 2020, SMBC Group committed to reduce its credit balance of project finance related to coal-fired power generation to zero by 2040. Mizuho has also announced it would reduce its credit exposure to coal power projects (currently at 300 billion Yen) by 50% in 2030 and to zero by 2050.

Given the exceptions, the real test of these policies is their effect on the coal power pipeline.

  • Based on publicly available financial information, SMBC Group, MUFG, and Mizuho are collectively in line to provide financial support for a total of four power projects, and all four could go ahead even with these new policies in effect. This includes a controversial new coal power project in Central Vietnam, Vung Ang 2.
  • Collectively, these plants represent close to 4.5GW of coal power, and would produce total CO2 emissions of close to 700 million tonnes.

What do the Policies say about coal power?


The English translation of Mizuho’s policy, which comes into effect on June 1, 2020 states the bank will not be involved in finance that is intended for new construction of coal power with the following exceptions:

  • They will be grandfathering in any projects they have committed to before June 2020. 

  • They will consider financing replacement coal power where it is indispensable for stable energy supply for host countries and where this would lead to reduced greenhouse gas emissions.

  • They will also continue financing next generation coal power projects.

Mizuho also commits to phasing out credit exposure to coal power projects by 2050, and it will half its current balance of 300 billion yen by 2030. 

 

SMBC Group’s policy, which takes effect on May 1, 2020, states:

Support for newly planned coal-fired power plants, in principle is not provided.  Exceptions may be considered for those projects which use environmentally friendly technologies, such as ultra-supercritical pressure and for those projects which have been provided support before the revision. SMBC Group also support the development of technologies which contribute to carbon recycling, such as carbon dioxide capture and storage.

In its 2020 Integrated Report, SMBC Group committed to reduce its credit balance of project finance related to coal-fired power generation to zero by 2040.

MUFG’s policy which takes effect on July 1, 2020, states:

MUFG will not provide financing for new coal-fired power generation projects once the revised Framework takes effect…MUFG will take a cautious approach to projects regarding which financial assessment has been ongoing since before the revision to the Framework.

Exceptions may be considered where we will take into consideration the energy policies and circumstances of the host countries, international standards such as the OECD Arrangement on Officially Supported Export Credits, and the use of other available technologies when deciding whether to provide financing. We concurrently support the adoption of advanced technologies for high efficiency power generation and Carbon Dioxide Capture and Storage (CCS) technologies which contribute to a reduction in the emission of greenhouse gases.

How do the policies compare?

No new coal projects (not quite)

All three banks now purport to rule out lending to new coal projects, but with significant loopholes.

  • SMBC Group and Mizuho both explicitly grandfather projects that they are already “supporting”. The banks have left it open as to what this includes. If it is all projects that have not reached financial close, then SMBC Group would be financing three new coal power stations, and Mizuho would finance one, Vung Ang 2 in Vietnam.
  • All three banks may make exceptions for technologies of coal power projects. While Mizuho has said that this does not include ultrasupercritical coal power, SMBC Group has explicitly stated that it would consider projects that use this technology. MUFG has also included possible exceptions for ultrasupercritical projects by citing the OECD Arrangement on Officially Supported Export Credits and “advanced technologies for high efficiency power generation and Carbon Dioxide Capture and Storage (CCS) technologies.
  • MUFG has the ability to finance coal power by “taking to account the circumstances of the host country“, which may not include the host country’s commitments under the Paris climate agreement or other climate considerations. Mizuho similarly discusses host country needs, but restricts its finance to replacing existing coal power projects.

“If Mizuho finances new coal projects such as Vung Ang 2, it risks undermining the credibility of its own policy before the policy even has a chance to take effect. If Mizuho is serious about supporting the goals of the Paris Agreement, it will stop financing new coal power plants as of today, with no exceptions.”
Julien Vincent, Executive Director, Market Forces
Sadly, Mizuho’s targets to reduce its exposure to coal fall well short of what is required to hold global warming to 1.5ºC. Climate Analytics research shows we need to have phased out coal power worldwide by 2040 in order to meet this goal, yet Mizuho plans to stay invested in this industry for a further 10 years. This ambition urgently needs to be scaled up.
Julien Vincent, Executive Director, Market Forces
Phasing out exposure to coal

SMBC Group has announced that it will reduce its credit balance of project finance related to coal-fired power generation to zero by 2040.  However, if SMBC Group continues to finance new coal power stations as suggested below, it is unclear how the bank plans to meet this target.

Mizuho has targets on when it will phase out any of its exposure to coal power, cutting its exposure of 300 billion yen ($2.8 billion) to loans to coal power projects in half by 2030 and reducing it to zero by 2050.

While these are welcome announcements, by limiting their coal phase out to only coal power projects, rather than including corporate lending and underwriting, the banks leave significant gaps. For example, from 2016 to 2019, Mizuho provided US$4.24 billion to coal power through lending and underwriting.

None of the Japanese banks explicitly restrict corporate lending as yet, falling behind the global standard.

Furthermore, these phase out plans aren’t Paris aligned. Climate Analytics has since stated that to meet the goals of Paris, coal needs to be phased out by 2031 in OECD countries, and 2040 globally.

Examples of bank coal policies pushing Paris-alignment

Credit Agricole

Standard Chartered

Coal power projects

No lending to coal power projects

No lending to new coal power projects

Client criteria

No new clients with a reliance on coal above 25%. No support for clients expanding coal operations. All clients must have by 2021 a detailed plan in line with this timeline.

Only support clients who actively transition their business to generate less than 10% of earnings from thermal coal by 2030

Phase out

Coal phase out by 2030 in EU / OECD countries, 2040 in China and 2050 elsewhere. 

For clients in breach of the 25 per cent threshold, only loans dedicated to renewable energy or GHG reduction projects will be authorised.

January 2021: no clients 100% dependent on thermal coal earnings 

January 2025: no clients 60% dependent on thermal coal earnings 

January 2027: no clients 40% dependent on thermal coal earnings 

January 2030: no clients 10% dependent on thermal coal earnings 


WHAT’S IN THE PIPELINE?


Based on publicly available financial information, SMBC Group, MUFG, and Mizuho are collectively in line to provide financial support for a total of four power projects (pipeline projects).  These projects have not reached financial close, but the banks are providing advisory services or part of syndicates considering providing finance.

  • These potential projects represent a total capacity of 4.3 GW of coal-fired power. These projects, if built, would produce total CO2 emissions of 674 million tonnes. 
  • All three banks would still be able to finance Vung Ang 2, a new polluting coal power project in Vietnam.
  • These projects are to be built in Vietnam and Bangladesh.
Number of Projects Bank is Reportedly Involved With; Capacity
SMBC - 3 projects; 3.1GW
MUFG - 2 projects; 2.4GW
Mizuho - 1 project; 1.2GW

NO SPACE FOR ANY MORE COAL


The fact remains that any new coal power projects threaten a safe climate.

The Executive Director of the International Energy Agency has stated that to limit temperature rises to 2ºC, let alone the 1.5ºC scientists recommend, “We have no room to build anything that emits CO2 emissions.” Oxford University researchers have found that in addition to no pipeline CO2 emitting power plants being built, over 20% of current global capacity would have to be stranded to meet the goals of the Paris climate agreement.

These projects are also represent material business risk. Any new credit exposure to coal power projects faces transition risk due to international efforts to meet the goals of the Paris Agreement. 

We need to see policies that rule out all coal power, do not have loopholes and do not grandfather in significant pipeline projects. The Japanese banks policies should therefore only be seen as a first step towards further policy change.

We call on the banks to:

  • Stop financing all new coal power with no exception
  • Decarbonize their portfolios by phasing out corporate and project lending and underwriting in line with the goals of the Paris Climate Agreement
  • Improvement of disclosure of physical and transitional climate risks in order for shareholders to better manage their own portfolios