OUR DEMANDS ON COAL

There are 5 key measures financial institutions must take to have a high-quality coal policy

A growing number of private and public institutions have adopted coal-specific financing, insurance, and investment policies to help achieve climate mitigation and public health.

Best practices consist of balancing exclusion criteria with an engagement process. (1) Companies unable or unwilling to meet sector exit targets should be excluded from portfolios. (2) Companies already engaged in decarbonisation can be included in investment portfolios, but new investments should depend on the achievement of specific, time-bound targets supporting their gradual exit from the sector. The complementarity of these criteria leads to policies that proactively support coal phase-out in a way that contributes to achieving Paris Agreement goals

Despite the sophistication of the policies adopted by financial institutions, too few have been robust. Below, Reclaim Finance explains the rationale behind the recommendations shared with a large number of international NGOs, to accompany financial institutions in their transition. The Coal Policy Tool offers an updated and detailed analysis of coal sector policies adopted by financial institutions based on these criteria.

1. End all support for coal projects

The number of thermal coal plants continues to grow despite the 2015 Paris Climate Agreement and countless United Nations, Intergovernmental Panel on Climate Change (IPCC), and International Energy Agency (IEA) reports on how these plants are incompatible with limiting global warming to 1.5ºC above pre-industrial levels. Since the signing of the Paris Agreement, the world’s coal power generation capacity grew by 135 GW—an amount equal to the combined coal power production of Germany, Japan and Russia.

However, the implications of the UN Paris Climate Agreement for the coal sector are clear. To achieve the agreement’s goal of limiting “the global average temperature to well below 2°C above pre-industrial levels and to continue efforts to limit the temperature increase to 1.5°C”, we must stop our increasing coal-fired power generation capacity and phase out existing production within the next few years.

In 2015, Christiana Figueres, then head of the UN Framework Convention on Climate Change (UNFCCC), warned: “There is no room for new coal”. And in 2015, OECD Secretary-General Angel Gurria called new coal-fired power plants “the most urgent threat to our climate”. Just last year, UN Secretary-General Antonio Guterres called on decision-makers to make 2020 the year in which the expansion of the coal industry would come to a halt.

Financial institutions have begun to heed these warnings. More than 40 banks and insurers have now ceased direct support for new coal mines and plants.

Financial institutions must not provide or renew any type of support for new coal-fired power plants, mines, and other associated infrastructure worldwide – including project finance and additional specialised financial support such as advisory mandates, insurance underwriting and direct investments. They must also stop the support to any retrofit of existing coal plants extending their lifetime, or to their selling.

Grade Coal projects
0 No policy
1 Very weak exclusion of new coal plants and/or mountaintop removal (MTR) exclusion only
2 Exclusion of all non ultra-supercritical (USC) plants or OECD guidelines, or all new plants in developed countries
3 Exclusion of all new thermal coal mines
OR Exclusion of all new coal plants in developed countries + all non USC everywhere (+ optional some restrictions for coal mines)
4 Exclusion of all new thermal coal mines + all new coal plants in developed countries or all non USC plants worldwide
OR Exclusion of all new coal plants but exceptions
5 Exclusion of all new thermal coal mines + all new coal plants in developed countries + all non USC plants elsewhere
OR Exclusion of all new coal plants
6 Full exclusion of new thermal coal mines and plants but potentially large exceptions
7 Full exclusion of new thermal coal mines and plants but minimal exceptions
8 Full exclusion of new thermal coal mines and plants with Carbon Capture and Storage (CCS) exception
9 Full exclusion of new coal mines and plants without CCS exception and existing projects retrofit extending the life of the plant
10 Full exclusion of coal mines, plants and infrastructures

2. Exclude companies developing new coal projects

Any new carbon-based power generation infrastructure such as thermal coal plants is incompatible with the 1.5°C target. The majority of coal reserves, including those already in operation, must remain in the ground to limit warming below the 2°C threshold. As a result, a growing number of financial institutions are increasingly excluding companies with plans to expand the coal sector from accessing financial services. By deliberately pursuing projects that fundamentally undermine the agreement’s climate objectives, companies are demonstrating an apparent lack of willingness to align their activities with the Paris Agreement’s scientific goals.

Financial institutions must cease all financial services to any company developing or planning to expand their activities in the thermal coal sector (mining, electricity, infrastructure, and services). Expansion means constructing new projects or purchasing existing infrastructures without a commitment to close them by pre-established dates—2030 in EU and OECD countries and 2040 worldwide at the latest. Companies that extend the lifespan of existing coal-fired power plants following their modernisation or selling services and equipment supporting the expansion of the sector should also be excluded.

Grade Coal developers
0 No exclusion of companies because of coal development plans
1 Exclusion only of new clients regardless of the threshold on coal mining and/or coal power
2 Diversification plans are considered but no explicit exclusion linked to coal development
3 Weak exclusion of some companies planning new coal projects or coupled with another criteria
4 Exclusion of companies listed in urgewald 120 Coal Plant Developers List (CPDL)
5 Exclusion of companies planning the construction of more than 1000 MW of new coal power capacity
6 Exclusion of companies planning the construction of more than 500 MW of new coal power capacity
7 Exclusion of companies planning the construction or building new coal plants
8 Exclusion of companies planning the construction or building new coal mines/plants
9 Exclusion of companies planning the construction or building new coal mines/plants/infrastructures
10 Exclusion of companies developing their coal capacity (because of construction plans of new coal mines/plants/infrastructures ; purchase of existing coal assets without clear commitment to close it or selling equipment for new coal projects).

Malus of minus 1 when minimal exceptions, minus 2 when large exceptions
Malus of 1 or 2 when policy not applied to all assets / all financial services
Malus of 1 when bonds are not sold or when it only concerns new coverage/investments
Maluses do not apply below score 1

3. Exclude companies with high exposure to coal

Excluding companies with more than a certain percentage of their operations in the coal sector is one of the most common methods used by financial institutions to filter out companies. This method allows institutions to exclude companies considered as risky because of their high dependence on coal and was used by investors before being adopted by banks and insurers.

Percentage exposure is calculated based on the share of coal in revenues, electricity generated, or installed coal-fired power generation capacity. The best metrics to reflect a company’s climate impact is to measure the share of coal in its electricity generation for electricity producers, and the share of coal in a company’s revenues for all other companies, whether in mining or service provision.

Initially, most financial institutions applied a high exclusion threshold, generally set at 50%. This threshold has been lowered steadily. While the most widely used threshold on the international stage is 30% of revenues and/or electricity generation from coal, there has been an accelerating downward trend with many institutions adopting a 10% or 20% threshold in recent months.

Financial institutions must exclude companies that generate more than 20% of their revenues or electricity generation from coal and commit to lowering their exclusion thresholds to zero to support an exit from coal by 2030 in OECD and European countries, and by 2040 at the latest elsewhere.

Grade Coal relative thresholds
0 No exclusion of companies because of their relative exposure to coal
1 Exclusion only of new clients regardless of the threshold on coal mining and/or coal power
2 Some exclusion for existing clients but only on coal mining or on coal power
3 Weak exclusion for existing clients for both coal mining and coal power companies
4 Exclusion of companies > 50 % coal share of revenues (CSR) / coal share of power production (CSPP)
5 Exclusion of companies > 45 % CSR / CSPP
6 Exclusion of companies > 40% CSR / CSPP
7 Exclusion of companies > 35% CSR / CSPP
8 Exclusion of companies > 30% CSR / CSPP
9 Exclusion of companies > 25% CSR / CSPP
10 Exclusion of companies > 20% CSR / CSPP

Malus of minus 1 when minimal exceptions, minus 2 when large exceptions
Malus of 1 or 2 when not applied to all assets / all financial services
Malus of 1 when bonds are not sold or when it only concerns new coverage/investments
Malus when wrong metric used for coal power from 20%: minus 1 for revenues and capacity instead of power generation
Maluses do not apply below score 1

The scoring grid goes above 10, applying the same logic (15% = 11, 10% = 12, 5% = 13, 0% = 14), to acknowledge exclusion thresholds which are more exigent than our 20% demand before the consideration of maluses, but the overall score is capped at 10. Only the 2 point malus for policies only covering half or less of the assets is strictly applied to scores above 10.

4. Exclude the biggest coal companies

Adopting an exclusion threshold based on the relative share of coal in a company’s activities does not consider the real impact on climate and health, nor the company’s ability to withdraw from coal in time to achieve Paris Agreement goals.

Indeed, some companies do not reach relative exclusion thresholds, whether 20% or higher, even though the size of their coal activities makes them significant coal producers and thermal coal plant operators. For this reason, the Global Coal Exit List identifies companies producing more than 20 Mt of coal a year or having a coal power generation capacity over 10 GW. These thresholds will be cut down to 10Mt and 5 GW in fall 2020. Some financial institutions are ahead of the curb and have already adopted them.

With an annual coal production of more than 73 million tons in 2018, China’s Jinneng Group Co Ltd exceeds the 20 Mt threshold despite deriving less than 30% of its revenue from coal. This is also the case for EPH, BHP Billiton Group, Anglo American PLC, and South32 Ltd, known for their purchases of assets from Rio Tinto and other mining companies.

Absolute criteria are also useful in cases where the share of coal in electricity generation or the share of coal in revenues is not readily calculable/estimable (e.g. the Adani Group in India). Those criteria are also useful facing fluctuating coal prices or coal power generation. The share of coal in revenues can be much lower than the percentage of coal in power generation, which further highlights the benefits of absolute thresholds.

Financial institutions must exclude companies that produce more than 10 Mt of coal per year or have more than 5 GW of coal capacity and commit to lowering these thresholds to zero to support an exit from coal by 2030 in EU and OECD countries, and by 2040 worldwide at the latest.

Grade Coal absolute thresholds
0 No exclusion of companies because of their absolute exposure to coal
1 Exclusion only of new clients regardless of the threshold on coal mining and/or coal power
2 Exclusion of some companies based on some absolute criteria
3 Exclusion of mining companies producing more than 100 MT coal a year
4 Exclusion of mining companies producing more than 50 MT coal a year
5 Exclusion of mining companies producing at least 20 MT coal a year ; or any lower exclusion threshold for mining companies but no exclusion of power companies
6 Exclusion of mining companies > 20 MT and some power companies based on some absolute criteria
7 Exclusion of mining companies > 20 MT and power companies > 15 GW
8 Exclusion of mining companies > 20 MT and power companies > 10 GW
9 Exclusion of mining companies > 15 MT and power companies > 5 GW
10 Exclusion of mining companies > 10 MT and power companies > 5 GW

Malus of minus 1 when minimal exceptions, minus 2 when large exceptions
Malus of 1 or 2 when not applied to all assets / all financial services
Malus of 1 when bonds are not sold or when it only concerns new coverage/investments
Maluses do not apply below score 1

5. Adopt a robust exit strategy to support the closure of existing coal assets

Meeting the objectives of the Paris Climate Agreement requires phasing out coal over the next few years. According to research by Climate Analytics based on the latest IPCC report, all coal-fired power plants must be closed by 2030 in OECD and EU countries and by 2040 elsewhere. Besides, the IPCC Special Report on Global Warming of 1.5 °C’s P1 shows that 78% of existing coal-fired power generation capacity must be shut down by 2030. More than 6,700 power generation units are operating around the world. This constitutes an immense challenge, making the next few years critical.

A growing number of financial institutions recognise the imperative to exit the coal sector. This is reflected in the emergence of increasingly sophisticated coal policies and positions taken by French and international financial institutions in favour of closing existing infrastructure.

On July 2, 2019, French financial institutions, working through their professional federations, committed to adopting “a timetable for the overall exit from financing coal activities” by mid-2020 and to report on the policy in their extra-financial reporting from FY2020 onwards.

Financial institutions must commit to reducing their financial services and their portfolios’ exposure to coal to zero by 2030 in EU and OECD countries and by 2040 in the rest of the world at the latest. To achieve these objectives, they must exclude all coal developers and commit to progressively strengthen their criteria for excluding companies active in the sector.

Finally, they must immediately call on remaining companies in their portfolio to adopt a plan for closing all coal assets by January 1, 2021, allowing an exit by 2030 or 2040, depending on the geographical area. It is imperative to request the closure and not the sale of assets in operation and to require the adoption of such a plan before a set date. Failure to act should lead to sanctions, such as the suspension of all new investment after January 1, 2021, and set a new time-limited engagement process into action. Failure to adopt such a closure plan before January 1, 2022, for all coal assets must result in the company’ definitive exclusion.

Grade Coal phase-out
0 Has not announced a coal phase-out
1 Has announced its intention to phase out coal with no deadline for coal mining and/or coal power
2 Has announced a global coal phase-out by 2050 for coal mining or coal power
3 Has announced a global coal phase-out by 2050 for coal mining or coal power ; exclusion of some coal developers
OR Has announced a global coal phase-out by 2050 for coal mining and coal power
OR Has announced a global coal phase-out by 2040 with the intermediary date of 2030 for EU/OECD for coal mining or coal power
4 Has announced a global coal phase out by 2050 with the intermediary date of 2030 for EU/OECD, or a global coal phase-out by 2040, for coal mining and coal power
OR Has announced a global coal phase-out by 2040 with the intermediary date of 2030 for EU/OECD for coal power ; exclusion of some coal developers
5 Has announced a global coal phase-out by 2040 with the intermediary date of 2030 for EU/OECD for coal power ; exclusion of all coal plant developers
OR Has announced a global coal phase out by 2040 with the intermediary date of 2030 for EU/OECD for coal mining and coal power
6 Has announced a global coal phase-out by 2050 with the intermediary date of 2030 for EU/OECD, or a global coal phase-out by 2040, for coal mining and coal power ; exclusion of some coal developers ; at least one of these 2 elements:
– demand of an exit plan
– decrease of exclusion threshold over time
OR Has announced a global coal phase out by 2040 with the intermediary date of 2030 for EU/OECD for coal mining and coal power ; exclusion of some coal developers
7 Has announced a global coal phase-out by 2040 with the intermediary date of 2030 for EU/OECD for coal mining and coal power ; at least 2 out of these 3 elements:
– exclusion of some coal developers
– demand of an exit plan
– decrease of exclusion threshold over time
OR Has adopted very restrictive exclusion criteria that imply an almost immediate full coal mining and coal power phase-out
8 Has announced a global coal phase-out by 2040 with the intermediary date of 2030 for EU/OECD for coal mining and coal power ; exclusion of coal mine developers and coal plant developers
OR Has announced a global coal phase-out by 2040 with the intermediary date of 2030 for EU/OECD for coal mining and coal power ; exclusion of all coal plant developers ; at least 1 out of these 2 elements:
– demand of an exit plan
– decrease of exclusion threshold over time
9 Has announced a global coal phase-out by 2040 with the intermediary date of 2030 for EU/OECD for coal mining and coal power ; exclusion of coal mine/plant/infrastructure developers ; demand of an exit plan
OR Has adopted a total exclusion criteria that imply an immediate full coal mining and coal power phase-out, but no exclusion of all coal mine/plant/infrastructure developers
10 Has announced a global coal phase-out by 2040 with the intermediary date of 2030 for EU/OECD for coal mining and coal power ; exclusion of coal mine/plant/infrastructure developers; demand of a closure plan and exclusion process if companies fail to adopt a closure plan OR decrease of exclusion threshold over time

Malus of 2 if phase-out commitment only covering lending not underwriting  or only a part of the assets owned/managed
Malus of 2 if phase-out commitment linked to a government commitment
Malus of 1 if phase-out commitment apply only to new financing/coverage and not existing financing/coverage

Malus of 2 if commitment only applies to financed companies and not to the financial player itself
Malus of 2 if financing of new coal mine or plant projects is still possible
Maluses do not apply below score 1

A “phase-out” strategy qualifies in this assessment if the end goal is a maximum 5% exclusion threshold

See the Coal Policy Tool