Ending coal financing, and jump-starting sustainability

SIMON TAY and LAU XIN YI Business Times 31 May 19;

ALL major Singapore banks recently announced that they will stop financing new coal-fired power plants. This is significant in aligning Singapore as a financial hub with the position of many Western financial institutions. But it opens up more questions about next steps and how sustainability can be jump-started in our rapidly growing region.

Coal has been singled out as burning coal is the single largest contributor to greenhouse gas emissions worldwide. Western moves against this source of energy have had an impact. Last year, there was a 39 per cent worldwide drop in new coal-fired plant construction as compared to 2017.

Coal-fired plant construction in Asia is led by energy-hungry India and China, even as they also ramp up solar, wind and other renewables. Asean countries especially Indonesia, the Philippines and Vietnam are not far behind.

While many Western financial institutions shun coal, others do not hesitate. China is now a major financing source for coal plants, even outside the country. According to the Institute for Energy Economics and Financial Analysis (IEEFA), Chinese institutions are financing or have committed to finance more than one-quarter of the 399 gigawatts of coal plants currently under development abroad.

In this context, the moves by the Singapore banks - DBS Bank, OCBC Bank and United Overseas Bank - are significant as the first in South-east Asia to align with their Western counterparts on this issue. It was only last year that these same banks had policies that conditionally permitted coal financing. Consider too that, since 2012, Singapore banks extended some US$2.29 billion loans to 21 coal power projects, especially in Indonesia and Vietnam.

Others in Asia may well follow. Shortly after the Singaporean banks, one of the world's largest banks by assets, the Mitsubishi UFJ Financial Group (MUFG), revised its environmental and social policy framework and will no longer finance new coal power projects. This is significant, given that the Japanese bank provided, from 2016 to 2018, an estimated US$3.5 billion for coal-fired plants.

NO COAL IS INSUFFICIENT

While these steps are notable, it will take more than saying "No" to move Asia towards a low-carbon future. A broader effort to "green" the financial system is needed so that capital is channelled towards sustainable industries, companies and projects. Steps towards green or sustainable finance have gained momentum in the West and in major Asian countries such as China.

The emerging challenge, however, is that national or institutional interpretations of "green" can sharply diverge. Common standards and approaches on what constitutes green or sustainable remain in their infancy. In Singapore, one step to develop a common understanding was taken in the 2015 Guidelines on Responsible Financing by the Association of Banks in Singapore. The fact that all three major banks moved in lockstep towards ending coal financing is positive and can contribute to a level-playing field that ensures fair competition.

This is especially as environmental and climate-friendly criteria expand to cover sectors other than coal. It will be important for banks to continue engaging their clients to nudge them towards improvement, and thereby raise the sustainability bar in the industry.

A rapidly growing Asia has growing demands not only for energy but also for infrastructure and other resources. It will, as such, be critical not only to cease carbon-intensive projects but, conversely, to facilitate climate- and environment-friendly alternatives.

With Asean's energy demand expected to rise by 50 per cent, the regional bloc is aiming to derive 23 per cent of its primary energy from renewable sources by 2025.

How individual governments translate this aspiration into their national development plans, establish clear energy targets, and improve on the time and processes needed to obtain permits, will be among the key steps to attract investors and accelerate the region's low-carbon transition.

Companies can also drive demand by switching to renewable energy. Many large multinational companies have publicly committed to reach 100 per cent renewable energy in the next two decades through initiatives such as RE100.

Embracing more sustainable infrastructure is not always straightforward or easy for different societies. Emerging economies, in particular, have to tread a fine line between powering economic growth, providing affordable electricity and addressing environmental concerns.

Ending coal financing is only a beginning. The next step will be to provide solar and other low-carbon energy and infrastructure projects with "green" finance - commercially viable and quicker to deploy - in the emerging markets of Asia. Only then can the finance sector help jump-start progress towards a low-carbon economy and sustainable future.

The writers are from the Singapore Institute of International Affairs. Associate Professor Simon Tay is chairman and Lau Xin Yi is Senior Policy Research Analyst (Sustainability). Prof Tay also serves on a Global Advisory Board for MUFG of Japan.