Earlier this month, Wells Fargo became the third major US bank to announce that it would stop financing new oil and gas projects in the Arctic region. It followed similar pledges by Godman Sachs and JPMorgan Chase.
These banks also said they would be reducing lending to the coal industry. Wells Fargo for instance announced that it would not fund coal projects that involved mountain top removal, nor provide financing to any coal producer engaged in this form of mining. JPMorgan Chase will no longer provide money or advice to any firm that generates most of its money from coal.
In February, Europe’s largest asset manager, Amundi, said it would back a shareholder resolution asking Barclays to phase out funding to fossil fuel companies that were not meeting the goals set out in the Paris Agreement on climate change. Sir Christopher Hohn, founder of activist hedge fund company TCI, also recently indicated that he may sue banks that continue to fund coal projects.
This demonstrates the significant level of pressure banks are feeling around the world to seriously consider their role in the fossil fuel industry.
“The risks are really twofold,” explains Tracey Davies, executive director of responsible investment organisation Just Share. “The first is the straightforward financial element that if banks continue to finance these projects and the market collapses – or they become stranded assets, or changing regulations prevent companies from extracting those fossil fuels – then they have effectively wasted money.”
The second, and more important risk, however, is the wider question of the role the private sector should be playing in addressing the climate crisis, and ultimately ensuring the sustainability of the economic system on which it relies.
“Every investment into projects that contribute to climate change contributes to the systemic risk that climate change poses to our entire economic system,” says Davies.
“These projects can’t happen if banks don’t finance them,” she adds.
A local precedent
This is the global context in which Standard Bank released its thermal coal mining policy earlier this month. The report is the result of a shareholder resolution that passed at the bank’s last AGM that required it to disclose its plans for lending to the coal industry.
“This is the first policy to deal specifically with coal mining,” Davies explains. “We have seen a few dealing with the funding of coal-fired power, which is easier to an extent because it’s quite clear to almost everyone that building new coal-fired power stations is a bad idea. So a coal mining policy is a harder policy to grapple with for the banks.”
To that extent, it sets a precedent in the local market, and all of the big South African banks have already indicated that they will follow suit.
However, shareholders who backed the resolution are less enthusiastic about what the policy actually says.
“The precedent is not so much what they have said, but more the fact that they have said something,” notes Jon Duncan, head of responsible investment at Old Mutual Investment Group.
“We have a bank stepping out and publicly positioning itself regarding its current and future funding of coal,” he points out. “But I don’t think the content of the policy itself is very precedent-setting.”
The risks and opportunities
The significance of these reports is that shareholders can now see the criteria on which banks are making lending decisions, and can form opinions on how appropriate these are. However, Standard Bank has not announced major reductions in its lending ambitions.
“The content of the policy is fairly measured in that the bank is not saying it is no longer going to do this,” says Duncan. “They are going to do it in a responsible fashion that deals with the requirements of the countries in which they operate.
“That is perhaps understandable in the sense that they need to watch and see where the level of national ambition goes,” he adds.
“But the really interesting point in the conversation about the future of coal in this and other African counties is that the window period for it being commercially viable from a funding perspective is closing.”
The imperative is that, regardless of anyone’s views on the matter, the world is moving away from fossil fuels. And shareholders want to know how lenders like Standard Bank are preparing for that transition.
“The world is trying to rapidly decarbonise long run economic growth,” Duncan explains. “The winners in that process will be those companies and countries that can do that ahead of the curve.”
A choice that isn’t a choice
For Davies, banks are not adapting to this reality quickly enough.
Even appreciating that South Africa specifically and Africa more generally will face serious challenges in phasing out the mining and use of fossil fuels, lenders can’t ignore what is happening in the wider global economy.
“I understand the very difficult political situation the banks are in, but all banks around the world are in a difficult political situation,” says Davies.
Standard Bank’s lending policy to coal miners specifically relies on the idea that emerging markets will have more flexibility on fossil fuels, as there is recognition that they have not contributed as much to historical carbon emissions and they should also be allowed to benefit from using them.
“But even that is disingenuous,” argues Davies. “Developing countries might have slightly longer to make changes, but that doesn’t mean those changes don’t need to be dramatic. It’s not an excuse not to change anything.”