Development banks have led the move away from coal ﬁnancing, but with a backlash in Africa and the US, will they hold steady? Finbarr Bermingham reports.
In October 2016, the ﬁnance minister of Nigeria launched a scathing attack on western governments, which she accused of effectively barring her country from accessing coal ﬁnancing.
Kemi Adeosun said: “We’re being blocked from coal because it’s not green, and there’s some hypocrisy in that. We had an entire western industrialisation that was built on coal-ﬁred energy, and that’s the competitive advantage that’s been used to develop Britain, certainly, where I grew up.”
Her remarks were made in relation to a development bank stand-off dating back to 2015. The World Bank declined to follow the African Development Bank (AfDB) into a guarantee for Nigerian Bulk Energy Trading, due to its coal commitments.
The AfDB president at the time, Donald Kaberuka, defended the bank’s policy of continuing to ﬁnance coal power when most of its cohorts were backing out of the sector.
“To every single African country, from South Africa to the north, the biggest impediment to economic growth is energy, and we don’t have the luxury of making this kind of choice,” he said. “There is a little bit of hypocrisy in the west at this moment.”
This word “hypocrisy” keeps cropping up: what we view as the developed world was able to achieve this status through burning coal. The Victorian skies of London were blackened by chimneys belching out smoke, while the 20th century rust belt of America was largely powered by coal mined from the Appalachian region to the east.
But we did not know then what we do now. The threat of climate change is no longer theoretical, nor is it a thing of the future. In November, Arctic air temperatures were 20°C higher than normal. Sea temperatures were 4°C up on a year earlier.
This creates a conundrum, and one which no doubt frustrates countries and regions at a certain stage of development: should they have the same rights to burn coal in order to fulﬁl their potential, when we know that it is killing our planet?
From an environmental perspective, the argument is a no-brainer. Of course, they should not. But for a ministry in Africa trying to electrify a nation on a budget, it is not such a one-sided debate.
At the coalface of the debate, so to speak, is ﬁnance. State-funded development banks, multilateral agencies and export credit agencies have been leading the move away from coal ﬁnancing for a number of years. Huge inﬂuence stemmed from the US which, up until recently anyway, was pushing this move. It is from here that the accusations of hypocrisy stem.
Us vs them?
As you might expect, it’s difﬁcult to draw tight-lipped ﬁnanciers on such philosophical quandaries, but most will at least state a company line.
“It is always good to look at all the arguments at the table, but ultimately climate change is a big problem for the world that we need to address. For various reasons it is the proper thing to do, but also in order to future-proof your business, we think in our bank it’s the right move to no longer ﬁnance coal,” Arnaud Cohen Stuart, head of business ethics at ING, which recently stopped all new coal-related ﬁnancing, tells GTR.
Answering the claims about the hypocrisy of the west, Zhai Yongping, technical advisor for energy at the Asian Development Bank (ADB), says: “The development objectives of the ADB are not only economic but must be holistic in nature. ADB energy policy aims at providing reliable, adequate and affordable energy for inclusive growth in a socially and economically acceptable and environmentally sustainable manner.
“This means that we cannot ignore the economic realities, but at the same time the lowest-cost solution is rarely the best solution for a given society. We work directly with countries to ﬁnd the best solution that can work in their context.”
Despite the protestations of Kaberuka, the AfDB’s ofﬁcial policy about coal ﬁnancing is not a million miles from the ADB’s. Its 2012 charter states that it would only support coal where it has a strong developmental impact and where it is environmentally responsible.
In 2015, of the US$1.8bn-worth of energy loans made by the bank, US$350mn were for renewables. If you take away one mammoth US$1bn loan to Angola’s energy sector (which supported multiple forms of power generation in a country with just 30% electriﬁcation), then 45% of the AfDB’s 2015 energy book was for renewables.
Since 2009, the ADB has had a policy of selectively supporting coal-ﬁred plants if they use clean technology.
Zhai tells GTR that it only supports coal on an “exceptional basis”, where there is overwhelming economic rationale and the countries have made a “clear commitment to accelerate the uptake of clean and renewable energy through reducing fossil fuel subsidies, developing roadmaps for renewables, making sector reforms of renewable energy technology development” and a host of other criteria.
These are broadly reﬂective of policies by the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB), the Inter-American Development Bank (IADB), the World Bank and unilateral agencies such as US Exim, which dropped coal in 2013, and Brazil’s development bank BNDES, which announced in October that it would cut back signiﬁcantly on its coal portfolio.
Indeed, in the four-year period to 2015, just US$1.5bn-worth of coal-ﬁred plants were ﬁnanced by multilateral development banks. For the four years prior to that, the ﬁgure was US$12.2bn, according to data from the Natural Resources Defence Council (NRDC).
This has now seeped into the commercial banking world, which is far less accountable to public scrutiny than the likes of the ADB, but which is realising the reputational hazards of coal ﬁnancing.
“It was not a position we took overnight. Climate change has been on the agenda for quite a long time at ING,” says Cohen Stuart. He also readily admits the inﬂuence of multilaterals in the bank’s shift.
“The DFIs, particularly the EBRD, IFC, US Exim, have been at the front of this. I believe it was US Exim that banned the ﬁnancing of coal-ﬁred plants in 2013. They were the frontrunners and started the policies of coal, and the rest of the industry took note. They can be an important force for awareness and for directing ﬁnance.”
He adds: “Not all multilaterals adopted that kind of policy and a lot of funding has gone on without the multilaterals, so commercial banks need to develop their own policies. They have to stand on their own feet.”
In December, the International Energy Agency (IEA) released its annual survey which showed that the volume of coal used across the world fell for the second successive year. Coal demand will continue to fall, the IEA found, with pressure from energy efﬁciency and renewables helping marginalise carbon products.
However, the US election in November has led to fears that the US, which is the most inﬂuential voice in multilateral agency policy, will seek to revive its coal mining industry.
If Donald Trump follows through with this, would that affect the stance of development banks around the world? Will the likes of Nigeria be permitted to tap the coal ﬁnance Kemi Adeosun says it needs to aid development?
Scott Morris, senior fellow at the Centre for Global Development, thinks that in the case of US Exim, a reversal in policy is possible. It is less likely, however, in multilateral agencies.
“Any US Exim transaction is directly supporting a US ﬁrm and therefore employees in the US. There was always a political tension. When Obama decided to impose a restrictive stance on its own programmes, we saw a very clear backlash in Congress at the time. It’s clear to me that those voices, including the coal industry, will be eager to revisit this post-January.”
He continues: “Then the issue is how do they act in the World Bank and other multilaterals, will we see a different message from the US? I’m less worried that it will have real effect on the actual operations of those institutions because I do think the climate agenda is more ﬁrmly entrenched among the upper echelons of those institutions. At the World Bank, the agenda is pretty ﬁrmly climate-oriented, and there will continue to be strong opposition to any robust coal ﬁnancing agenda.”
For commercial banks, if the political capital spent by investing in coal-ﬁred plants is not so toxic, perhaps we will see a shift in stance there. In most cases, the policies are less entrenched and looser in their deployment.
As a European bank, ING may not have to make such considerations.
“The policy was a response to climate change. We feel strongly about sustainability: climate change, resource costs, ﬁnancial empowerment. These are things we think we can help with, given the portfolio we have. If this is a strong item to us, we need to live up to that agenda.
“We do that by sticking to it. It’s the higher agenda so no, I don’t think it’ll be reversed. The agenda remains there. I don’t see any rationale for coming back on our policy,” says Cohen Stuart.
While there is coal left to burn, the debate will wage on. But if the time has come for the ﬁnancial sector to wake up to the realities of climate change, then governments of all standing must do the same.