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The Asian Development Bank (ADB) has announced plans to ban financing of coal mining and power plants, as well as upstream oil and gas activities. But the bank has been urged to proceed with caution and avoid abandoning countries that continue to rely on fossil fuels for energy and exports.

In a new draft energy policy report, released last week, the multilateral development bank (MDB) lays out commitments to end financing for “any coal mining, oil and natural gas field exploration, drilling or extraction activities”.

Meanwhile, support for “any new coal-fired capacity for power and heat generation, or any facilities associated with new coal generation” will also be formally brought to a halt. The ADB notes that it hasn’t financed investments in coal power plants since 2013.

Yongping Zhai, chief of the Energy Sector Group at ADB, tells GTR that because it is a draft proposal, the report will serve as the basis for further consultations with ADB shareholders and the public in May and June.

The policy will become effective upon approval by the bank’s board of directors, which is expected in Q4 this year.

“As ADB continues to consult with a wide range of stakeholders on the new policy, this draft is still subject to change so as to enable ADB to provide effective support to its developing member countries in meeting the SDGs [sustainable development goals] and climate goals,” Zhai says.

ADB says in its report that coal remains a vital energy source across the Asia Pacific, accounting for 43% of final industrial energy across the region in 2019.

However, the bank now plans to help developing member countries achieve a “planned and rapid phase-out of coal”.

The ADB says its new energy plan will broadly work to support the low-carbon transition in the Asia and Pacific region, and that its previous policy “no longer adequately aligned with the global consensus on climate change, the ongoing global transformation of the energy sector, and recent changes in the energy sectors of ADB [developing member countries]”.

 

A “decade overdue”

The bank’s decision to update its energy policy has been broadly applauded by NGOs, though some activists remain unimpressed by the timing and scope of the proposals.

“An exit from coal financing is a welcome step in accelerating the region’s transition to a low-carbon economy and push alignment with the Paris Agreement, which calls for deep decarbonisation to achieve climate stabilisation. Unfortunately, the commitment to end finance for coal is a decade overdue and still not enough,” Julian Havers, a programme lead at climate change thinktank E3G, tells GTR.

“The ADB has spent US$4.7bn on gas since the 2015 Paris Agreement and the draft energy policy allows for gas financing to continue across the region by setting out terms under which gas projects would continue to receive funding, such as where no other cost-effective technology is available,” he adds.

While ADB says in the report that there are questions as to whether natural gas chimes with Paris Agreement goals, it also notes that “many of the region’s economies” will continue to include gas in their energy transition strategies to replace coal and fuel oil.

Demand for natural gas has soared in Asia in recent years, with the region accounting for 70% of global liquified natural gas (LNG) imports in 2019, stats from the International Energy Agency show.

Fossil fuels have dominated the power projects being built in the region. According to a February IHS Markit report, 451GW of power projects are currently under construction in Asia Pacific, with coal and gas accounting for 43% and 14% of the total, respectively.

Against this backdrop, the bank says in its proposal that it may only finance natural gas deals if a list of certain conditions are met.

These include projects where natural gas represents a “more modern” energy option, where a new plant uses highly efficient technologies, and where a project demonstrates alignment with targets to achieve carbon neutrality by mid-century.

Rayyan Hassan, executive director at the NGO Forum on ADB, an Asian network of civil society organisations, calls for the bank’s new energy policy to expand by nixing support for waste-to-energy incinerators and large hydropower plants.

“We urge the ADB to take the coal moratorium ahead and move towards a full transition to renewable energy finance through solar and wind as soon as possible,” Hassan says in a statement on the group’s website.

In response, ADB’s Zhai says that the bank has pledged to spend US$80bn in cumulative climate finance between 2019 and 2030 and has promised to ensure that at least 75% of its projects address climate change mitigation and adaptation by 2030.

 

Proceed with caution

Amid calls for the ADB to ramp up its move away from fossil fuel financing, others have urged caution and warned against the bank withdrawing fossil fuel financing in a hurry.

Kevin Gallagher, a professor of global development policy at Boston University, tells GTR that “ADB’s move is a welcome one, but needs to be done with care”.

“As a development finance institution, it needs to be forward looking, and financing projects that will be stranded assets before their lifetime is up is counterproductive for borrowing countries and the ADB balance sheets,” he says.

However, at the same time, the bank shouldn’t “pull the rug” from under countries’ feet in the short term.

“ADB has to put key emphasis on ensuring that these countries energy needs are met and in the case of countries that rely on fossil fuel energy exports for balance of payments needs, that new forms of foreign exchange are had,” he says.

“One country that is key to highlight is Indonesia – it can’t be abandoned and will need real work.”

According to the International Energy Agency’s Coal 2020 report, Indonesia is the world’s largest exporter of coal by weight, with total exports of 455 million tonnes in 2019.

 

Who will back coal?

There has been a growing push globally among export credit agencies (ECAs) and MDBs to exit coal, but there are signs that both private and public lenders may continue to support Asian coal projects.

The Japanese government said last year it would tighten lending criteria for export credit support for coal-fired power plants.

However, critics have condemned “loopholes” in Japan’s commitment, noting that the country is still open to funding overseas coal plants that use highly efficient technology, or any project it has already agreed to back.

In January, for instance, GTR reported how the Japanese and Korean ECAs lent support to a Vietnamese coal project despite widespread opposition from NGOs and influential investors.

Asian ECAs remain some of the worst offenders when it comes to backing coal, with an early 2020 report from US-based research organisation Oil Change International detailing how Japan and China have bankrolled polluting projects.

According to the report, Japan provides US$7.8bn annually to the fossil fuels industry, followed by China, Korea and Canada with US$7.7bn, US$5.3bn and US$4.3bn respectively.

Asian commercial banks have also been called out in recent years for backing coal, including major lenders in Japan.

Research published in late 2019 by Urgewald, BankTrack and 30 partner NGOs, for instance, found that from January 2017, 307 commercial banks across the world had provided US$159bn in direct loans to coal plant developers.

The top three lenders were Japanese banks Mizuho (US$16.8bn), MUFG Group (US$14.6bn) and SMBC (US$7.9bn), reveals the research.

In late April, MUFG said it will no longer finance expansion of existing coal-fired power projects, with some exceptions, an extension of an existing policy not to fund any new coal power plants. No Coal Japan, an alliance of campaign groups, welcomed the move but said MUFG’s overall approach falls well short of the country’s 2050 net zero target.

It called on major banks Mizuho and Sumitomo Mitsui Financial Group to set climate goals in line with the target.

SMBC intimated this week that it would work to phase out coal from its portfolio. In a statement released today, the bank says it will “reinforce its efforts against climate change” and “revise its policy regarding coal-fired power generation”.