Together, we can move the money that's financing the climate crisis into funding climate solutions
Burning coal and gas is the biggest cause of climate breakdown, and now more than ever, it is imperative that we replace these polluting fuels with clean energy.
With the Morrison Government dragging its heels and refusing to lead the transition, it's time for corporations to step up.
One industry has an enormous opportunity to lead the transition to a decarbonised world — the financial sector.
Banks, superannuation funds, corporate investors and insurance companies all have a huge influence over which big projects can progress, and which ones are deemed too risky.
By providing project financing and corporate loans, banks have the power to decide where money flows in the Australian economy. Corporate investors and superannuation funds choose which companies and projects to inject funds into and have shareholder privileges and voting rights, giving them the ability to exert control over a company’s strategic direction. Insurers also play a significant role, determining which risks companies can be shielded from.
By targeting the finance sector, we can dry up the money that's financing the climate crisis and instead funnel all those dollars into climate solutions.
In fact, we’ve already seen the financial sector’s significant influence over various fossil fuel companies, including Adani. After all four of Australia’s major banks ruled out funding Adani, construction of its Carmichael Mine was significantly delayed and Adani scrambled to finance the project itself. The viability of the Adani Mine has also been brought into question after major insurers have begun ruling out providing coverage.
But while some banks, super funds and insurers are taking positive steps to rule out or limit support for individual coal projects, the Australian financial sector broadly needs to make stronger commitments to rule out funding coal and gas projects.
Financial and regulatory experts have recognised the importance of the financial sector addressing climate change. The Australian Prudential Regulation Authority recently announced it is stepping up scrutiny based on climate-related risks following the head of insurance, Geoff Summerhayes, encouraging the financial sector to get ahead of the curve and take advantage of climate-conscious financing opportunities. Summerhayes noted that in the future “all finance will need to be sustainable”.
In the future, “..all finance will need to be sustainable”
According to the Governor of the Bank of England, Mark Carney, the Governor of the Banque de France, Francois Villeroy de Galhau, and the Executive Director of Supervision at De Nederlandsche Bank, Frank Elderson, the financial sector can no longer ignore the risks posed by climate change and “must be at the heart of tackling it.” To do so requires the financial sector to significantly reallocate capital away from fossil fuels.
As new coal and gas projects continue to pop up in Australia, it is increasingly clear that millions of dollars are being funnelled into fossil fuel companies annually. However, the exact extent of the capital the financial sector holds in fossil fuels is notoriously difficult to determine. And while many businesses are starting to take steps to publicly disclose their financial exposure to fossil fuels, their disclosures are often riddled with caveats that exclude reporting on all of their exposure.
IAG Insurance, for example, reported that at 30 June 2019, it had underwritten less than $10million of gross premiums related to all mining and fossil fuel power generation. However, their reporting did not account for companies that generate less than 30 per cent of electricity from thermal coal nor did it include mining companies whose fossil fuel extraction comprised less than 30 per cent of its activities.
Exclusions like these enable the financial sector to under-report their total exposure and mislead the public where resource companies have multiple portfolios and their coal and gas projects make up a small (but still emissions intensive) proportion of their overall activities.
Shady reporting practices make it extremely difficult to follow the money that's bankrolling fossil fuels
Financial reporting is also often unclear and inaccessible to the shareholders, customers and the general public. In its 2019 climate-related financial disclosure report, for example, ANZ specified that it had invested $10.4 billion in electric utilities. It failed, however, to identify what percentage of that investment was in coal and gas power stations.
A lack of clarity around investment decisions also muddies the water when determining where capital is held. AustralianSuper is one company that purports to have a “socially aware” fund which does not directly invest in companies that own fossil fuels. However, hidden in the fine print is a caveat that it does not screen private equity investments, allowing the fund to continue to invest in fossil fuel activities. The fund’s disclosure reported that it had actually invested at least $39 million dollars in coal, oil and gas projects comprising approximately 1.6 per cent of its total portfolio.
Leaders in the financial sector should provide clear, honest, and transparent disclosures of their fossil fuel exposure. This will allow the community, investors and stakeholders to accurately determine whether they are reallocating capital with the urgency required to meet net zero emissions by 2050.
The banking industry, led by the big four banks, has recently become an increasingly vocal part of the financial sector on the need for climate action.
But when the curtains are pulled back, a different picture emerges: the Australian banking industry remains heavily invested in fossil fuel extraction and power generation.
Despite the public support for the Paris Agreement, the big 4 have collectively lent $35.4 billion to fossil fuel projects, including $7.1 billion to expansionary projects since 1 January 2016.
Australia's big 4 banks have collectively lent $34.5 billion to fossil fuel projects over the past five years
Flexible lending policies have enabled the banks to contradict their support for addressing climate change. However, the Commonwealth Bank recently announced that it aims to end its funding to thermal coal mining and coal power generation by 2030 if Australia has a “secure energy platform.” NAB will no longer finance new thermal coal mine projects or customers. It has also agreed not to fund new or “material expansions” to coal power stations without technology that will “materially reduce emissions.” In essence, these policies should rule out financing for new coal mines and coal power stations.
Westpac and ANZ, on the other hand, are lagging far behind. Neither bank has introduced targets to completely end financing thermal coal mining and coal power generation. Westpac will lend to thermal coal mining projects in existing basins where the quality ranks in the top 15 per cent globally. It will only finance new power stations if it will reduce the emissions of the proposed grid. This should effectively rule out new coal-burning power stations. However, Westpac has agreed to lend to existing coal power stations if it is required for system reliability and will not extend the station’s life.
ANZ’s coal financing policies are the least restrictive. While ANZ will only finance new coal power stations if emissions are below a certain threshold, it has made no commitment to rule out funding upgrades or expansions to existing power stations. Even more concerning is ANZ’s policy that it will lend to thermal coal projects when it contributes to less than 50 per cent of a company's revenue, installed capacity or generation. This broad exception allows ANZ to duplicity lend money to resource companies that include other climate damaging practices such as gas and oil extraction.
In fact, ANZ alongside NAB and Westpac have not yet made any commitments to restrict lending practices to gas projects. CBA, on the other hand, has stated it will only finance gas projects if they are supported by an environmental assessment and are in line with the Paris Agreement.
With the United Nations Environment Program revealing that the gap between the current trajectory of gas production and the limit required to remain on a 1.5-degree pathway will exceed 70 per cent by 2030, there is no longer room for any bank to fund new gas projects.
Statements from the finance sector supporting climate action are only meaningful when these corporations divest from their interests in fossil fuels. It is incongruous for banks and other companies to say they commit to decarbonising the economy whilst simultaneously enabling new coal mines and gas projects and prolonging the life of coal power stations.
If the big four banks are serious about reaching net zero emissions by 2050 and limiting global temperatures to 1.5 degrees, they can no longer fund coal and gas companies to disrupt our climate.
It’s time for all businesses to recognise that their success depends on a habitable planet.
The finance sector must become responsible corporate citizens and funnel money away from coal and gas and into projects that are good for our future.
And it's up to all of us to use our power as customers, shareholders and employees, to get them there.
So let's get on with it.