Four years after local banks announced plans to exclude coal from their loan books, regional guidelines are now being updated to include the managed phase-out of coal power generation — known to be the largest source of carbon dioxide emissions in the world.
Accelerating the retirement of coal-fired power plants is the “mother of all transitions”, says Ravi Menon, managing director of the Monetary Authority of Singapore (MAS). Speaking at the opening session of the Glasgow Financial Alliance for Net Zero Asia-Pacific (GFANZ APAC) Summit on June 5, Menon calls this the “single most important step we can take” to reach net zero by 2050.
Menon’s speech fronted the GFANZ APAC Network’s launch of a public consultation on its proposed set of voluntary guidelines for financing the early retirement of coal-fired power plants in the Asia Pacific region.
The consultation is open until Aug 4. The final guidance will outline practical steps that financial institutions committed to net zero can independently take to support the financing of coal phase-out transactions. In doing so, the guidance seeks to strengthen the credibility of these transactions in the eyes of relevant stakeholders.
Menon, who is also the advisory board chair of the GFANZ APAC Network, says the challenge of phasing out coal is “most acute” in the Asia Pacific. “The region’s coal plants account for about a third of Asia Pacific’s total greenhouse gas emissions … Coal accounts for nearly 60% of power generation in the region. Asia’s energy demand is projected to increase by two-and-a-half times by 2050, on the back of economic development, population growth and urbanisation.”
See also: JPMorgan pursues deals to finance shutdown of coal-fired power
But there are significant challenges to financing the early retirement of coal, he adds. “Financial institutions will need to justify how such financing is consistent with their net-zero commitments, especially when their financed emissions rise over the short term. They will need to address potential greenwashing concerns that new coal capacity is being created to replace the coal plants being phased out early. There is a lack of scalable risk-sharing mechanisms to support coal plant owners in their transition to cleaner energy.”
Hoping to illuminate this opaque area is the Network’s 73-page consultation paper, titled “Financing the managed phase-out of coal-fired power plants in Asia Pacific”. “The guidance aims to ensure that managed phase-out transactions are climate credible, economically viable and socially inclusive,” says Menon.
It proposes a three-step process. First, ensuring that there are credible plans for coal phase-out at the government, company and project level; second, optimising meaningful outcomes across climate impact, financial viability and socio-economic considerations; and third, provide transparency and accountability for coal phase-out plans in line with the GFANZ Net Zero Transition Plan framework.
See also: Indonesia’s ‘ambitious’ net zero, coal phase-out plans ‘challenging’ in reality: BMI
GFANZ is a global coalition of eight financial sector net-zero alliances working together to support the world’s transition to net-zero emissions by 2050. GFANZ has united over 550 institutions spanning 50 countries and representing 40% of global private financial assets.
The regional offshoot of GFANZ began in June 2022, hosted by the Singapore Exchange S68 (SGX), with support from MAS, Temasek and Bain & Company.
Menon hopes the GFANZ guidance will serve as an “important, ambitious and practical tool to help catalyse coal phase-out transactions in the coming years”. “We hope it will be useful for other regional initiatives to encourage coal phase-out, such as the Asian Development Bank’s Energy Transition Mechanism and country-led platforms, such as the Just Energy Transition Partnerships in Indonesia and Vietnam.”
MAS made a similar decision a week prior, announcing on May 30 that it will launch a consultation on its proposal to include the managed phase-out of coal-fired power plants in the Singapore-Asia Taxonomy.
Formerly referred to as the Singapore Taxonomy, the guidelines were expected to be published in June. Instead, MAS will seek feedback on additional criteria from financial institutions “within the next few weeks”, says Gillian Tan, chief sustainability officer of MAS.
“It’s rare to see a central bank worry about coal,” says Tan at her first media briefing since assuming the role in October 2022. “But, we realised that it was something needle-moving for Asia’s transition… Someone needed to pull the different pieces together, get the different relevant organisations and parties in the same room and crack it, bit by bit.”
The taxonomy was developed by the Green Finance Industry Taskforce (GFIT), an industry-led initiative convened by MAS, whose mandate is to help accelerate the development of green finance.
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GFIT launched its third public consultation on the taxonomy in February — then thought to be the last round to provide feedback. However, the central bank and regulator received “extensive feedback”, says Tan, who is also assistant managing director (development and international) at MAS. “So, we definitely want to take some time to really cover it well.”
The consultations by the GFANZ APAC Network and MAS follow the Asean Taxonomy Board’s announcement in March, which determined that projects phasing out coal can obtain transition financing, a first for any regional taxonomy.
These projects are graded by the Asean Taxonomy Board on a “traffic light” model, with the lowest tier — “Amber Tier 3” — qualifying coal plants built between 2023 and 2027, provided they adopt best-in-class technology that is affordable, accessible, reliable and can be implemented within a reasonable timeframe.
What do Singapore’s banks think?
The proposed move could appear dissonant with banks’ efforts to decarbonise their portfolios. In April 2019, Oversea-Chinese Banking Corporation (OCBC) became the first Southeast Asian bank to stop financing new coal-fired plants. DBS D05 and United Overseas Bank U11 (UOB) followed within a month.
DBS announced in 2021 that it will phase out thermal coal exposure by 2039. From January 2026, DBS will also stop financing customers who derive more than half of their revenue from thermal coal, except for their non-thermal coal or renewable energy activities.
Meanwhile, UOB has committed to stop financing the thermal coal sector by 2039. This is on top of its existing prohibitions on new project financing of new or expanding coal-fired power plants and thermal coal mines.
Singapore’s financial institutions should “take their dressing” from global best practices, standard-setters and science-based experts, says Tan. “If a bank finances the managed early phase-out of coal, they should only do it where it is helpful to the climate challenge and [if] it is credible.”
DBS is co-leading the GFANZ APAC Network workstream on managed phase-out of coal in Asia Pacific. The bank also serves as the financial advisor to the Indonesia Investment Authority, the sovereign wealth fund of Indonesia, on their energy transition mechanism to tackle the managed phase-out of coal.
Helge Muenkel, chief sustainability officer at DBS Bank, says the bank’s focus “cannot only be on reducing financed emissions but also financing the reduction of emissions”. “Investments in renewable energy alone will not allow us to reach the goals of the Paris Agreement, which is critical to protect vulnerable communities across Asia against the most severe impacts of climate change.”
Mike Ng, head of sustainability office, global wholesale banking at OCBC, sa O39 ys transition financing and a collaborative approach involving the power industry, financial institutions and regulatory authorities are essential for supporting the early phase-out of coal-fired power plants in Asia in a just and orderly manner, without compromising energy security and livelihoods.
Ng says it is “heartening” that the GFANZ APAC Network has developed a framework and guidelines for financial institutions on this issue, which is still at a nascent stage. “They will help guide decision-making by banks and address the issue of compatibility with banks’ financing policies and net-zero targets. We are reviewing the consultation paper in detail and look forward to sharing our feedback and suggestions with the GFANZ APAC Network duly.”
Eric Lim, chief sustainability officer at UOB, hopes governments, in conjunction with philanthropic funds and multilateral agencies undertaking blended finance, can identify suitable candidates for this managed phase-out and provide a “prioritised list” for financial institutions to further study the viability of financing.
“The consultation paper has provided various useful options on how the managed phase-out can be potentially structured to be economically viable… However, given the varied landscapes in the region and different stakeholders, situations will need to be considered on a case-by-case basis,” says Lim.
According to Lim, other challenges ahead include successfully implementing the phase-out and determining how these will be counted towards financial institutions’ financed emissions, “especially those who have made coal sector commitments or have committed to certain net-zero pathways”.
Comprehensive Asia-specific approach
There needs to be a comprehensive approach to energy transition that takes into account a few “Asia-specific features”, says MAS’s Tan, who began dual-hatting in October 2022 following the exit of their first CSO, Darian McBain, after a year.
Most of the coal-fired power plants in Asia are very young, she adds, averaging between 10 and 20 years old. “They have at least another 30 to 40 years left. So, if we just say ‘No new coal’, it will not be enough to get us to where we need to be for the net-zero transition… We need to, difficult as it is, think about how to decommission these plants early and how to retire them early.”
Tan acknowledges that this is an expensive endeavour. “The economic viability of it is an issue… A lot of early phase-out models [are] very much premised on us being able to bring the costs of borrowing down such that you can buy out the incumbents, and then bring the lifespan down.”
Thus, the industry needs to find innovative ways to solve those challenges, she adds, such as using carbon credits to “sweeten the economics slightly”.
The process is also labour-intensive, says Tan. “The problem is that currently, we’re looking at it in a very transaction-by-transaction approach. If we could group together a set of power plants with similar characteristics and risk — maybe they come from the same permit jurisdictions [or share the] same set of decision-makers — if you can standardise that, you can actually scale it and bring it down to a good level.”
Ultimately, banks will need to look at the range of guidance that will be available and make a decision, says Tan. “You saw the decarbonisation targets that they put up, all the slight variations here and there because they’ve made their assessments based on what experts have told them and what the shape of the portfolios look like. I think they will do likewise on the managed phase-out [of coal].”
OCBC unveiled its 2030 and 2050 sectoral decarbonisation targets in May after its peers DBS and UOB published their plans in September and October 2022 respectively.
Last year, MAS announced it will walk away from equities and corporate bonds of companies that derive more than 10% of their revenues from thermal coal mining and oil sands activities.
“Such companies will be exposed to significant risks of asset stranding as the world increasingly shifts towards the use of cleaner or renewable sources of energy,” reads MAS’s second annual sustainability report, released in July 2022.
Menon said then that he is confident the central bank and regulator will hit this target “well in advance” of FY2030 and that “there will be no sacrificing returns”.
In response to media queries, an MAS spokesperson says the climate exclusions are scoped to avoid investing in companies with the “largest risk of asset stranding” and is the “most restrictive” of the set of actions MAS is taking to manage climate risks. “We plan to review such exclusions periodically and will provide an update when there are changes. More importantly, exclusions are not our default action, as we believe that there continue to be viable options for a low-carbon transition for broad sectors of the economy. Instead, we prefer to remain invested and, through those investments, encourage portfolio companies to transition.”
The managed phase-out of coal is not easy to do, says Menon at the end of his June 5 speech. “It is a system-wide challenge that requires a system-wide approach — an approach that involves the public, private and people sectors. But to achieve a just transition to net zero, it is critical that we do this, and do this well and do this right.”
Photos: Bloomberg, Albert Chua/The Edge Singapore
Infographics: BloombergNEF
