Protesters dressed as bankers and coal miners gathered in London this summer brandishing a banner that read: “Barclays ♡ Coal: UK’s #1 Coal Bank.”

The UK lender is one of Europe’s biggest financiers of coal-consuming utilities, extending £1.5bn in loans and underwriting since November 2018, according to environmental lobby group Europe Beyond Coal.

Under mounting pressure from customers and shareholders for action on climate change, a string of banks have announced they will withdraw credit to the most carbon-intensive natural resources projects.

But critics say the sector has been too slow to act, has barely scratched the surface and continues to exploit loopholes to finance the biggest corporate polluters. The world’s 35 biggest banks have lent and underwritten $2.7tn to oil, gas and coal companies since the 2015 Paris climate agreement, according to the Rainforest Action Network.

Banks that have made carbon pledges have targeted low-hanging fruit such as thermal coal and oil sands projects, the dirtiest and often smallest parts of their lending. And despite expectations that the coronavirus pandemic will accelerate the transition towards cleaner fuels, there is a question over how far the banks might go. 

“What NGOs want is for us to move away from the sector as quickly as possible. But that is not the most responsible way to manage this transition,” said Cécile Rechatin, director of environmental and social standards at Société Générale. 

Bar chart of Aggregate value from 2016 ($bn) showing Bank with the largest loan exposures to fossil fuel companies

Stopping lending abruptly would not help companies become cleaner, and the role of the banks is to “help them see how they can progressively disengage from the sector, little by little”, she added.

Daniel Klier, global head of sustainable finance at HSBC, believes lenders are not all taking the right approach.

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“Every organisation is drawing lines about what they will and will not do,” he said. “[But] most financing isn’t impacted by saying companies will not finance certain projects. Most activity happens at company level.” 

Despite banks’ support for projects such as the Task Force on Climate-related Financial Disclosures (TCFD), which pushes companies to spell out risks of global warming on their businesses, Mr Klier said such disclosures needed to be standardised — and improved: “We need to get a handle on what pace companies are shifting.”

European banks including SocGen, Crédit Agricole and BNP Paribas were among the first to make strong commitments to cut exposure to the most carbon-intensive parts of the natural resources sector.

Switzerland’s Credit Suisse is the latest to announce it will restrict lending and bond underwriting to thermal coal extractors, coal-fired power generators and companies drilling for oil and gas in the Arctic. However, companies making up to a quarter of their revenues from thermal coal mining or coal power are unaffected.

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Deutsche Bank said in July it was moving away from financing coal miners but it will continue doing business with companies that generate up to 50 per cent of their revenues from coal. 

HSBC, which in 2018 decided to phase out support for the coal sector, only this April removed an exemption that allowed lending to companies with projects in Bangladesh, Indonesia and Vietnam.

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Barclays will no longer support financing of new thermal coal mining projects or the expansion of coal-fired power stations. However, it will continue to lend to corporate clients that own and operate such facilities.

It said the £1.5bn identified by Europe Beyond Coal predated its current position on fossil fuel lending. But while it will reduce credit to clients deriving most of their revenue or power from thermal coal, anything below that threshold remains acceptable. 

In some ways banks are lagging behind the industry. Big diversified mining groups have already started to retreat from thermal coal, under pressure from investors such as Norway’s $1tn sovereign wealth fund.

Rio Tinto sold its last coal mine in 2018, while Anglo American, BHP and Glencore also have divestment plans.

Privately, mining executives view banks’ pledges to move away from coal as little more than “greenwashing”, and say they have not been forced to find alternative forms of capital or suffered an increase in funding costs.

They also point out that none of the big mining houses generates anywhere near 50 per cent of their sales from coal. At Glencore, the world’s biggest producer of seaborne thermal coal, the fossil fuel accounts for just 6 per cent of revenue.

Moreover, only a few large coal mines are under development globally and not all require outside finance. One of the biggest is the Carmichael project in Australia, which owner Adani plans to self-fund. 

Column chart of $bn showing Total bank financing for fossil fuel companies

Where the big miners could face problems, executives concede, is when they look to divest thermal coal assets. If BHP cannot find a buyer for its thermal coal mines and decides on a demerger, it is not clear how many banks would be able to provide credit and loans to a business solely focused on coal. Equally, many investors may be forced to sell the shares they receive.

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Anglo American will have to address these questions as it looks to demerge its South African thermal coal business, although local attitudes towards coal, still a cheap source of power, are very different from in Europe.

In Europe, too, many utilities have sold or swapped out of fossil fuel assets in recent years. But economies such as Poland and Germany remain reliant on coal power, and other utilities have argued that coal assets are needed for the sake of energy security and affordability during the energy transition.

But there is only one direction of travel, analysts say, with oil companies now also in line of sight. Although some of the biggest oil majors, which have sought to placate activist shareholders with big announcements on cleaner energy projects, have yet to see a difference in cost of capital, others have not been so lucky. 

Michele Della Vigna, analyst at Goldman Sachs, said that “for a pure-play oil exploration and production company today, it becomes almost impossible to finance new long-term big oil projects”.

For Mr Klier, the stakes are clear.

“If we don’t manage to transition, the top 100 most polluting companies, including oil and gas, coal, utilities, cement and steel,” he said, “we will have no economy.”

Via Financial Times