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Thermal coal in Asia: the real risks for investors

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World Coal,

Japanese project lenders are increasingly isolated globally in their exposure to coal power. Amid greater shareholder scrutiny on climate risk, their disclosure remains poor.

These are the key findings of new research from London based think tank InfluenceMap, which examines the exposure of Japanese financial institutions to thermal coal power projects in three key emerging markets - India, Indonesia and Vietnam. Japanese banks have financed 11 operational plants in these countries with another 10 planned or under construction, representing over 26 GW of coal generation capacity.

"Storebrand has long considered that thermal coal assets have no place in our portfolios. The IPCC's 2018 Global Warming of 1.5°C report has stated loudly and clearly the role of thermal coal in economies globally is limited. We are concerned therefore than some of the world's largest financial institutions are still lending to new coal power projects, particularly in emerging markets in Asia which are bearing the brunt of the physical impacts of climate change," said Jan Erik Saugestad CEO, Storebrand Asset Management AS.

These emerging Asian economies are already experiencing the catastrophic impacts of climate change. At the same time, they are seeing renewable energy rapidly undercutting the cost of coal power, threatening the economic viability of existing and new coal projects. They are also seeing increasingly sophisticated and well-funded global campaigns targeting coal financing and the brands of banks involved are driving the stigmatisation of the fuel, generating unquantifiable reputational risks for the institutions still involved in coal power.

These trends have prompted more than 100 major financial institutions globally to make commitments to restrict or eliminate financing of thermal coal. These include many of the world’s top 10 global project lenders including Santander, BNP Paribas, Natixis, ING and Credit Agricole, all of which have robust policies in place. InfluenceMap’s analysis finds that, in contrast to their European peers among this top 10, Japan’s Big Three banking groups (Mitsubishi UFJ, Mizuho and Sumitomo Mitsui) stand out for their weak coal financing policies, which contain numerous loopholes and effectively enable ‘business as usual’ scenarios.

"As a global asset manager, we hold significant investments in Japan. However, we are increasingly concerned that companies in the region may not be taking full advantage of the opportunities presented by the rapidly growing low-carbon markets. We believe a key factor behind this is the continued financing of coal power by lenders and investors in Japan and in emerging markets. Such financing inhibits global efforts to address climate change and may lead Japan to miss out on a major market transformation. The stability of the climate is critical to the stability and success of our global financial systems and is therefore relevant to the entire investment community," stated Shin Furuya, Impact Investment Strategist, Domini Impact Investments LLC.

The IPCC's 2018 Global Warming of 1.5°C report implies the need for a global phaseout of coal power in the near term to achieve the goals of the Paris Agreement, of which Japan is a signatory. Similarly, research from financial ratings groups S&P, Moody's and Fitch in the last six months has suggested an unfavourable future for thermal coal in Asia and the strong potential for asset stranding. Investor-driven climate processes like the Task Force on Climate-related Financial Disclosures (TCFD) are gathering steam in Japan, with the Ministry of Economics, Trade and Industry (METI) in particular promoting the country's leadership on TCFD.

As the TCFD meets in Tokyo in October, it is likely there will be mounting shareholder pressure on Japanese financial institutions to explain their continued exposure to thermal coal, the full extent of risks to their balance sheets and brands and how they intend to manage these risks - particularly as they stand isolated among the world's top project lenders who are exiting coal lending globally.

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