As long-term investors, we recognise that tangible action is needed to tackle the urgent climate crisis we face. Phasing out financing for coal-fired power plants (CFPPs) is a crucial step towards a more sustainable global economy and for this reason we initiated a thematic engagement with banks on their financing of such plants in Asia. Initially, we focused on Singaporean banks, but we have since expanded our engagement to banks in Japan and China.
Through the Paris Agreement signed in 2015, nearly every nation on earth committed to limit the average global temperature rise to 2 degrees Celsius, and to pursue efforts to limit the increase to 1.5 degrees. In the four years since the Paris Agreement was adopted (2016-2019), the biggest global banks have funnelled $2.7 trillion into fossil fuels.4 Continued bank financing for coal projects undermines the Paris Agreement. In fact, the disruption unleashed by Covid-19 has highlighted how much worse the consequences of climate inaction could prove.
Coal-fired power plants release more greenhouse gases per unit of energy produced than any other electricity source.5 In fact, the UN's Intergovernmental Panel on Climate Change has said that coal-fired electricity must end by 2040 if we are to limit global warming rises to 1.5 degrees Celsius.6 While financial support for coal projects across the globe is declining, in South East Asia the pipeline of financing for coal power is growing. As a result, we initiated our engagement in the region back in 2018, initially focussing on Singaporean banks due to their critical signalling effect for the region.
The power of engagement
Over the years, Singaporean banks have introduced climate change and responsible finance policies, with the aim of reducing their financing of CFPPs where appropriate. However, in our view, the original policies were not specific enough and continued to permit new CFPP financing in emerging markets.
With this in mind, Fidelity's Asia banks analyst and our Sustainable Investing team engaged with the chief sustainability officer of a leading Singapore bank, discussing its sustainability strategy and approach to CFPP financing. The bank committed to speaking with its lending partners in the region about their coal exposure and to report in accordance with the Taskforce on Climate-related Financial Disclosure (TCFD) recommendations. TCFD recommendations on climate-related financial disclosures are structured around four thematic areas: governance, strategy, risk management, and metrics and targets. We have been urging banks to report on all four areas, with a focus on risk management.
In addition, we collaborated with several institutional investors through a Singaporean-based ESG consultancy, with the aim of encouraging the major banks in the country to forego short-term opportunities in coal and to improve their climate change strategies.
Representatives from each asset manager, together with the consultancy, collaborated on a joint statement calling on Bank A, as well as other banks (B and C), to implement an outright ban on coal financing. Before the statement could be read out as intended at the banks' AGMs in April 2019, Bank A announced it would no longer offer financing to coal-fired plants anywhere (except its current projects, to which it remains contractually obliged), thus conceding to the wishes of a significant proportion of its shareholders.
Bank B quickly followed suit. Bank C had no policy relating to coal financing. Our jointly signed letter was sent to them and read publicly at their AGM in late April 2019, encouraging more transparency on the issue and a blanket ban on financing coal-fired facilities. The bank committed to changing its policy at the AGM and it later announced that it would also stop funding CFPPs and would focus on renewable energy projects instead.
We believe this is an excellent example of the good that can come from both constructive engagement and collaboration across the industry. We also intend to continue to promote increased climate risk disclosure in line with TCFD guidelines from all regional banks.
Engaging further afield
In early 2020, we decided to expand our engagement to Japan as the Japanese Government and Japan's commercial banks are among the largest coal financiers in the world. We wrote to the three largest commercial banks in Japan, specifically encouraging them to tighten their coal policies further to cease financing new CFPP's globally and to request reporting according to TCFD.
All three banks that we engaged with have since tightened their coal policies, reducing the exceptions that were previously allowable and stating that they would not finance new construction of coal power. Each bank has still allowed for some exceptions; for example, they might consider financing projects which use environmentally friendly technologies, such as ultra-supercritical pressure power plants.
At the end of 2020, we expanded this engagement further to concentrate on Chinese banks. We joined a collaborative engagement run by an ESG consultancy called Asia Research and Engagement (ARE), participating in a letter written to five large Chinese banks. This requested an engagement to discuss important topics such as their ESG risk management practices, lending policies to high environmental risk sectors and climate risk scenario analysis.
We have set-up collaborative engagements with these banks which we aim to conclude in the first half of 2021. We also plan to further expand our engagement to banks in other countries in Asia such as Malaysia.
Moving towards a more sustainable future
As the most heavily polluting fossil fuel, coal should have no future in the global energy mix. We firmly believe that given its severe climate impact, coal should be rapidly phased out globally as we move towards a future with smarter and more sustainable energy options. Through active engagement, which is the cornerstone of our sustainable investment strategy and a crucial component to our role as stewards of client capital, we are continuing to play our part in making this a reality.
Sources: 1 IMF: A greener future starts with a shift towards coal alternatives, 2 World Coal Association, 3 ICCR: Fossil Fuel Financing, 4 Banking_on_Climate_Change__2020_vF.pdf (ran.org), 5 https://www.greenamerica.org/fight-dirty-energy/amazon-build-cleaner-cloud/coal-why-it-dirty, 6 Global Warming of 1.5 ºC — (ipcc.ch)
Important information
This content is for investment professionals only and should not be relied upon by private investors.
The value of investments (and the income from them) can go down as well as up and you may not get back the amount invested. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. A focus on securities of companies which maintain strong environmental, social and governance (ESG) credentials may result in a return that at times compares unfavourably to the broader market. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security's ESG credentials can change over time. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments in emerging markets can also be more volatile than other more developed markets. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document and current and semi-annual reports, free of charge on request, by calling 0800 368 1732. Issued by Financial Administration Services Limited and FIL Pensions Management, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0421/34283/SSO/NA
