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When will Japanese megabanks stop financing coal?

During the 24th Conference of the Parties to the UNFCCC (COP24) in Katowice, Poland in December 2018 the German environmental organization Urgewald and international group BankTrack released a research report identifying banks and institutional investors that are supporting new coal plant development. There was no surprise to find three Japanese megabanks on the list (Sumitomo Mitsui, Tokyo Mitsubishi UFJ, and Mizuho).

Massive funding pipeline for coal plant development

According to the Urgewald/BankTrack Report, from January 2016 to September 2018, 235 commercial banks had provided more than $US 101 billion in direct loans to the world’s top 120 coal plant developers. At the top of the list was the Mizuho Financial Group at $US 12.8 billion in loans, followed by Mitsubishi UFG Financial Group (MUFG) at $US 9.9 billion. During the same period, Japanese commercial banks including those two had provided 30% of all lending to coal plant developers. Among developed countries, Japanese banks are a top driver of coal plant development. In addition, they support the new construction of about 40 coal plant units since 2012. This figure includes some units already under construction.

Megabanks under pressure to change

However, the world is increasingly scrutinizing the financing of coal power, and even Japan’s megabanks cannot ignore this trend. There is a movement under way to change course on investments in coal power. In May 2018, the Mitsubishi UFJ Financial Group was the first Japanese bank to announce it would seriously review financing for coal power. Then in June, the Sumitomo Mitsui Banking Corporation declared a policy, in principle, of not financing coal unless it was for ultra-super critical technology (USC), which it considers to be highly efficient. The same month, the Mizuho Financial Group announced a policy of more carefully considering investments in coal power. It is reported that the three megabanks would regularly review their policies and would in the future be increasingly rigorous toward coal.

Despite these announcements, their coal policies are filled with loopholes. They will still consider exceptions and provide coal financing if it is for efficient technology, if a project complies with OECD guidelines, and if the Japanese government is providing co-financing (i.e., with the Japan Bank for International Cooperation, JBIC). The Japanese government to this day is still promoting coal power as baseload power supply, so no major policy changes are yet on the horizon.

Some banks have taken positive steps

The three megabanks mentioned above left big loopholes in their policies, but Sumitomo Mitsui Trust Bank took a bigger step forward than others. In July 2018, the trust bank’s integrated report stated clearly that it would no longer be providing lending for coal plants in Japan and overseas, including USC. A report by Sumitomo Mitsui Trust Holdings declared the same policy although it is still not perfect that they would still allow exceptions on a case by case basis, considering factors such as OECD guidelines and environmental impacts.

Financial institutions

Bank Announced Details Loopholes & problems
Mitsubishi UFJ Bank Financial Group May 2018 “Carefully” consider financing Fund coal power with high efficiency power generation, carbon capture and storage (CCS). Defers to OECD Arrangement on Officially Supported Export Credits
Mizuho Bank Financial Group June 2018 Credit decisions will be made based on verification of energy efficiency, alternative technology, etc.
Sumitomo Mitsui Banking Corporation June 2018 Provide new lending only for USC or high efficiency plants Provide loans for USC or better. Policy only applies to new projects. Will consider exceptions for government supported projects.

 

Sumitomo Mitsui Trust Bank July 2018 In principle, not engage in new coal plant construction projects “Carefully” consider exceptions based on OECD guidelines, energy efficiency, environmental impacts, etc.

Japanese insurance companies have also announced coal power-related policies. Nippon Life and Daiichi Life said they would no longer provide project financing relating to coal power generation. But there are no records nor plans to finance coal projects by these insurance companies, therefore it doesn’t change the world. Among Japan’s large trading companies, Marubeni took the lead by announcing it would not be involved in new coal plant construction. However, besides having the largest coal portfolio among Japanese trading companies, it will still allow exceptions for coal plants currently planned or under construction, will accept coal using “best available technologies” (BAT, which currently includes USC), and will still consider exceptions if they are aligned with national policies. We have pointed out that Marubeni’s policies are still inadequate in terms of climate responses.

Insurance companies

Insurance companies Announced Details Loopholes and problems
Dai-Ichi Life Insurance May 2018 Not provide lending (project finance) for coal plants overseas Exceptions allowed for coal plants in Japan
Nippon Life Insurance Company July 2018 No longer extend loans (project finance) for or invest in new coal plants in Japan and overseas Does not completely reject coal power. Consider investing/lending in new coal plants with CCS
Meiji Yasuda Life Insurance Company Sept 2018 In principle, no longer provide new project financing for coal power as of Oct 2018 in Japan or overseas, and will stop corporate financing/investing for coal plant upgrades Still permit new financing of USC as an exception to its lending principles
Japanese banks still lag behind global coal exit trend

These summary tables indicate that the three megabanks did make some progress in 2018 by adopting stricter criteria for the financing of coal power, but not one of them went so far as to completely stop lending and investing in coal power projects. In the international context, their policies are still lukewarm and riddled with loopholes, so it is fair to question their real impacts.

While rest of the world moves to phase out coal, Japanese banks that continue financing coal will attract international rebuke and may also face the risk to see their ratings decline as financial institutions. Financial exposure to coal will result in lower investor valuations. Companies could be left with stranded assets if coal plant operating ratios drop in the future.

On the global stage, French bank BNP Paribas, the German Deutsche Bank, the American JPMorgan Chase and other major western financial institutions have either completely stopped or significantly reduced new lending and investment in coal power, and they are moving ahead with more stringent financing criteria and implementation of policies. Among large insurers as well, the French firm AXA and Swiss firm Zurich Insurance are no longer investing in coal-related companies.

As environmentally, socially, and governance-conscious (ESG) investment becomes more mainstream, the headwinds for coal power will probably only get stronger. These winds are starting to blow stronger in Japan. How much longer will Japanese megabanks and the rest of the banking industry continue supporting coal?

References: Press Release from NGOs

  • [For Immediate Release]Environmental NGOs Evaluate SMBC’s New Sector Policies on Coal-fired Power, Palm Oil and Deforestation : “A policy showing little progress with a concerning loophole that does not align with the Paris Agreement”(Link)
  • [For Immediate Release]”A small step forward on climate change risk management, but bolder action required”- Environmental NGOs Respond to Release of New Mizuho Financial Group Financing Policy (Link)
  • 【Press Release】 “A small step forward, but not nearly enough”- Environmental NGOs Respond to Release of New MUFG Environmental, Social and Human Rights Policy (Link)
  • [Press Release] Major insurer Nippon Life sets benchmark in Japan by dropping coal power project finance – NGOs welcome “blanket restriction”- (Link)
  • 【For Immediate Release】 Meiji Yasuda Life Insurance’s new coal policy poses serious question over Japanese financial sector’s effectiveness in tackling climate change (Link)