Finance & Investment
HSBC to Phase Out Coal Financing by 2040 — Will Wall Street Follow Suit?

Last week, British banking giant HSBC set out a detailed policy to phase out the financing of coal-fired power and thermal coal mining by 2030 in EU and OECD markets, and worldwide by 2040 — in accordance with International Energy Agency (IEA) recommendations. In recognition of the rapid decline in coal emissions required for any viable pathway to 1.5°C , the plan will see HSBC phasing out finance to clients whose transition plans are not compatible with the bank’s net zero by 2050 target. It builds on current HSBC policy that prohibits finance for new coal-fired power plants and new thermal coal mines; broadening the approach to drive the phase-out of existing thermal coal.

The policy includes short-term targets to help drive measurable results in advance of the phase-out dates. A science-based financed-emissions target will be published in 2022 to reduce emissions from coal-fired power in line with a 1.5°C pathway. HSBC also intends to reduce its exposure to thermal coal financing by at least 25 percent by 2025 and by 50 percent by 2030. Thermal coal financing remaining after 2030 will only relate to clients with thermal coal assets in non-EU/OECD markets and will be completely phased out by 2040. HSBC will report annually on progress in reducing thermal coal financing in its Annual Report and Accounts.

The bank will work with impacted clients and will expect them to formulate and publish transition plans by the end of 2023 that are compatible with its net zero by 2050 target.

HSBC says it will decline to provide new financing (including refinancing) and advisory services to any client that it determines doesn’t engage sufficiently on its transition plan, or where plans are not compatible with HSBC’s net-zero target. Over the next nine years, new finance to clients in EU/OECD markets will be declined where thermal coal makes up more than 40 percent of a client’s total revenues (or more than 30 percent of total revenues by 2025), unless the finance is explicitly for the purpose of clean technology and infrastructure.

Given the bank’s substantial footprint across Asia, with the region’s heavy reliance on coal today and its rapidly growing energy demand, HSBC recognizes it has a critical role to play in helping to finance the region’s energy transition from coal to clean. HSBC will expect its clients to lay out credible transition plans for the next two decades to diversify away from coal-fired power production to clean energy, and from coal mining to other raw materials, including those vital to clean-energy technologies.

“We need to tackle the tough issues head on to deliver on our net-zero commitment, and for a global bank like HSBC with a significant presence across fast-growing coal-reliant emerging economies, unabated coal phase out is right up there,” says HSBC Group Chief Sustainability Officer Dr Celine Herweijer. “Asia’s ability to transition to clean energy in time will make or break the world’s ability to avoid dangerous climate change. Whilst our coal phase-out dates and interim targets are driven by the science, we need an approach that recognizes the realities on the ground in Asia today. The transition will only be successful if development needs are addressed hand in hand with decarbonization goals. Our clients in Asia are at different starting points to their EU/OECD counterparts — with more infrastructure, resource and policy obstacles — but many have declared a strong interest and ambition to invest in the transition and diversify their businesses. The good news is that zero-marginal-cost renewables, rising carbon prices and a terminal contraction in coal demand are factors helping them diversify.”

While more and more banks have begun to mobilize around climate change and have made individual net-zero pledges, their continued investment in polluting sources of energy flies in the face of those pledges — and external pressure has continued to mount to put their money where their mouths are. A January 2021 Market Forces survey found that 80 percent of Barclays and HSBC customers were unaware of their bank’s role in financing continued production of fossil fuels; of those, over one in ten (roughly 3 million customers) said they would be very likely to consider switching to a more ethical bank. To prompt this, campaign group Bank.Green launched a “Swap for COP” campaign to coincide with COP26 — encouraging and facilitating bank customers moving their money away from banks that continue to finance fossil fuels, as one of the simplest and most impactful things that individuals can do to help mitigate the climate crisis.

For its part, HSBC joined the Powering Past Coal Alliance — a global coalition of over 150 governments, utilities, financial institutions, NGOs and others working to advance the transition from unabated coal power generation to clean energy — at COP26; and committed to the Partnership for Carbon Accounting Financials’ Global GHG Accounting and Reporting Standard for the Financial Industry. The bank has also committed to provide between $750 billion and $1 trillion of sustainable finance and investment to support the transition to net zero — including through investment in innovative solutions and sustainable infrastructure. One initiative underway is work with WWF and WRI on a $100 million Climate Solutions Partnership, which aims to unlock barriers to finance for startups developing climate solutions — particularly those developing carbon-cutting technologies, projects that protect and restore biodiversity, and initiatives to help the transition to renewable energy in Asia.

So, while the ball is rolling at a major player such as HSBC, is it rolling fast enough to do its part in helping us avoid catastrophic climate change?

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A new report by Center for American Progress and the Sierra Club finds that the 18 largest US banks and asset managers alone were responsible for financing the equivalent of 1.968 billion tons of CO₂ in 2020. This would make the US financial sector the 5th biggest emitter of CO₂ in the world if it were a country — ranked just below Russia and ahead of Indonesia. The research offers a novel picture of the enormous carbon footprint of US finance and calls for a suite of regulations to be introduced across the sector to bring US banks in line with the Paris Agreement target of less than 1.5° Celsius of global warming.

“Regulators can no longer ignore Wall Street’s staggering contribution to the climate crisis,” says Ben Cushing, Campaign Manager for the Sierra Club’s Fossil-Free Finance campaign. “Wall Street’s toxic fossil-fuel investments threaten the future of our planet and the stability of our financial system — and put all of us, especially our most vulnerable communities, at risk. Financial regulators have the authority to rein in this risky behavior, and this report makes it clear that there is no time to waste.”

The analysis, carried out by leading climate solutions and project developer South Pole, used a first-of-its-kind carbon accounting methodology to calculate the aggregate carbon emissions associated with the lending and investment activities of the US financial sector, based on an indicative sample. While the analysis clearly demonstrates the scale of impact from financial institutions in driving climate change, it likely represents a gross underestimate, as it relies on public disclosures that exclude crucial data — including emissions related to advisory services and underwriting and estimations of Scope 3 emissions for bank clients. Scope 3 emissions account for 88 percent of emissions for oil and gas companies.

In addition to coinciding with the HSBC announcement, the timing of the report is meaningful because it demonstrates how the financial industry takes advantage of weak disclosure rules to obscure understanding of its contributions to global emissions. Narrow public disclosures by banks do not include transaction-level data in their estimations of credit exposure. In the coming weeks and months, both the OCC and SEC will be considering rules that can — and should — directly address this shortcoming. This report can help inform their decision-making.

According to the IPCC’s latest edict, global emissions need to fall by 45 percent from 2010 levels before 2030 to limit global warming to 1.5°C and avoid catastrophic climate change. This year, the IEA stated that for the world to reach net-zero emissions by 2050, there must be no new oil and gas development. Unfortunately, pledges from the finance sector at COP26 last month have been widely criticized for a lack of concrete targets or timelines; a failure to directly address banks’ support of fossil fuel companies; and a reliance on watered-down “intensity” targets on emissions, instead of absolute targets.

Meanwhile, banks continue to pour money into fossil fuels. In fact, since the signing of the Paris Agreement in 2015, the world’s largest 60 banks alone have provided $3.8 trillion to the fossil fuel industry.

President Biden has set ambitious targets for emission reductions in the US; but so far, his administration has been stymied by bipartisan gridlock and fallen short of utilizing its regulatory and policymaking powers to address the role of corporations in driving climate change. The report recommends numerous immediate and specific steps federal financial regulators can take to account for the imminent systemic threat of climate change, including reforms to capital markets regulation and regulations regarding capital requirements and supervision of banks.

Fossil fuel investments represent a large systemic financial risk in and of themselves. As the climate changes and as the world moves towards cleaner and cheaper renewable energy, fossil fuel assets are increasingly at risk of being “stranded” — whether because the world is forced to move to cleaner energy or because of the impacts of climate change itself. As the report notes:

“According to insurance provider Swiss Re, climate change could reduce global GDP by 11 percent to 14 percent by 2050 as compared with a world without climate change. That amounts to a $23 trillion loss, causing damage that would far surpass the scale of the 2008 financial crisis.”

The report replicates a similar approach to one by Greenpeace UK and WWF that found that the UK financial sector was responsible for over 800 million tons of CO₂ equivalent, nearly double the UK’s total emissions.

“Climate change poses a large, systemic risk to the world economy. If left unaddressed, climate change could lead to a financial crisis larger than any in living memory,” said Andres Vinelli, VP of Economic Policy at the Center for American Progress. “The US banking sector is endangering itself and the planet by continuing to finance the fossil fuel sector. Because the industry has proven itself to be unwilling to govern itself, regulators including the SEC and the OCC must urgently develop a framework to reduce banks’ contributions to climate change.”