Mitsubishi UFJ Financial Group, the biggest commercial bank in Japan and the fifth-largest in the world, is reportedly considering a ban on lending to new coal-fired power stations.
If the move is confirmed, it will add weight to a growing -- and very welcome -- policy shift among Asian lenders. Not before time, the region's banks are recognizing the global threat from climate change and pulling back from the world's most carbon-intensive energy source. But there must be no backsliding or loopholes for specific projects under a no-coal approach.
Soon after Japanese media reported on MUFG's plans in mid-April, Oversea-Chinese Banking Corp. and DBS Group Holdings, Singapore's two most significant lenders, announced policies to stop financing new coal-fired power plants, becoming the first banks in Southeast Asia to make such commitments.
Earlier this year, China's State Development Investment Corp. became the first Chinese financial institution to announce it would no longer engage in coal financing.
If MUFG and other major Japanese banks now follow suit, the region's financial dominoes will fall in quick succession. Japanese lenders should have the courage to signal the end of coal-fired power expansion -- and the Japanese government should lead the way, especially as this year it chairs the G-20 grouping of top economies.
Action on coal is vital for efforts to keep the expected global temperature rise below 1.5 C, which requires a 50% reduction in global greenhouse gas emissions by 2030, according to the Intergovernmental Panel on Climate Change.
According to the heads of the International Energy Agency and the United Nations Environment Program, meeting the Paris Climate Agreement goals means that we cannot build any more power stations that emit carbon dioxide -- let alone coal plants.
For a region with the biggest pipeline of planned new coal-burning power stations, this should send a clear signal that financing new coal infrastructure in Asia will become increasingly difficult. According to data from CoalSwarm's Global Coal Plant Tracker, current plans envisage the construction of 448,286 megawatts of coal capacity in Asia, on top of the 1,385,107 MW already in existence.
The combination of stricter greenhouse gas emissions controls and accelerated technological advancements in renewable energy threaten to make these new coal-fired power sources obsolete, and banks have taken note.
Closer scrutiny of the OCBC and DBS policies does, however, reveal major loopholes, as the new stated exclusions do not apply to "existing commitments" to build new coal-fired power plants in Vietnam. There's a word for claiming the environmental high ground but not really doing the work -- "greenwashing." These loopholes undermine the banks' environmental credentials and open them up to criticisms of "greenwashing."
One such project in Vietnam -- Van Phong 1 -- highlights the role of the Japanese government and companies in perpetuating the reliance of Southeast Asian countries on coal power.
The Japan Bank for International Cooperation and Nippon Export Insurance -- together with a syndicate of commercial banks including MUFG, Sumitomo Mitsui Banking Corp., Mizuho Bank and Sumitomo Mitsui Trust Bank, as well as Singaporean banks OCBC and DBS -- announced a decision to finance the $2 billion Van Phong 1 on April 19. That was just three days after OCBC revealed its new coal policy.
The move came despite repeated calls from not-for-profit groups for the plant's cancellation due to significant environmental and social concerns.
Alarmingly, Van Phong 1 is to deploy the outdated, so-called supercritical technology, which would be expected to have an emissions intensity between 750 grams and 850 grams of carbon dioxide per kilowatt-hour. This does not comply with standards set by the Organization for Economic Cooperation and Development, which call for the use of more modern ultra-supercritical technology and an emissions intensity lower than 750g CO2/kWh.
As a result, the project fails to meet the policy standards set by SMBC and Sumitomo Mitsui Trust Bank.
SMBC's policy revision in May 2018 stated that the bank would restrict finance to ultra-supercritical coal technology only. Meanwhile, Sumitomo Mitsui Trust Bank's policy adopted in July 2018 stated that it would refrain from financing new coal plant projects in their entirety, regardless of the technology used.
When this was put to Japan's top three banks by a coalition of NGOs and over 500 account holders in February 2019, the only response the banks gave was that they "cannot provide information regarding specific project finance decisions due to confidentiality reasons."
However they said they would "comply with the Equator Principles" -- a risk management framework adopted by financial institutions to determine and manage environmental and social risk in projects.
Looking more closely at the banks' policies however, SMBC's credit policy dated in June 2018 states that "for projects, which we have already committed support from the perspective of energy shortage solution in emerging countries, or where the Japanese government or Multilateral Development Banks support are confirmed will be considered prudently as exceptions." Sumitomo Mitsui Trust Bank's Integrated Report from July 2018 states that exemptions may be considered "on a case-by-case basis, under strict standards that address the environmental impact, such as the OECD Guidelines and the energy efficiency of the specific projects."
These vague declarations amount to loopholes which stand in stark contrast to statements by Prime Minister Shinzo Abe that Japan will take the lead on tackling climate change as this year's G-20 chair.
Commercial banks in Japan and their Asian counterparts have, for decades, generally enjoyed good reputations in Asia as the financial backers of national economic plans. However, more and more young people in the region want financial providers to act with a bigger social conscience and greater respect for the environment.
If decisions to fund new coal power in the region continue, the international reputation of the Japanese government and Japanese banks will decline.
This reputational risk is accompanied by potential regulatory risk. As Bank of England Gov. Mark Carney has warned, climate change will multiply financial risks due to the repricing of carbon-related assets in a post-carbon economy, the increasing physical risks to economic activities from the impact of climate change, and the risks of litigation against companies that fail to respond to society's demands.
Japan as the G-20 chair has a historic opportunity to help shift the energy trajectory of the region from a reliance on coal to a rapid move toward renewable energy -- in line with the Paris Agreement.
Fifty international environmental nongovernment organizations, including 350.org, are calling on Japan's prime minister, companies and banks to show real leadership on climate through the No Coal Japan campaign, by halting any financial support for new coal power projects in Japan and overseas. How Japan's government and banks respond will affect the country's reputation in the region and globally.
Shin Furuno is East Asia Finance Analyst at 350.org, an environmental advocacy organization.