Australian banks give coal the cold shoulder

The coal sector feels the heat, with leading domestic and international banks increasingly reluctant to lend

After a four-year legal battle, Indian energy giant Adani is getting closer to finally winning approval for its Carmichael coal mine in central Australia. The company could be forgiven for wondering whether it was worth the hassle. 

Appetite for lending to fossil fuels has weakened since the Indian company put forward the $16 billion project in 2010. There is speculation it may now be struggling to secure finance.

National Australia Bank and Commonwealth Bank of Australia publicly withdrew their support in 2015, and several other foreign banks have stated their intention not to fund the mine including Standard Chartered, HSBC and Deutsche Bank.

“The fact that there hasn’t been any major announcement since Adani cleared its final legal hurdle in August would suggest it can’t raise the required debt,” said Emma Herd, chief executive of the Investor Group on Climate Change (IGCC) in Sydney.

This is not an isolated example. Banks around the globe have become increasingly wary about lending to the coal sector as evidence mounts that it is not only risky and environmentally unpalatable, but potentially unprofitable.

Several Australian banks were left holding bad loans when US coal producer Peabody Energy went bankrupt in April. Analysts speculated that a A$100 million-plus increase in ANZ’s bad debt provisions at the time was largely due to loans to the failed firm.

Banks were also hurt by their support for Whitehaven Coal when it secured a much-needed A$1.4 billion refinancing package in March 2015. Within a year the company’s share price had fallen 65% and banks were reported to be taking a 20% haircut as they tried to offload the securities in the secondary market.

Christina Tonkin, ANZ

“This was an a-ha moment for the industry, though I wouldn’t say it took us by surprise,” said Christina Tonkin, head of loans and specialised finance at ANZ. “We have been encouraging our mining and energy related customers to plan for potential transition risks associated with climate change including investor and bank market liquidity.”

There certainly appears to have been a reduction in bank liquidity. But its impact have remains an open question.

Two-degree target

At the Paris climate accord in December 2015, Australia’s big four domestic banks took a unified stance by announcing they would tailor their lending and investment activities to support an economy that limits global warming to less than two degrees.

Asked how they intend to achieve this, the banks point to support for renewable energy projects and green bonds. All four have issued targets for writing new sustainable loans, ranging from A$10 billion to A$18 billion over the next three to five years.

But lobby groups say banks must do more to meet their two-degree commitment. They must also stop lending to dirty fossil fuels, particularly coal.

Julien Vincent, a lead campaigner at green banking lobbyist Market Forces, estimates that since the Paris accord, for every A$1 invested in renewables, Westpac has loaned A$11.60 to fossil fuels, ANZ A$10.10 and CBA A$4.25. In total, the institutional and corporate arms of the banks funnelled A$18.2 billion into coal mining, transport and power generation between 2008 and mid-2016 (see table).

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At the consumer bank level, support for the coal industry extends even further, deep into the corners of Australia’s economy. In New South Wales and Queensland whole towns survive on coal production, meaning banks are heavily exposed through their mortgage and small business loan books.

“It would be almost impossible to accurately calculate indirect exposure to the coal sector, but it highlights the need for banks to align their intentions and their actions,” said Vincent. “They can’t be serious about their commitment to carbon reduction if they are still financing the expansion of coal mines and ports.”

Policy statements on climate action vary from bank to bank but the wording is often woolly. Sources say the government puts a lot of pressure on banks not to make blanket statements about ruling-in or ruling-out lending to coal projects.

Only ANZ has been specific about exclusions, pledging not to lend to new coal-fired power plants unless the carbon emissions are less than 800 kilograms per megawatt hour.

Westpac: renewables

In the main, the banks play a game of follow the leader, said Herd at IGCC, who prior to joining the investor group spent 15 years on the inside at Westpac, ultimately as head of emissions and environment.

“They just go along with what their peers are doing. They might say no to one deal today, but yes to another one tomorrow,” she said.

“The banks listen to what the commodities houses say about global demand for coal — and at the moment they are forecasting total volumes to rise even as coal declines as a percentage of the energy mix. With volumes rising the picture is complicated as technically banks are incentivised to keep lending over the immediate term.”

Of course, lending decisions are always made behind closed doors in conversations between debt bankers and their bosses, or in credit committee meetings. “Banks don’t broadcast the deals they reject,” said Herd, believing there is anecdotal evidence that more coal deals are being vetoed — Adani being a case in point.

Turning down deals

Michael Chen, head of sustainability at Westpac Institutional Bank, said Westpac applies a sustainability risk management framework to every deal that passes through the bank. “If we aren’t comfortable with a particular risk profile of a transaction, we don’t proceed,” said Chen, declining to give concrete examples of when or how often this happens.

Westpac’s exposure to the mining sector — including auxiliary services — has dropped from A$14.4 billion last year to A$11.3 billion this year. In terms of electricity generation, fossil fuels now make up 41% of the portfolio down from 55% five years ago. The rest, said Chen, is in renewables.

Didier Van Not, Westpac’s head of trade, asset and structured finance, expects the bank’s exposure to fossil fuel power generators to reduce further as outstanding loans come up for refinance or plants close down. “We have already had situations where we haven’t participated in refinancings,” he said. “In these cases we have worked with our clients to find finance from other sources or to inject equity.”

Christina Tonkin said ANZ is not prescriptive about how it plans to manage down its exposure to fossil fuels, but that it will be “transitioned responsibility over time”. 

“Our exposures to the most carbon-intensive sources of energy generation have declined over the past year, partly as an outcome of active portfolio management,” she said.

“Managing existing exposures is always more complicated than making decisions about new loans,” said Tonkin, who has been has been reviewing in detail the banking syndicates in which ANZ is a party. “Appetite is shifting among global players and we don’t know how banks are going to behave in four to five to six years’ time.”

Steve Lambert, NAB

Steve Lambert, head of capital financing at NAB, says banks are now more aware of environmental risks and deals that would have sailed through seven years ago now meet headwinds.

Lambert said he has turned down deals based on their carbon credentials. “Last year we were involved in structuring a deal for a fossil fuel logistics company, but when it came time to decide whether we join the syndicate we just couldn’t get comfortable with the climate risk, so we walked away from the money and the customer relationship.”

But excluding fossil fuels from a portfolio becomes problematic when the borrower is a diversified conglomerate — like BHP Billiton or Rio Tinto — that operates a centralised treasury. Their sheer size means few banks would walk away entirely.

“Sometimes you can offer finance around purpose which means you can exclude lending to certain activities — it depends on the customer’s corporate structure — but often it’s not possible,” said Lambert.

Whether the banks’ retreat inflicts collateral damage on an industry that employs tens of thousands in Australia will depend on the influx of other institutions to fill the gap.

Asian banks, in particular, could prove the deciding factor.

Chinese and Japanese banks have long supported Australian coal. By far the biggest lender to coal mines in the country, according to Market Forces, is Bank of China with nearly A$3.5 billion extended to mining projects from 2008 to mid-2016. Other big lenders include Bank of Tokyo Mitsubishi and Sumitomo Mitsui from Japan, and State Bank of India.

“Over the years, Asian banks have become bigger players in the Australian market and it only stands to reason that they would be willing to step into a market that has become unpalatable to the local banks,” said a Sydney-based banker who declined to be named.

“Chinese and Asian banks are motivated by different factors. I expect it will be many years before they really start talking about their contribution to a low carbon future, except maybe in their own countries.”

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