Banks to evaluate CO2 emissions on loans

Wall Street banks have come up with a set of principles to guide them in evaluating carbon risks in an environment of evolving climate policy.
Three Wall Street banks have announced they will set standards to factor in the risks posed to the environment from carbon emissions when lending to power companies that want to build coal-fired power plants.

Citi, JPMorgan Chase and Morgan Stanley have formed the Carbon Principles which are a set of climate change guidelines aimed at advisers and lenders to power companies in the US.

ôThe need for these principles is driven by the risks faced by the power industry as utilities, independent producers, regulators, lenders and investors deal with the uncertainties around regional and national climate change policy,ö the banks said in a statement.

The principles were developed by the banks over a nine-month period and in consultation with leading power companies American Electric Power, CMS Energy, DTE Energy, NRG Energy, PSEG, Sempra and Southern Company. Environmental Defense and the Natural Resources Defense Council, which are both environmental non-governmental organisations, also advised on the creation of the principles.

"Leading utilities and financial institutions understand that the rules of the road have changed for coal," says Mark Brownstein, managing director of business partnerships at Environmental Defense. "These principles are a first step in facilitating an honest assessment of electric generation options in light of the obvious and pressing need to substantially reduce national greenhouse gas pollution."

According to the banks, the carbon principles recognise the benefits of a portfolio approach to meeting the power needs of consumers, without prescribing how power companies should act to meet these needs. However, if high carbon dioxide (CO2) emitting technologies are selected by power companies, the signatory banks have agreed to follow an "enhanced diligence" process and factor these risks into the final financing decision.

"There was full and frank dialogue around the table," said Matt Arnold, director of Sustainable Finance, which helped coordinate the principles process. "There was a remarkable amount of debate and exchange of information and views among the banks, power companies and environmental organisations. The dialogue resulted in a rigorous analysis of the carbon risks in power investments, and sets the stage for further discussion."

The three banks pledged their commitment to the principles and will use them as a framework when talking about these issues with clients. The aim is to create a "consistent approach among major lenders and advisors in evaluating climate change risks and opportunities in the US electric power industry", they stated. "The principles and associated enhanced diligence represent a first step in a process aimed at providing banks and their power industry clients with a consistent road map for reducing the regulatory and financial risks associated with greenhouse gas emissions."

The three lending principles are the following:

- Energy efficiency: The financial institutions will encourage clients to invest in cost-effective demand reduction, taking into consideration the value of CO2 emissions that are being avoided, and they will encourage regulatory and legislative changes to increase efficiency in electricity consumption, including the removal of barriers to investments in cost-effective demand reduction. The institutions will consider demand reduction caused by increased energy efficiency (or other means) to assess its impact on proposed financings of certain new fossil fuel generation.

- Renewable and low-carbon distributed energy technologies: The banks plan to encourage clients to invest in cost-effective renewables and distributed technologies, again taking into consideration the value of CO2 emissions that are being avoided, and they will encourage legislative and regulatory changes that remove barriers to and promote such investments. The banks will also consider production increases from renewable and low-carbon generation to assess their impact on proposed financings of certain new fossil fuel-fired generation.

- Conventional and advanced generation: Besides renewables and energy efficiency, investments in conventional or advanced generating facilities will be needed to supply reliable electric power to the US market, which may include power from natural gas, coal and nuclear technologies. Because of an evolving climate policy, investing in CO2-emitting fossil fuel-fired generation entails uncertain financial, regulatory and certain environmental liability risks, and the enhanced diligence process would assess and reflect these risks in the financing considerations for certain fossil fuel-fired generation. The banks also will encourage regulatory and legislative changes that facilitate carbon capture and storage to further reduce CO2 emissions from the electric sector.

"To move the needle on global warming, clean energy technologies need to be developed, demonstrated and deployed as quickly as possible," said NRG chief executive David Crane. "Given the capital-intensive nature of this challenge, we welcome these carbon principles as a sign that America's leading financial institutions are ready to support a massive increase of investment in clean energy solutions. With the support of both Wall Street and public policymakers in Washington, the American power industry can lead the way in achieving the dramatic GHG (greenhouse gas) reductions that are critical to the health of both our economy and our planet."

Dale Bryk, senior attorney at the Natural Resources Defense Council, adds: "Expectations are rising fast for this industry. Global warming is changing the competitive landscape. Clean power is the name of the game today. Conventional coal facilities are already facing intensive scrutiny. We think the serious money is increasingly going to be on clean, efficient solutions."
¬ Haymarket Media Limited. All rights reserved.

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