The Asia-Pacific chapter of GFANZ is expected to publish guidance setting out how financial institutions can rewrite their coal exclusion policies and adopt other safeguards if they decide to finance the early retirement of coal-fired power plants.
Banks and investors have been subject to strong public pressure to pull financial support from coal producers in recent years, due to the commodity’s role as the biggest single contributor to climate change.
However, there is a growing realisation that these policies could limit the capital needed to retire coal plants. This is particularly relevant in Asia, where coal plants are young, insulated from competition, and could theoretically operate well beyond the 2040 global deadline to stop using coal envisaged by the IEA.
In an earlier draft of guidance put out for consultation in June, GFANZ APAC said these policies could “exclude financing to those countries and entities which have credible plans to accelerate the phaseout of coal… [and] inadvertently hinder phase-out efforts and the delivery of climate goals”.
Financial institutions will also be concerned about the spike in financed emissions that would result from increasing their exposure to coal, as well as potential reputational risk.
The forthcoming guidance could provide a way for investors and banks to generate time-bound returns from coal, while continuing to align with their broader institutional climate goals.
The new guidance will build on the version produced in June. However, the earlier draft did not set out a clear course of action for financial institutions with existing coal policies.
It is expected that GFANZ APAC will provide a menu of possible templates that financial institutions can adopt in place of their current coal and climate policies, in addition to guidance that provide exemptions for energy transition investments in financed emissions accounting and climate target-setting.
The guidance may also include criteria on the treatment of sustainability-linked bonds, or other labelled debt, issued by coal producers that have committed to a phase-out.
Responsible Investor understands that there was some support in the GFANZ APAC working group for developing the guidance to incorporate the use of green hydrogen to gradually “phase down” coal usage, but this is not expected to make it to the final publication.
A draft copy is now undergoing reviews and is expected to be published at COP28.
A separate initiative to support coal plant phase-out via the issuance of “transition credits” is also expected to publish its methodology at the global climate conference in Dubai.
The initiative is billed as the world’s first “Coal-To-Clean” credit programme and is being spearheaded by the Rockefeller Foundation and Global Energy Alliance for People and Planet (GEAPP).
Revenue generated from the issuance of credits will be allocated to support phase-outs by providing capital for coal plant owners to invest in renewable energy, while supporting the transition of workers and communities away from coal-fired power.
Unlike traditional carbon credits, which can be issued immediately once a project is verified, transition credits can only be issued once coal phase-outs have been delivered, potentially exposing buyers to political or policy risks for a decade or longer.
The methodology is expected to include a minimum threshold for the amount of revenue that must be allocated to fund the Just Transition – a first for the voluntary carbon credit market – and safeguards to prevent carbon leakage through the construction of new coal plants.
This will include requirements on “pairing” coal plants with renewable energy infrastructure, to ensure there is a ready energy replacement for coal once it is taken off-grid.
The methodology will be brought to market by Verra, the world’s largest issuer of carbon credits. Work is currently being done on identifying a suitable pilot project but a decision is not expected to be forthcoming in time for COP28.
The Rockefeller Foundation’s managing director for power and climate Joseph Curtin told RI: “We have a very sophisticated methodology which we are happy to stand up at the end of the year and announce to the world. We are confident that there will be a demand for these credits and we see sovereign buyers as a potentially key market in addition to voluntary carbon market buyers.”
He added: “We are currently losing the battle against coal and losing it badly without some new form of finance – we’re absolutely convinced of that. It’s not going to be green capital from philanthropy that saves us because we just don’t have enough.”