The Asia-Pacific chapter of the Glasgow Financial Alliance for Net Zero (GFANZ) has published guidelines for financial institutions that want to allocate capital to support the early retirement of coal assets in the region.
The growing popularity of policies restricting investment in coal projects could prevent the financing of entities with “credible plans to accelerate the phase-out of coal” and inadvertently hinder efforts to exit the sector early, GFANZ warned.
Around 200 major bank and investors have coal-related measures in place, according to recent data from climate thinktank IEEFA.
The GFANZ framework, released in draft form today, aims to “provide confidence” so that financial institutions can identify credible phase-out plans for coal assets that are science-based and demonstrate absolute emissions reductions compared with business-as-usual operations.
The need to end coal dependency is acute in APAC, where coal plants are relatively young – 14 years old on average, compared to around 45 years in the US and Europe – and insulated from market forces due to different forms of state ownership, long-term energy contracts and subsidies.
Coal plants in APAC account for one-fifth of global emissions, and a dependency on the commodity is expected to continue without intervention due to the relatively higher costs of switching to gas in the region.
Under the GFANZ framework, eligible coal phase-out plans must include commitments not to develop new coal projects after reaching financial close and a retirement date aligned to a net-zero pathway. Coal entities also need to put in place retraining schemes and other support to mitigate economic hardship on communities.
The alliance has not proposed a hard-cap on the number of years that coal plants can be allowed to operate under a phase-out plan but has suggested a 35-year limit. This is in line with the newly published ASEAN taxonomy, which is the first of its kind to categorise coal phase-out as a green activity.
GFANZ has recommended that phase-out plans should be verified and stick to national-level climate targets and policies, but added that financial institutions should also source independent analysis “where national-level planning is absent or nascent”.
The organisation advised members to take care to prevent incentivising the building of new coal plants or extending the runtime of existing plants by giving the impression that such projects would be able to take advantage of phase-out financing.
Supporting managed phase-outs for dirty assets is one of GFANZ’s four headline financing strategies. The others are financing climate solutions, financing entities that are already aligned to a 1.5C pathway and enabling entities to decarbonise.
The draft guideline notes that GFANZ members are “not automatically expected to adopt” the guidance, and should do so as long as it is “consistent with members’ fiduciary and contractual duties and applicable laws and regulations, including securities, banking and antitrust laws”.
Ravi Menon, GFANZ APAC chair and managing director of Singapore’s central bank, described the coal phase-out as “the mother of all transitions” at the framework’s launch. “Financial institutions will need to justify how such financing is consistent with their net-zero commitments, especially when their financed emissions rise over the short term,” he said.
Menon, who also chairs green central banking network the NGFS, said that government policies such as removing fossil fuel subsidies, introducing carbon pricing and setting emissions standards would also be required to end coal dependency.
The guidance was launched at the inaugural GFANZ APAC summit and will be open for public feedback until 4 August.
It comes days after the Monetary Authority of Singapore (MAS), in partnership with Australia, announced a grant worth S$5 million ($3.7 million; €3.5 million) for blended finance proposals that invest in Asian sustainability and climate solution projects.
MAS, which supports the GFANZ APAC office together with Singapore Exchange and state fund Temasek, has indicated to local news outlets that it plans to include coal phase-outs in Singapore’s upcoming taxonomy.