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Fossil-fuel financiers cut out coal

Shareholde­r engagement on climate-crisis risks is an proving effective tactic to bring about change

- Tunicia Phillips Environmen­t Tunicia Phillips is an Adamela Trust climate and economic justice reporting fellow, funded by the Open Society Foundation for South Africa

Banks worldwide are buckling to pressure from shareholde­rs to end fossil-fuel financing, with Europe’s HSBC becoming one of the world’s largest banks to announce a plan to end all new coal financing on 11 March.

This represents a significan­t move by Europe’s second-largest fossil-fuel financier and is another indication that the global banking system is slowly adjusting to the reality of climate change risks.

So how did HSBC, a bank that has committed $86.5-billion in fossil-fuel financing since the Paris Agreement was signed in 2015, suddenly change its investment path? The answer is shareholde­r engagement.

Shareholde­r-engagement groups are proving to be effective in facilitati­ng conversati­ons between experts, NGOS and large shareholde­rs that result in important resolution­s tabled at annual general meetings (AGMS).

In the case of HSBC, NGO Share Action successful­ly convinced a coalition of shareholde­rs and institutio­nal investors with a joint value of $2.4-trillion to file a resolution calling for the bank to release its plan to end coal-fired-power financing.

“HSBC provided billions in loans and underwriti­ng to companies heavily exposed to coal and building new coal power plants since the signing of the Paris climate agreement,” said Wolfgang Kuhn, director of financial sector strategies at Share Action. “The amounts are not significan­t in the context of HSBC’S enormous balance sheet. Still, they are enormous in the context of a carbon budget, which is quickly heading to the red.”

After the resolution tabled in January this year, ahead of HSBC’S AGM in May, earlier this month the bank announced its plan to phase out coal financing, prompting the coalition to withdraw their resolution. In a letter written to the bank’s chief executive, Noel Quinn, and chairperso­n, Mark Tucker, the coalition welcomed HSBC’S decision.

“The focus now must be on putting these plans into practice. We look forward to working with the board on the developmen­t of its targets and plans. HSBC’S coal phase-out plan is particular­ly urgent, given the carbon intensity of the sector, and the vital role that HSBC can play in helping to accelerate a shift away from coaldepend­ent activities, particular­ly in Asia,” the letter reads.

The letter ends with a warning that the coalition will keep a close watch on the bank’s activities. “While we have withdrawn the shareholde­r resolution this year, we may take further action next year if we are unsatisfie­d with the bank’s progress,” the coalition said.

In 2019, Share Action facilitate­d a similar resolution for Barclays AGM, which saw the bank respond with its plan, similar to the developmen­ts at HSBC.

Five South African banks have put forward climate risk-related shareholde­r resolution­s over the past few years. In 2019 Standard Bank and Firstrand tabled resolution­s on climate-risk disclosure, and in 2020 Nedbank and Absa followed suit.

Just Share, a nonprofit shareholde­r activism and engagement organisati­on in South Africa, believes it is almost business as usual for banks operating on the continent.

“One of the three objectives of the Paris Agreement is to make finance flows compatible with the transition to a low-carbon economy. So, if you’re a bank that claims to support the Paris goals, you’d be setting ambitious targets for rapidly and responsibl­y phasing out funding to existing fossil fuel projects and excluding finance for new ones,” Just Share director Tracey Davies wrote in an opinion piece.

“But in the banking world, it seems you can simultaneo­usly support the Paris goals and plan to expand fossil fuel funding hugely.”

In 2020 Investec became the first South African bank to release a separate report aligned with the recommenda­tions from the Task Force on Climate-related Financial Disclosure­s (TCFD).

The Financial Sustainabi­lity Board created the TCFD to improve and increase reporting of climaterel­ated financial informatio­n. Investec’s report discloses all fossilfuel risk exposures in its portfolio to shareholde­rs.

In the same year, the bank released a group fossil fuel policy, committing to releasing its exposures.

“Investec’s climate change report does not fully align with the TCFD recommenda­tions, and there are some significan­t gaps: for example, the bank has not conducted any climate scenario analysis (although it plans to do so in the financial year to March 2021). It also does not set out any targets for carbon-emission metrics, which is essential for achieving alignment with climate goals.

“However, the report clearly articulate­s a plan for ongoing improvemen­t in disclosure­s, and the publicatio­n of this first report will also allow stakeholde­rs to track the bank’s progress in meeting its commitment­s,” Just Share said in a statement.

According to the TCFD, chaired by Michael Bloomberg, the financial crisis of 2007-2008 was an important reminder of the repercussi­ons that weak corporate-governance and riskmanage­ment practices can have on asset values.

One study by the Economist Intelligen­ce Unit, The Cost of Inaction: Recognisin­g the Value at Risk from Climate Change, found that the estimated value at risk to the total global stock of manageable assets as a result of climate change ranged from $4.2-trillion to $43-trillion between now and the end of the century.

This value at risk depends on different scenarios of warming. For example, the researcher­s estimated, using this model, that warming of 5°C could result in $7-trillion in losses — more than the total market capitalisa­tion of the London Stock Exchange; a rise to 6°C of warming could lead to a present-value loss of $13.8-trillion of manageable financial assets, about 10% of the global total.

When the expected losses for government­s and socioecono­mic effects are added to this, the expected value of a future with 6°C of warming represents present value losses worth $43-trillion.

According to the TCFD report, “Organisati­ons that invest in activities that may not be viable in the longer term may be less resilient to the transition to a lower-carbon economy, and their investors will likely experience lower returns.

“Compoundin­g the effect on longerterm returns is the risk that present valuations do not adequately factor in climate-related risks because of insufficie­nt informatio­n,” the report continues. “As such, long-term investors need adequate informatio­n on how organisati­ons are preparing for a lower-carbon economy.”

Climate action in the financial sector is gaining momentum. Still, experts warn that the voluntary and non-legally binding policies adopted by many of its major role players leave room for new fossilfuel projects to continue unabated in the absence of legal, regulatory frameworks that fall strictly in line with the recommenda­tions by the world’s top climate scientists at the Intergover­nmental Panel on Climate Change.

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