TODAY’S STUDY: BANKS’ PRINCIPLES FAIL TO SEE COAL FOR WHAT IT IS

On the face of it, the report highlighted below about the failure of an initiative in the banking industry to prevent big money from flowing to the coal industry looks like a triumph of greenwashing over activism. But anybody who reads it that way doesn’t know much about the anti-coal movement, the most successful and determined U.S. grassroots movement in decades.

What the report really represents is a message from folks in the Sierra Club’s Beyond Coal and its many allied organizations. It says this to Big Banking: We demonstrated, disrupted your business, and revealed the financial support you provide to an Old Energy industry and you said you were going to change your practices but you have not done so. If you don’t want to have to deal with us again, you better move your backing to New Energy and stop funding an industry that destroys the environment and aggravates the climate.

And the anti-coal movement's record shows they mean what they say.

The Principle Matter; Banks, Climate and The Carbon Principles
January 19-20, 2011 (Rainforest Action Network)

Introduction

In February 2008, three leading banks, Citi, JPMorgan Chase and Morgan Stanley, announced common coal power financing policies, known as the Carbon Principles. The principles were designed to address the risks associated with regulatory uncertainty of carbon emissions, and were also a direct response to growing public concern over plans for more than one hundred new coal-fired power plants. The risk of those plants being built would lock the United States into a carbon-intensive utility sector future with hundreds of millions of tons of new and additional CO2 emissions every year. The Carbon Principles placed stricter due diligence conditions on these banks for financing the construction of new coal fired power plants in the United States.

When the Carbon Principles were created, they were one of the first industry-wide statements from the banking sector specifically addressing climate change and carbon-intensive investments. Taking a cue from many other sectors of the economy that have acknowledged the urgency of climate change, the Carbon Principles were welcome additions to the diverse chorus recognizing that the private sector must respond to climate change without waiting for slow-moving governments. Banks recognized that carbon- intensive investments posed great risks, and that carbon must be included in traditional models for assessing risk.

According to the bank proponents, The Carbon Principles: “Represent the first time that financial institutions, advised by their clients and environmental advocacy groups, have jointly committed to advance a consistent approach to the issue of climate change in the US electric power industry.”

The Carbon Principles were the outcome of a nine month bank led process to evaluate and address “carbon risks in the financing of electric power projects” in the United States. Since the Principles were released, Wells Fargo, Bank of America and Credit Suisse have subsequently become signatories.

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This review of the Carbon Principles was completed by Rainforest Action Network (RAN) to assess their implementation and impact on the financing of U.S. coal-fired power plants and alternative low-carbon energy sources. In compiling this review, RAN:

»» Compared Carbon Principles with non-Carbon Principles bank underwriting in the U.S. electricity sector;
»» Reviewed signatory bank reporting of Carbon Principles implementation;
»» Interviewed bank and civil society participants in the Carbon Principles process;
»» Examined alternative policy frameworks.

Context for the Carbon Principles: The New Coal Rush

In 2005, the Department of Energy’s National Energy Technology Laboratory (NETL) published a list of 151 proposed new coal power plants. The NETL database helped galvanize public attention to the negative impacts on the ability of the United States to meet any scientifically meaningful green gas emission reduction targets if even a fraction of these 151 planned new coal power plants were built.

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TXU – King of the Coal Rush

Leading the new coal power plant charge, TXU, the fifth biggest energy utility in the country, announced on Earth Day in 2006 plans to construct 11 new conventional coal fired power plants in Texas. The plan was to use a standardized “cookie cutter” power plant design intended to speed construction and reduce costs. This $11 billion build-out project, the largest single proposed new coal power construction project of any utility in the U.S., became a lightening rod at both the regional and national levels, attracting the active opposition of a diverse set of stakeholders concerned about a range of negative health, environmental and economic impacts.

The 11 new coal fired plants would have increased TXU’s CO2 pollution emissions by 78 million tons of CO2 per year, an amount equivalent to 80% of the UK’s entire Kyoto Protocol emission reduction commitment, 100% of Japan’s, and 200% of Canada’s. TXU was also starting to vet plans to construct even more coal fired power plants in the Midwest, which, if implemented, would have vaulted the company into the rank as number one corporate greenhouse gas emitter in the United States.

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Oblivious to the climate implications, in June of 2006, Citi, Merrill Lynch and Morgan Stanley provided an $11 billion bridge loan to help initiate financing for TXU’s new coal power plant construction project. Shortly thereafter Rainforest Action Network (RAN) and others launched a campaign to draw attention to the financing role of these banks in the coal rush. RAN also approached other major banks in North America, Europe and Japan to alert them to the high carbon risks of TXU’s project.

In a surprising move, on February 26, 2007, two large U.S. hedge funds, Texas Pacific Group and Kohlberg Kravis Roberts, announced that they had struck a $45 billion deal to take TXU private in the largest leveraged buyout deal in U.S. history. As part of the deal, the new owners announced that they would suspend plans for 8 out of the 11 planned new coal fired power plants, which in turn freed up capital pledged to their construction to help finance the deal itself. Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup and Lehman Brothers provided $4 billion in equity “bridge” financing for the deal. The same banks also took on the $14 billion in existing TXU debt and $24 billion in new term debt to help close the deal.

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Birth of the Carbon Principes

The TXU buyout served as a wake-up call to Wall Street banks that carbon risk was a growing and poorly assessed material isssue on a number of levels. To address this, three of the banks involved in the TXY debacle: Citi, JPMorgan Chase and Morgan Stanley, initiated a dialogue in May of 2007 that led to the development and release of the Carbon Principles in February 2008.

The signatories to the Carbon Principles commit to the following:

“Encourage clients to pursue cost-effective energy efficiency, renewable energy and other low carbon alternatives to conventional generation, taking into consideration the potential value of avoided CO2 emissions.

Ascertain and evaluate the financial and operational risk to fossil fuel generation financings posed by the prospect of domestic CO2 emissions controls through the application of the Enhanced Diligence Process. Use the results of this diligence as a contribution to the determination whether a transaction is eligible for financing and under what terms.

Educate clients, regulators, and other industry participants regarding the additional diligence required for fossil fuel generation financings, and encourage regulatory and legislative changes consistent with the Principles.”

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In August 2008 the Carbon Principles came into effect for financing of investor owned utilities. In February 2009 their scope was further extended to include transactions for public power and electric cooperatives. To date, the Carbon Principles only apply to transactions in the United States. Most of the signatories to the Carbon Principles have a large global banking presence or are implementing strategies for global growth of their commercial banking businesses. New coal power plants are capital intensive, costing as much as $4 billion to build, with construction project cycle times as long as five years for larger power stations. The Carbon Principles themselves have only been in effect for two years. During this period a limited number of new coal power plant proposals have been moving forward and have received financing. (Table 1.2)

The Carbon Principles are process standards and not performance standards. They require that clients provide information demonstrating that the utilities have considered energy efficiency and renewable energy opportunities. They do not specify, for example, a carbon intensity threshold for new power generation above which the banks would not provide financing. Examples of such carbon intensity performance standards include the one mandated by the State of California, which excludes Californian utilities from making new long term investments or contracts with in or out-of-state providers of electricity from conventional coal or any other source with a carbon intensity greater than that for new combined cycle natural gas power plants.

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Wall Street Banks and Utility Sector Financing

The CP banks comprise six of the top seven ranked banks in Bloomberg League Tables for underwriting and loans in the electric utility sector in the U.S. (Table 1.2). They also accounted for more than 55% of the $125 billion in loan and bond underwriting in the United States to the sector from the beginning of the Carbon Principles implementation date of August 4, 2008 through June 30, 2010”.

Table 1.3 shows that the CP banks dominate loan and bond underwriting for the U.S. utility sector. A significant portion of this financing is to companies that are actively pursuing permitting for or construction of new coal-fired power plants in the U.S. At first level of screening, no clear pattern emerges distinguishing CP banks from non-CP banks by the percentage of financing deals that involve such utilities. It is clear, CP banks are not disproportionately avoiding financing deals with clients actively pursuing new coal.

Industry Participation in Carbon Principles Development

The Carbon Principles were developed in consultation with the U.S. electricity utilities sector, including representatives from American Electric Power, CMS Energy, DTE Energy, NRG Energy, PSEG, Sempra and Southern Company, as well as environmental representatives from Environmental Defense, NRDC and CERES”. In total, the seven utility companies above are responsible for nearly 10 percent of the total CO2 emissions in the United States, emitting approximately 496 million tons of CO2 in 2006. If these seven companies were a country, they would be the 10th largest greenhouse gas emitter in the world”. 85 percent of the seven companies combined electricity generation comes from combustion of coal. (See Appendix for profiles of the participant utilities.) The Carbon Principles require that prior to financing new coal power generation in the U.S. the company should demonstrate that it has evaluated cost-effective energy efficiency and renewable energy opportunities, and identified CO2 pipeline routes to potential underground storage sites if carbon capture and sequestration is mandated in the future…

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Alternative Policy Frameworks

The Carbon Principles was one of the first widely adopted policy frameworks in the banking sector that addresses the risks specifically posed by carbon-intensive investment and climate change. However, several other policies have emerged since then that offer a more comprehensive approach to addressing climate change from both a frame of ecological and social responsibility as well as addressing the economic risk posed by carbon-intensive investments. The Carbon Principles have often been compared to The Equator Principles, which were created in 2003 to address “social and environmental risk in project financing” and have since been signed by over 65 international banks. However, there are several important distinctions between them. While the Equator Principles are limited only to project finance specific financing arrangements, the Carbon Principles are a framework looking at transactions that include corporate financing, bond issuance, and even advisory services. The Carbon Principles affirm that banks can create policies that address a broader spectrum of corporate financing and services, beyond project financing. The Climate Principles are a similar industry-wide framework, created in December 2008 by primarily European and international banks including Credit Agricole, HSBC, Munich Re, Standard Chartered, and Swiss RE. While similar to the Carbon Principles in terms of incorporating a risk analysis regarding carbon and climate into their due diligence protocols, the Climate Principles look more broadly at carbon-intensive aspects of their operations, clients, and transactions rather than only looking at coal-fired power plants. They also go beyond concern for immediate risk in a transaction, and also seek to address greenhouse gas impacts of their supply chain while explicitly acknowledging the urgency of the climate crisis and the need for collective societal action.

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While industry-wide policies may appear simpler and more comprehensive, bank-specific policies often can lead to a more robust framework, rather than the lowest-common-denominator agreements across competitors. For instance, Bank of America has created a specific emissions-intensity target for its investment portfolio, and is aiming to lower the carbon-intensity of its portfolio by specific targets. Eight US and Swiss banks have also created sector-specific policies limiting their financing of mountain-top removal coal mining. While several Carbon Principles signatory banks have pledged to reduce their emissions from their direct operations (physical buildings, travel etc), Bank of America also recognizes its responsibility to reduce “financed emissions” or the emissions associated with its client portfolio. In 2004, the bank committed to reduce the emissions rate from its utility portfolio by 7 percent by the end of 2008. Bank of America did meet this modest goal, but did not continue or expand its commitment. The German bank WestLB recently announced its Policy for Business Activities Related to Coal-Fired Power Generation. This policy provides more than just a “due diligence framework”, but actually creates sector-specific regulations. While these regulations do not bar financing of new coal-fired power plants, they do create tangible performance benchmarks that can be reported and verified, and concretely push the industry to pursue cleaner energy projects.

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Conclusion

While lacking clear guidelines from national or international political institutions, the global economy has responded to climate change in myriad ways – from investment in clean energy technologies to voluntary commitments to reduce emissions. The Carbon Principles are not concerned with recognizing or addressing the environmental, social, or economic impacts of climate change and a carbon-intensive economy, they were adopted to address the “growing uncertainty around federal climate change policy and potential carbon costs.” In this way, the Principles reflect only a short-term responsibility to shareholders and profit, not recognition of responsibility to communities concerning the climate nor a comprehensive commitment to the transition to a low-carbon economy. At their launch, the Carbon Principles were touted by banks as an indication of the “Greening” of the banking sector, or at least as a step towards stronger corporate social responsibility from this sector. But despite dozens of media articles, press releases, and public comments that imply that the Carbon Principles are a step forward for corporate social responsibility – nothing in the Carbon Principles makes reference to such broader concerns. It is unclear why the guidelines of the Carbon Principles merited a stand-alone policy document. Banks should be expected to perform due diligence with a client that encompasses all aspects of risk – this is standard practice in any industry. Incorporating the risk associated with carbon should not be seen as any more unusual than assessing the revenue streams, debt ratios, or management competency of a client. The Principles represent business-as-usual for a bank, and singling out one aspect of standard due diligence for accolades seems unwarranted. In summary - have the Carbon Principles restricted financing to coal-fired power plants? Have they encouraged clients to evaluate low-carbon alternatives to coal-fired power plants? Are they adequately addressing the social and environmental risks posed by carbon-intensive projects? Are they even adequately minimizing the financial risk to investors in such projects – given the tremendous uncertainty of regulatory action? The answer is no to all these questions. Our research reveals that, while the broader economy has been shifting away from coal for myriad reasons, banks that have signed onto the Carbon Principles are continuing with business-as-usual in regards to coal and carbon.

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Recommendations

RAN calls upon leading financial institutions to develop a robust framework of policies and practices to address climate risk, which should include:

»» Phase out support for new and existing coal extraction and delivery projects
»» Phase out support for new and existing coal-fired power plants
»» Public acknowledgement of the risks and urgency of the climate crisis, and the need for economy and society-wide responses.
»» Assess and report on the GHG emissions associated with all their loans, investments and other financial services (Financed emissions) to develop a baseline on which to set reduction targets, starting with the most GHG intensive sectors.
»» Establish portfolio and business-unit emissions reduction targets in line with what is considered necessary to stop climate change from unfolding, as based on current scientific consensus on climate stabilization;
»» Performance, not just procedural, standards for financial transactions and client engagement.
»» Science-based emissions reduction targets that include emissions from both operational as well as financed emissions.
»» A commitment to support political climate policy frameworks and emission reduction goals that will limit global temperature rise to between 1.5-2C
»» A commitment to dramatically increase support for financing emissions reduction technology, renewable energy production and energy efficiency in all business lines
»» Development of products and services to help retail customers address climate change