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The risk posed by thermal coal power projects in Asian emerging markets has been highlighted by several key financial risk data providers in the last few months including Moody’s, S&P and Fitch. All point to the risk of coal power assets becoming stranded due to competition from fast-growing renewable power in the region and environmental regulation. RepRisk, a leading ESG data provider, further highlights the reputational risk associated with coal power projects.
The three largest Japanese private sector lenders, Mitsubishi UFJ Financial Group (MUFJ), Mizuho Financial Group and Sumitomo Mitsui Financial Group (SMBC), have an estimated US $5Bn in outstanding loans for coal power project finance in emerging markets, with the majority in three countries: India, Indonesia and Vietnam. All are anchored with Japanese government loans via the Japan Bank for International Cooperation (JBIC), and guaranteed by Nippon Export and Investment Insurance (NEXI), a government entity. The banks’ full lending exposure to coal power is likely much higher through exposure to corporate loans, for which disclosure is poor.
Japanese investors including Mitsubishi Corporation, Marubeni Corporation and Mitsui Corporation have equity stakes in 18 projects in emerging markets, with a major stake (30% equity or greater) in at least 10 of these projects. Disclosure of equity holdings in coal power projects by these Japanese trading houses is limited, so an exact US $ figure is difficult to ascertain, and exposure may be more extensive then indicated in this research. This equity is likely at risk given the uncertain status of coal power in the Asian energy mix in the medium to long term due to competitive pressures from alternative energy sources and strengthened environmental regulations, all of which could render the plants economically unviable.
While Japanese private bank loans are backed by the Japanese government, there exist potentially significant risks related to reputational damage for the financial institutions involved. The research finds that the Japanese ‘mega-banks’ (MUFJ, Mizuho Group and SMBC) policies regarding coal power financing lag far behind the other largest project lenders globally, creating reputational risk in a world where coal power financing is increasingly stigmatized by NGO campaigns, the media and shareholders.
Thermal coal power generation and associated value chains (mining, infrastructure, power engineering) are becoming increasingly stigmatized by campaigns, global financial institutions and policy makers outside Japan. This will reduce economies of scale associated with the widespread continuation of coal power's role in the energy mix. Along with the increasing cost competitiveness of renewables, this will drive up the cost of coal power relative to alternative energy sources, adding to business risks for thermal coal project lenders, investors and operators.
Global financial institutions with strong brands to protect are increasingly the target of high profile global campaigns. In light of this, many of the top project lenders globally have implemented firm policies on coal power financing. The research finds Japanese banks MUFJ Group, Mizuho Group and Sumitomo Mitsui Financial Group (all among the global top ten project lenders) lag behind their European peers in this respect, with coal financing policies that effectively enable business-as-usual.
Analysis from think tank Carbon Tracker Initiative (based on Bloomberg New Energy Finance data) suggests that the potential value of ‘stranded’ coal power assets as their economic viability is undercut by the plummeting cost of renewable energy represents a significant portion of the GDP of the recipient countries highlighted in this report - roughly 3% each in the case of India, Indonesia and Vietnam. It is noted that this analysis does not assume any price on carbon emissions but rather relies on the economics of coal vs. renewable power going forward.
As the physical impacts of climate change accelerate and public and political concern grows, there is a mounting possibility that future disruption in the recipient-country power markets may lead governments to alter the conditions of their Japanese government-backed loans. Although unprecedented, such a restructuring would be in line with current trends around the unpredictability of impacts on business and finance from climate risk globally. Notably, the guarantee of these loans by the Japanese government for losses related to climate change has yet to be tested.
Bond and shareholders in the three Japanese ‘mega-banks’ and major trading companies should demand greater transparency, first on the full extent of existing and planned debt (including project bonds) and equity exposure to thermal coal power outside Japan, second on how the organisations assess the mounting reputational risks associated with involvement in projects, and third on how climate risk is considered and priced into lending decisions. Such disclosures are squarely within the remit of the Task Force on Climate-related Financial Disclosures (TCFD), currently supported by Japan’s Ministry of Economics, Trade and Industry (METI).
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