ANZ was the last of Australia's big four banks to announce it will stop financing thermal coal projects in Australia. The Australian coal industry will now need to head overseas if it wants to borrow funds for new projects, and many government MPs aren't happy. The Agriculture Minister called for a boycott of ANZ. The Deputy Prime Minister said such "virtue signalling" would hurt farmers. Now the Treasurer has escalated the rhetoric, backing a parliamentary inquiry into the banks' decisions.
Inevitably, the inquiry will reveal the banks to be doing exactly what you'd expect of them: responding to market forces in order to minimise their exposure to risky investments. Despite the odds being tipped thoroughly in coal's favour by our lack of a carbon price, and despite a regulatory framework that discourages sustainable lending, the banks are avoiding coal for good reasons.
Pushing them back into coal would produce a less stable financial system, make banks less profitable and create a dangerous precedent. Politicians would be directing the flow of credit in the economy - something they have already attempted to do with their public criticism of the banks - setting a dangerous precedent.
Like most of us, the banks have noticed that the outlook for Australian coal is bleak. Australia's three biggest export markets for thermal coal - Japan, China and South Korea - have all announced plans to decarbonise their economies and achieve net zero emissions. And that was before the trade tensions with China. Coal's share of power generation in China was already declining, and trade tensions will mean even less of that shrinking demand will come to Australia. Nor is China alone. The number of new coal plants that began construction worldwide fell by 84 per cent between 2015 and 2018, and coal burning worldwide fell 3 per cent last year.
Worse still for the miners, the relative cost of coal is also rising. ANU analysis shows that, as things currently stand, any new wind-power installations will produce cheaper energy than coal-fired power stations. The gap will only become more profound as technology, particularly around storage, continues to reduce the relative cost of renewables.
And all of this is despite a regulatory framework that still overwhelmingly supports coal. The absence of a carbon price means polluting industries are effectively subsidised by the community on a substantial scale. Given coal produces roughly twice as much carbon dioxide as natural gas for every unit of energy output, any price on carbon will profoundly - and appropriately - make coal even less cost effective.
If there's one thing the banks know how to do, it's make money. A growing body of research shows that it is profitable for banks to take account of their clients' environmental, social and corporate governance (or ESG) standards. Companies that do better on ESG indicators are less likely to default on their loans and are more resilient to economic shocks, including COVID-19. Portfolios full of strong ESG firms provide better returns to investors than the average.
None of this is surprising. A bank's profitability improves when it reduces its exposure to environmental liability: when a borrower's obligation to clean up contaminated sites impairs its ability to repay the bank, for example. And a bank's profitability improves when the economic value of an asset is increased by better environmental management: when increased tree coverage on agricultural land improves the productivity of grazing stock, for example. Reducing a bank's balance sheet risks and supporting sustainability are one and the same.
Banks are also being pushed away from coal by their shareholders. The claim that it is somehow illegitimate or inappropriate for shareholders to influence corporate decisions seems to forget that shareholders are the owners of these companies. Pressure from environmentally conscious consumers is legitimate, too; after all, it's up to consumers to decide who they buy their goods and services from. Politicians who resent the influence of shareholders and consumers on corporate decisions have revealed a distaste for free markets that is both surprising and worrying.
Given that the coal industry is struggling on multiple fronts, it's odd to single out the banks. The coal industry also faces growing challenges in attracting equity finance, partnering with engineering and construction firms, or even getting insurance.
According to one analysis, the number of insurance companies limiting their exposure to coal more than doubled in 2019. Axa, Aviva, Allianz and Zurich Insurance are among more than a dozen major firms limiting their exposure to coal. Many will no longer underwrite coal projects for companies that get more than 30 per cent of their revenue from mining or burning coal. Reinsurance companies - the insurance companies for insurance companies - are also turning away. The world's three biggest reinsurers - Swiss Re, Munich Re, and Lloyds of London - have all restricted their coal coverage since 2018.
Pushing the banks back into coal would mean pushing them to take more risky, uninsured, declining assets onto their balance sheets. With a concentrated banking system like Australia's, in a country disproportionately exposed to the risks of climate change, the risks to financial stability would be significant.
If the government's objective is to ensure a stable finance system and profitable banks, it should be encouraging the banks to take greater account of ESG risks, not less. A carbon price is at the top of the list, but so are financial regulatory reforms. The regulations that dictate which assets a bank must hold as part of their capital buffers, for example, don't account for the growing evidence that ESG-backed assets are safer than their peers. Regulatory frameworks do little to encourage sustainable lending, such as giving lower interest rates to borrowers who carry fewer environmental risks and meet pre-agreed sustainability performance targets.
Too many politicians are fighting an irreversible global economic tide, peddling false hope to people who should be receiving assistance to help cope with the transition. A clear-eyed inquiry into banks and coal will reveal free markets functioning effectively, along with an uncomfortable truth: that the private sector is pricing carbon even if the government refuses to do so.
- Adam Triggs is director of research at the Asian Bureau of Economic Research at ANU, a non-resident fellow at the Brookings Institution, and a regular contributor to Inside Story.