Banks coalescing on funding?

Southern Africa’s temperature is likely to increase almost twice as fast as the global average this century. Under scenarios of low global mitigation, its temperature could rise over 4°C and exceed 6°C in parts, which could threaten food security and have serious implications for biodiversity, water scarcity and human health. The WWF forecasts South Africa’s water demand to exceed supply by 17% in 2030. So SA should have a strong interest in reducing its comparatively high emissions. For instance, last month Greenpeace said that SA has the “most polluting coal-fired power stations in the world.”

However, its economy is very energy and coal-intensive. This complicates the shift to low-emission pathways, particularly in a country with significant poverty (19% live on less than US$1.9 a day), income inequality (highest globally) and 28% unemployment. And real GDP growth has disappointed, averaging just 1% the past five years, including a recession in the first half of 2018. The transition must also be carefully managed, to ensure it is ‘just’ for SA’s coal workers and truckers, who are concentrated in one province.

In addition, SA’s state-owned power monopoly, Eskom, is struggling to meet demand. It implemented rolling black outs in January. Moreover, Eskom’s financial position is precarious and it required another bailout from Treasury this month.

So local banks have had to think about their role in funding SA’s power sector. On the one hand, they have done a great job financing SA’s renewable power program, the largest in Africa, with 92 projects and a capacity of 6322MW. Although renewable energy prices have dropped to competitive levels (and construction is considerably faster than power stations), they generally can’t be used for baseload power due to their intermittent supply to the grid. Hence coal is likely to remain an important part of SA’s power longer-term and will still contribute 40% of Eskom’s energy supply after decommissioning older stations.

Banks also have to decide whether or not to fund Eskom itself. The five large banks provided it with R15bn of funding this January, which could be seen as essential to ‘keep SA’s lights on’. In addition, they agreed back in 2015 to fund two approved coal-fired power plants that form part of SA’s long-term energy plan. However, three of SA’s five large banks recently withdrew their support, after adopting policies to no longer fund coal-fired plants.

Recent speculation that government might consider forcing banks to fund various sectors through prescribed lending, irrespective of their policies, is concerning for the sector.

    

3 thoughts on “Banks coalescing on funding?

  1. Thank you for your blog eco-triller. Really interesting to read about the financing of the transition to the low-carbon economy and hard to abate sectors in a South African context. I recognise many of the challenges set out from a UK context also. Please find a few thoughts below.

    There are a group of central banks who view climate change as a financial risk. This helps support the banking sector in their own transitions to move. This group of central banks, called the Network for Green the Financial System (NGFS), published a report on this topic last month following a meeting in Paris. It includes a number of possible policies and recommendations to take this work forward. The group is organised by the French central bank, looking at the membership list unfortunately I cannot see any South Africa regulator/central bank listed.

    Click to access ngfs_first_comprehensive_report_-_17042019_0.pdf


    https://www.banque-france.fr/en/financial-stability/international-role/network-greening-financial-system/about-us

    Viewing climate change in the a risk for financial stability has also been recognised by the UK banking regulator, the Prudential Regulatory Authority (PRA), who have had a number of publications: https://www.bankofengland.co.uk/prudential-regulation/publication/2019/enhancing-banks-and-insurers-approaches-to-managing-the-financial-risks-from-climate-change-ss

    As ever, the challenge of time horizon with regards to climate change is important. These publications reflect the fact, it is very easy to view climate change as a medium or long-term financial issue which not reflect for the next quarter results or even the next year. Of course, there will be financiers who are not prepared to make a change in financing, particularly if it involves turning down short-term profits which could come from industries with future stranded assets (for example from coal fired power stations).

    However, I do see some financiers coalescing to make the change – supported by the regulators and central banks as set out above and also under programmes set up by the United Nations Environment Programme and the Institute of International Finance.
    https://www.iif.com/Press/View/ID/1009/IIF-Launches-Forum-On-Implementation-of-TCFD-Recommendations
    https://www.unepfi.org/

    These umbrellas provide a way for organisations to talk to one another and share ideas. They also offer a way to discuss reporting activities related to climate change, such as the Taskforce for Climate-related Financial Disclosures. It would be great to see a broader set of banks driving this change and broadening out from a European-centric lead.

    There are no easy answers, but I am hopeful given some of the changes I see in the above groups…happy to hear any thoughts and how these could or do apply to South Africa.

    Liked by 1 person

  2. Thanks for a strong advocacy blog. Can you think of a way to ensure whether it’s lip service to ESG integration or genuinely integrated in all investment processes.

    UN PRI has conducted interesting research at: https://www.unepfi.org/fileadmin/documents/The_State_of_Responsible_Investment_01.pdf

    Over a year ago, a journalist conducted a survey by relating that the asset manager’s website claimed w.r.t. ESG and what their corporate governance actions ‘said’. I recall it being quite revealing about levels of hypocricy, but cannot now locate the news piece.

    Nevertheless, for those of us involved in trying to transform investment processes into ones that genuinely reflect a deep consideration of ESG factors in the investment decision making process, I believe that there are 2 considerations over an above the normal ‘checklist’;
    namely, incentive structures and attendant KPI’s need to be directly aligned to better ESG outcomes;
    and, in our context, the makeup of investment and credit committees needs more diversity (away form the preponderance of CA’s) and more lateral and fresh thinking in approaching investment risk in a more holistic and long term thinking manner.

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    1. Thanks for your comments. I agree incentives/KPIs and diversity among investors are important ingredients. One challenge is the limited pool of stocks on the JSE to invest in based on particular themes, and over 30% of JSE earnings are outside SA. And as you say, longer-term investment horizons are another important element.

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