Canberra Times
- Adam Triggs
|
Deputy Prime Minister Michael McCormack, left, has
criticised banks' "virtue signalling", and Treasurer Josh
Frydenberg is backing a parliamentary inquiry into their
decisions to stop financing thermal coal projects.
Picture: Sitthixay Ditthavong
|
Author Adam Triggs is director of research at the Asian Bureau of Economic Research at the ANU and a non-resident fellow at the Brookings Institution. |
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.
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