Singapore banks caught in grey area as regional financial sector moves to OK coal phase-out

SOUTH-EAST Asia's financial sector looks set to give the green light for the financing of early coal phase-out projects. But the ability of Singapore's three banks to pursue such deals lies in a grey area due to their self-imposed coal policies.

DBS, OCBC and UOB had publicly committed to cease funding for coal-fired power plants in 2019, amid growing international pressure on banks to help curb global warming by cutting financing for fossil fuels. The industry's approach towards coal has softened somewhat since then, with regional regulators and industry standard-setters now making accommodations for coal phase-out -- the early retirement of existing coal power plants.

The Asean Taxonomy -- the Association of Southeast Asian Nations' classification system that defines which activities qualify for sustainable financing -- added coal phase-out to its list of eligible activities in March. The Monetary Authority of Singapore (MAS) said last week that it will delay the roll-out of the country's taxonomy in order to consult on the inclusion of coal phase-out. The Asia-Pacific chapter of the Glasgow Financial Alliance for Net Zero (GFANZ) has said that it is looking into allowing coal phase-out, and its announcement is expected imminently.

Whether Singapore's banks are able to take advantage of these new opportunities remains to be seen. The responsible financing frameworks of all three local banks make no mention of how they will accommodate such projects. This has created some degree of uncertainty, since coal phase-out is neither expressly allowed nor prohibited.

The Business Times (BT) understands from industry sources that the three banks might not be comfortable pursuing coal phase-out projects at this time without greater clarity on their own policies. BT understands that the banks will have to review their restrictions on coal financing before taking up such projects.

That uncertainty could potentially cost the banks an early start in a hot area within sustainable finance. Regulators in this region, including MAS, have been making a big push for transition finance over the last year at least, and have urged the private sector to support the early retirement of coal-fired power plants.

This is because fossil fuels account for about 70 per cent of power and electricity generation in the Asia-Pacific region, of which coal makes up almost 60 per cent of total generation. Many coal-fired power plants in Asia are also young, with at least another 30 to 40 years left in their lifespan, MAS previously said.

Other banks, including HSBC and Standard Chartered, have been able to participate in early coal phase-out projects, such as the Just Energy Transition Partnership with Vietnam and Indonesia. Both banks made project financing of early retirement of coal-fired power plants an exception in their coal policies.

Chng Bee Leng, head of group ESG risk and sustainability at OCBC, said that transition financing has emerged as an important lever to support early phase-out of coal-fired power plants in Asia, many of which will remain in operation well beyond 2040.

"A collaborative approach involving the power industry, financiers and governments is needed to hasten our transition away from coal power without compromising energy security and livelihoods," she noted.

"That said, greater clarity on the markers of credibility for managed phase-out of coal-fired power plants is required... The current efforts by the regulators and standard setters to develop the guidance and boundaries... will go a long way to help financial institutions to assess and consider the implications such as impact on a bank's committed net-zero targets and financing policies."

A DBS spokesperson said the bank recognises the importance of accelerating coal managed phase-out as part of Asia's transition.

"DBS is actively involved in various policy and industry workgroups to develop clear guidance for financial institutions. The bank also has a mandate from the Indonesia Investment Authority, serving as financial adviser on its energy transition mechanism to tackle coal managed phase-out, as well as crowding in public and private capital to facilitate the process."

The spokesperson added that the bank will "continuously review" its coal policies in line with industry developments.

However, industry sources have told BT that it is still unclear whether any of the three local banks may actually take that step and adjust their policies on coal financing.

For a start, coal phase-out project financing can be highly complex, and not every bank's cup of tea. Second, taking on such projects would inevitably add a coal plant -- albeit one that will reach end of life at an accelerated pace -- and its additional carbon footprint to a bank's financed emissions. For banks trying to decarbonise, this would take them further from their emissions targets in the short term.

In addition to reputational risks a bank may be exposed to when they make an accommodation, there could be other financial-related risks as well, such as changing regulations in the jurisdictions where these coal-fired power plants are located.

Justin Tan, partner at financial service consultancy Arthur D Little, said there are potentially three key areas of uncertainty in an early coal phase-out project that could impact a bank's future cash flows. These are the successful transformation of the power plant; the end-throughput of the "green" power generated; and the demand and pricing of the green energy.

To mitigate these uncertainties or to hedge cash-flow risk, banks would have to work with professional companies for expert estimates, and work with the broader ecosystem, including relevant government bodies that may, for example, commit to buying a substantial percentage of the power to be generated at a pre-determined price before the plant is re-purposed or built.

Despite the complexities involved, Tan said the early retirement of coal-fired power plants is an additional tool in a bank's arsenal to achieve its decarbonisation goals, on top of its financing restrictions.

"Ultimately, the banks will need to work out the cost-benefit analysis for each approach, and importantly align with the client's needs and constraints, as well as the overall viability of the underlying economics," he added.