G7 private banks account for over a third of global investments in coal, while investors hold over two thirds of shares in coal. If the G7 won’t take the final step in coal phase out and restrict private financing of coal, it risks undermining the progress made in removing public finance.
The latest G7 leaders’ communique has solidified its commitment to end public finance of fossil fuels by the end of 2022. Even with exemptions made for temporary measures to deal with national security concerns, this declaration is profound and underscores the G7’s ambition to end public support of fossil fuels abroad. In turn, it builds on the commitment made at the G7 in Cornwall last year to end public financing of coal by the end of 2021.
Thanks to the G7 commitment and subsequent restrictions from China, Japan, and South Korea, public finance for coal power generation has almost completely ended. This now leaves private finance as the major remaining source of funding for coal. Since 2019, commercial financial institutions have invested around $1.5 trillion USD into the global coal industry.
G7 private banks account for over a third of global investments in coal. 19 of the top 24 private financiers of global coal investment are based in G7 countries. So too are institutional investors holding more than three quarters of bonds and shares in coal companies. The global pipeline of proposed coal power plants has collapsed by more than 76% since 2015, yet the last remaining projects under development are still seeking funding from private sector financial institutions based in the G7. This visibly undermines progress made by G7 countries in removing public finance.
This year, G7 climate and energy ministers recognised the problem of private finance in coal during the May ministerial meeting. They now have the rest of the year to work on solutions.
“We note with concern the scale of private finance currently still supporting non-Paris aligned activities especially in the fossil fuel sector. We welcome private sector initiatives and voluntary commitments including through their active participation in the Glasgow Financial Alliance for Net Zero (GFANZ).” – G7 Climate, and Environment Ministers’ Communiqué, 27 May 2022 .
GFANZ alone is unlikely to deliver transformational change. The alliance is a purely voluntary one and lacks the regulatory and supervisory mechanisms to oversee implementation of the commitments proposed by members. Commitments are also often far off in the future and are only beginning to address the need for 2030 phase-outs. Additional policy signals are required to make clear that certain investments are not compatible with a net-zero future.
France currently leads the way with financial institutions adopting coal phase-out dates. They account for 10 out of 12 of the best coal exclusion policies in the finance sector. This is no accident. In 2019, the government requested that financial institutions remove coal from their portfolios by 2030 for OECD countries, and 2040 for the rest of the world. The French finance minister at the time, Bruno Le Maire, made it clear that regulation would follow if the financial institutions did not act themselves. Because of this, French institutions have largely adopted progressive coal policies.
The other members of the G7 can take inspiration and insight from the French experience: sending strong policy signals to private financial institutions to align their portfolios with government agendas on coal. The German government can facilitate this knowledge exchange and aligned action during the remainder of its G7 presidency year.
Many of the tools needed to regulate commercial investments in coal already exist, but regulators could do far more to implement them. Climate risk disclosures made by banks would enable investors and regulatory bodies to understand the scale of risk that financial institutions are taking on. These could be tackled by mandating higher capital requirements for investments in fossil fuels. Financial institutions must also be asked to submit transition plans to outline 1.5 °C-aligned investment strategies.
The need for action on private finance is now visibly undermining the positive progress made by the G7 to end public financing of overseas coal. It will therefore increasingly be on the G7 agenda. Fixing the missing restrictions on private finance would reaffirm G7 leadership and deal a knockout blow to the last remaining new coal plants proposed worldwide.