Australia and New Zealand Banking Group (ASX: ANZ) has taken a first step in applying stricter guidelines for lending to the coal mining, coal-powered energy and the coal transport industries, but other banks could be forced to follow.
It could result in more body blows to the struggling coal industry, already suffering from commodity prices not seen in more than 5 years, major community opposition to new coal mines and developing countries like China switching to cleaner energy.
What politicians and governments have failed to do in curbing the coal industry and carbon emissions may be taken up by the lenders to the coal industry.
ANZ's plan includes not lending to new coal-fired power plants unless the CO2 emissions are less than 800 kilograms/Mwhr, not to extend the life of a coal plant without a strong plan to cut emissions and to lend $10 billion for emissions reductions over 5 years, according to the Australian Financial Review (AFR).
The AFR reports that ANZ currently has a $19 billion exposure to the mining, oil and gas sectors of which an estimated $3 billion is exposed to coal. Commonwealth Bank of Australia (ASX: CBA) has $18.7 billion resources exposure with around $1 billion in coal, while National Australia Bank Ltd (ASX: NAB) has just $6 billion with a similar exposure to coal as CBA. Westpac Banking Corp (ASX: WBC) has $16.7 billion in lending to the resources sector, with $1.4 billion of that in coal.
ANZ has a further $14 billion lending to the power sector – well above its competitors.
Whilst you might wonder if the banks are taking the action simply for the 'good of the planet', there are also economic reasons for their action.
- An estimated half of the world's coal isn't worth digging out of the ground according to Moody's Investors Service
- Metallurgical coal has fallen to its lowest levels in a decade
- China's slowing demand has created a worldwide glut
- Cheap natural gas is replacing much of coal's share of power generation in the US
- The entire US coal sector's earnings are expected to fall 10% in 2015 after falling 25% last year.
It seems coal projects and related industries are much higher risk in today's environment – and banks will always try to reduce their risk of not seeing a return of their capital.
It's also a major issue for Australia, with coal exports accounting for 18% of total exports and our second largest export behind iron ore and worth nearly $38 billion in 2014.
The banks do have their own climate change policies and have been increasing lending to the renewable energy sector. A CBA spokesman has told the AFR that the bank has funded more than 180 renewable energy projects, while Westpac is reported to have lent $8 billion to the clean technology sector – which includes renewable energy and emission reduction technologies – exceeding its own target.
Foolish takeaway
While Australia's coal industry is not about to close overnight, it appears the writing is on the wall. Investing in coal mining, coal transport and coal energy companies could get your fingers burnt.
