On the 26 November, the United Nations Environment Programme Finance Initiative (UNEP-FI) released the draft of the Principles for Responsible Banking (PRBs), which aims to align the banking sector’s business strategy with the goals of the Paris Agreement and the United Nations’ Sustainable Development Goals (SDGs).

The Principles are expected to “provide the framework for the sustainable banking system of the future”, and a major part of this redefinition will be how the banking sector can help finance the transition towards the decarbonisation of the global economy.

Developed by 28 leading banks including BNP Paribas, ICBC, Santander, Barclays, ING and Nordea, as well as banks from emerging economies such as India’s Yes Bank and Nigeria’s Access Bank, these banks jointly represent more than US$17 trillion in assets.  

Unfortunately, Japan’s three biggest retail banks—Mitsubishi UFJ Financial Group (MUFG), Sumitomo Mitsui Financial Group (SMFG) and Mizuho Financial Group, together worth US$6.29 trillion in assets—were nowhere to be seen during the discussions.

Japan’s big three banks: The world’s top lenders to coal

While MUFG, Mizuho and SMFG recently identified coal-fired power as a significant environmental risk in their credit policies, their policies leave the door wide open for so-called “highly efficient coal power” and provide exceptions where projects have “national government backing”.

Yet, UNEP has clarified that there is no room for new investments into coal under any scenario of keeping global warming below 2 degrees Celsius.

Numerous global banks have consequently restricted any new project finance for coal power or coal mining, and have begun restricting corporate finance to companies heavily involved in the coal sector. Japan’s banks’ coal policies clearly do not align with the Paris Agreement goals.  

Yet according to the latest report released at COP24, Japan’s top three banks continue to offer massive loans to the top 120 global coal developers. They collectively rank first among global banks and provided nearly $31 billion between 2016 and 2018. Japan’s Big Three Mizuho, MUFG, and SMFG are the first, second, and fourth biggest lenders to coal respectively.

On the domestic front, financial data compiled by 350.org Japan suggests that from January 2013 to July 2018, the country’s Big Three banks together provided approximately $25 billion in lending and underwriting to Japanese coal developers, the same companies currently involved in plans to build 35 new coal plants in Japan.  These include two new power stations in Kobe, near Osaka where Japan will host the G20 meeting in 2019. What is more, records suggest such lending increased after the 2015 Paris Agreement.

As of July 2018, the banks held a total of approximately $2.9 billion in shares and bonds of the top coal developer companies in Japan (MUFG, $1.828 billion; Mizuho, $705 million; and SMFG, $323 million).

Furthermore, the coal-fired power stations recently financed by Mizuho, MUFG and SMFG include controversial overseas projects such as Batang and Cirebon 2 in Indonesia and Nghi Son 2 in Vietnam. They have been the subject of strong community opposition due to alleged human rights violations, continuing environmental damages and poor pollution standards that have adversely affected community livelihoods.

While on the surface Japan’s banks have declared their support for the SDGs and commitment to the Equator Principles (EPs)—which purport to help banks minimise environmental and social risk in projects—these actions show that they are unwilling to undertake due diligence and fulfil their responsibility as project sponsors to ensure that these projects limit their impact on people, the environment and climate change.

If current practices continue, Japan’s Big Three banks should be seen as being seriously out of step with the Paris Agreement, and should expect poor ratings by credit rating agencies and ESG index providers alike.

Sumitomo Mitsui Trust Bank and Resona Bank are leading Japan’s banking sector in this regard and have set the benchmark by ruling out new finance for coal power projects regardless of the technology used and their geographic location.

Changing course

The PRBs released in November provide a useful tool to hold global banks to account and to assess whether they are taking concrete actions to decarbonise and adopt credit policies in line with global climate action.

If Japan’s Big Three banks fail to get their house in order, their international reputations will be compromised. Ethical businesses, major clients and even retail customers may choose to shift their business to more socially responsible banks.      

On the other hand, Japan’s banks could seize the opportunity to align with the PRBs, and here are five ways they can do so: 

• Endorse the PRBs as participating banks
  Signal their willingness to act responsibly by formally endorsing the Principles for Responsible Banking. 

• Adopt Science Based Targets
  Set emissions reduction targets which include financed emissions through their lending and investment portfolios. Mizuho has said it is considering the adoption of Science Based Targets, an initiative that has been signed by 35 financial institutions worldwide. MUFG and SMFG should follow.

• Improve risk disclosure in line with TCFD recommendations
  Engage with non-government organisations and fully disclose the climate risks they are exposed to in their lending and investment portfolios in line with the recommendations of the Task Force on Climate Related Financial Disclosures (TCFD), especially for the most carbon-intensive sectors such as coal and tar sands. Without full disclosure and accountability for financed emissions, the “carbon reduction outcomes” of backing clean energy projects themselves cannot be considered progress. 

• Restrict finance for highly carbon-intensive sectors
  Adopt credit policies in line with the Paris Agreement by ceasing any new finance for coal power and mining projects and restrict corporate finance to coal developers. Banks should do the same for other carbon-intensive sectors such as tar sands, extreme oil and gas.

• Integrate climate change and indigenous rights in the Equator Principles
  Participate actively in ongoing discussions to update the Equator Principles, and fully integrate climate risk mitigation and indigenous rights in project financing decisions.

Acknowledging that Japan’s Big Three have pledged to review and improve the ambition of their social and environmental policies over time, we encourage the banks to publicly report on their progress before the G20 Finance Ministers Meeting to be held on 8-9 June 2019.

If Japan’s banks can read the writing on the wall and make a clear shift away from coal towards decarbonisation, they stand to uphold their reputations and benefit from the burgeoning opportunities for green finance ahead.  

Notes:

This article was originally published in Eco-Business