Why Japanese Megabanks hesitating to Finance Coal-Fired Power Plants?

Japan's private banks, Mizuho, MUFG, and SMBC Group - are the top three largest lenders to coal developers globally, providing nearly USD 39.3 billion over three years. Furthermore, MUFG is the world's 6th largest investor for 30 top coal power companies, followed by Mizuho which is the 8th and SMBC which is the 21st largest in the world. These banks are backing coal power plants in countries such as Indonesia and Vietnam, as well as supporting coal mining in Australia.

However, in order for the world to achieve the Paris Agreement's goal of limiting global temperature rise to 1.5 degrees celsius, the banking sector is required stop funding any new coal plant. While Japanese banks had been actively supporting the polluting carbon fuel- coal, it seems that the country's mega-lenders are now taking steps and revising their policies to support the cause.

Mizhou: As per the latest updates, on 15 Apr'20, Mizuho Financial Group announced its decision to abolish new investments in and loans to construction projects for coal-fired power plants with high emissions of carbon dioxide, with effect from 1 Jun'20. The megabank also aims to cut the lending balance for relevant projects, which totalled some 300 billion yen in fiscal 2019, by half by fiscal 2030 and to zero by fiscal 2050.

Mizuho also said that it may consider loans to projects to upgrade existing coal-fired plants to high-efficiency facilities including ones with lower CO2 emissions.

SMBC: Following its peer, a day later, Japan's Sumitomo Mitsui Financial Group Inc has also announced that it would no longer lend to new coal-fired power plants from 1 May'20.

MUFG has revised its coal policy in May 2019 declaring that it would not provide financing for new coal-fired power projects in principle. However, MUFG states that it may continue to finance new coal power projects depending on host country circumstances, international standards such as the OECD Arrangement on Officially Supported Export Credits (OECD Sector Understanding), and the use of other available technologies.

Sumitomo Mitsui Trust Bank (SMTH) and Resona Group have set an early standard by ruling out any new project finance for coal power. However, they have few exceptions as well.

Are these self-restrictions enough?

While megabanks are announcing curbs on investment of new coal-fired plants, market participants are of the opinion that all of these banks' policies are not fully consistent with the underlying goal of the Paris Agreement. This is because of their continued support to the coal-fired power projects committed by them before the enactment of those policies and also because all the banks have exceptions that will enable them to continue to support coal projects. In addition to this, these banks' coal policies are only applicable for project finance, which means they are allowed to keep funding in shares and bonds under their current coal policy.