To keep the 1.5 degrees Celsius (°C) goal within reach, global coal combustion needs to decline rapidly. Unabated coal use for power generation, the largest coal-consuming sector globally, would need to fall from 36 per cent in 2022 to 13 per cent by 2030, and three per cent by 2035, according to global energy system modeling.
Banks are vital in coal divestment and transition. They fund coal using multiple instruments, such as loan and bond underwriting, across multiple business lines, subsidiaries or intermediates in different markets. As more banks commit to net zero, coal exit — or reducing and finally clearing coal exposure — helps them manage risks, meet climate targets and find new opportunities, such as funding needs for coal decommission and the transition to renewables.
Organizations
This paper studies both sectoral and individual banks’ practice in coal exit and builds a coal exit framework for banks’ continuous improvement. The framework consists of three parts, which could also be used for exiting from other fossil fuels to achieve net zero:
- Plan/review. A checklist is used to help banks examine the information and resources needed for credible pledges and successful implementation.
- Decide. A prioritization table is used enabling banks to assess priorities and update pledges.
- Implement. Metrics are set to inform banks of approaches to execute and check progress.
This paper aims to provide Chinese banks with international coal exit experience to equip them with an understanding of practices, trends, and resources for credible coal exit pledges and successful implementation. Chinese banks have restricted coal financing, but there remains room to enhance transparency and clarity. A more comprehensive framework will be needed to catalyze Chinese banks to improve coal financing strategies.
This paper concludes that banks have been continuously honing their coal exit strategies for broader coverage and greater transparency, spurred by heightened scrutiny and deeper recognition of their coal industry affiliations. While many banks halt financing for new coal power plants, others extend their coal exit plans across the entire coal value chain. This approach demands a holistic blueprint covering all financial instruments, including indirect financing of coal operations — an area needing clarification, particularly among Asian banks.
This paper recommends that Chinese banks strategically manage coal relationships and collaborate internationally. The proposed “plan/review, decide, implement” framework helps navigate coal relations in domestic and cross-border markets and furthers the “no new coal power plants overseas” pledge. The framework promotes clarity and transparency, explores transition options with clients and global banks, and highlights robust and continuously updated coal exit metrics to which Chinese banks could contribute. The international practices demonstrated alongside the framework can enhance capacity-building and foster common ground and dialogue with the global banking sector.
Key findings:
- Phasing out coal is a crucial climate priority. Banks will be vital in this process by divesting and by reallocating financing, which also will help them and their clients achieve net zero and manage risks and opportunities.
- A number of public and commercial institutions have made progress on existing coal, while further actions should extend to all financial products and services, as well as transition away from coal, in addition to mere divestment.
- This working paper proposes a three-step framework with checklists and metric-setting approaches to guide banks in reducing and clearing coal exposure, or coal exit, with a procedure and approaches that can apply to other fossil fuels.
- The framework considers bank variety and goes beyond mere divestment. It recommends that Chinese banks improve their coal exit with detailed planning and continuous efforts.
- Coal exit can give Chinese banks a competitive edge, and collaborating internationally on this front can help them adapt to the global energy transition.
Read the full working paper originally published by the World Resources Institute on Dec. 31, 2024.
It is republished under a Creative Commons licence.