Energy Shift Southeast Asia

For banks that backed PH coal boom, the path to renewable energy comes with roadblocks

Banks in Asia and the Philippines are moving at a snail’s pace in defunding coal. At least 10 Philippine banks gave $841 million in loans and participated in $1.3 billion worth of underwriting activities involving at least five coal companies since the 2015 Paris climate agreement.

By Karol Ilagan, Philippine Center for Investigative Journalism

In 2017, a network of more than 100 organizations filed a landmark climate complaint against the International Finance Corp. (IFC), the private sector arm of the World Bank.

The Philippine Movement for Climate Justice (PMCJ) accused the IFC of contributing to the climate crisis as it had funded 19 coal power plants across the Philippines through a local bank, the Rizal Commercial Banking Corp. (RCBC), the ninth largest bank in the country in terms of assets.

IFC gave RCBC $253 million to invest in projects that could cause “significant adverse environmental and social risks that are diverse, irreversible or unprecedented,” according to the complaint filed before the World Bank Group in Washington. The IFC, whose funds are pooled from governments all over the world, was in effect violating its environmental and social standards.

Three years later, in September 2020, the IFC announced that it would no longer invest in banks that did not have a plan to divest from coal.

In October, the following month, RCBC also announced that it would no longer finance coal plants. RCBC became the first in the Philippines and only the fourth bank in Southeast Asia to phase out funding for fossil fuel.

The IFC was initially defensive, recalled Ian Rivera, PMCJ’s national coordinator. Philippine bank managers claimed that getting the money back would be difficult because it was already spent, he said.

“If you claim that it has already been used in constructing the coal plants, then you should be accountable [for] that, particularly in the impacts,” said Rivera, who also represents communities adversely affected by coal operations.

The pronouncements signaled a bold move for financiers who have been backing the recent coal expansion in the Philippines, one of the most vulnerable countries to climate change. They also came at a time when the country’s energy department announced a moratorium on new coal plants. Monetary regulators also released guidelines on how banks could adopt a sustainable finance framework.

IFC and RCBC have joined the list of banks around the world – now more than 100 and counting – that have pledged to exit coal and realign their portfolios with the ambitions of the 2015 Paris climate agreement to cut greenhouse gas emissions and limit global warming. However, banks and coal companies in Asia, including the Philippines, are moving at a snail’s pace in adopting policies that would phase out fossil fuel and pave the way for a credible transition to renewable energy. Asia has the most number of new, operating and planned coal plants.

Apart from RCBC and Bank of the Philippine Islands (BPI), which just last April announced plans to bring down its coal exposure by half in 2026 and to zero by 2037, no other local bank has followed suit or made public pronouncements. The momentum at the global level is high, but not so much at the local level. (PCIJ conducted an online search for other banks’ announcements on coal divestment, but did not find any so far.)

Billions of dollars

In fact, a 2020 study found that at least 15 Philippine banks had channeled a total of $13.42 billion to coal companies and coal projects in the Philippines from 2009 to 2019. More recent data from the German-based non-profit Urgewald showed that at least 10 Philippine banks gave $841 million in loans and participated in $1.3 billion worth of underwriting activities involving at least five coal companies since the Paris agreement.

Moreover, as of writing, banks have yet to submit their transition plans, as required six months after the release of the Bangko Sentral ng Pilipinas (BSP)’s Circular No. 1085 or the Sustainable Finance Framework.

Issued in April 2020, Circular No. 1085 outlines steps in mainstreaming sustainability principles in the financial sector. While it does not explicitly mention coal, the framework adopts the United Nations Environment Program’s full spectrum of sustainability, which includes climate and green finance.

The issuance of the circular is timely, said the BSP, as the impact of the pandemic covers Environmental, Social and Governance (ESG) issues that are all high on the country’s Sustainable Development Goals (SDGs), a set of global goals to eradicate extreme poverty and achieve sustainable development by 2030.

Rivera recalled that when the circular was unveiled in April 2020, some banks held back and asked the central bank to go slow because of the losses they had incurred amid the pandemic.

The issuance of the circular is a welcome development, but how it will be implemented is another thing, he said. “By the end of three years, banks should be transparent about their investments involving environment and social risks. That should be made public and also to guide their depositors and stockholders,” he said.

In an email to PCIJ, the BSP clarified that banks must submit transition plans upon the request of the central bank’s supervising department. Because of the pandemic, the BSP said it would be flexible as regards the submission of the plan.

The BSP also said it was helping banks adopt sustainability principles. The central bank’s initiatives include webinars that allow “first-mover” banks to share their experiences in Environmental and Social Risk Management (ESRM), sustainability reporting requirements, and the issuance of green, social or sustainability bonds.

Lyn Javier, managing director of the Supervisory Policy Sub-Sector under the BSP’s Financial Supervision Sector, said the central bank was cognizant that banks were in various stages of awareness and capability in managing financial risks arising from climate change.

This was the reason why the circular gave banks a transitory period of three years to make the necessary adjustments, considering that the change won’t happen overnight, she said. Key to this transition is the bank’s plan on how it will comply with standards, including the assessment of its loan portfolio.

The circular also emphasizes the role of the board of directors in the adoption of sustainability principles as well as in promoting a culture that fosters environmentally and socially responsible business decisions.

“As banks embrace sustainability principles, the tone that will be set by the board of directors and senior management will then reflect into the bank’s strategic objectives and risk appetite, including in business decisions on which projects to invest in or finance,” said the BSP.

In an email to PCIJ, BPI said it had prepared a transition plan to comply with the BSP’s sustainable finance circular. BPI also said it had established the BPI Group Sustainability Agenda Policy, which will guide the bank in integrating sustainability principles in its corporate governance, risk management, strategic objectives, and operations.

PCIJ sent requests for interviews and comments to the Bankers’ Association of the Philippines (BAP), BDO Unibank, the country’s biggest bank, and Metrobank. Metrobank, the third largest bank in the country in terms of assets, acknowledged PCIJ’s request and said it would answer PCIJ’s queries. The BAP said it was unable to grant an interview.

Can a bank be “sustainable” if it still funds coal?

Several banks even prior to the issuance of the circular have supported the sustainable finance agenda by taking on initiatives in line with the UN’s SDGs. Major banks have issued sustainability and green bonds and financed renewable energy projects.

The Bank of the Philippine Islands (BPI), for instance, issued the country’s first dollar-denominated Asean green bonds in September 2019. According to BPI, the fourth largest bank in the country, net proceeds of the bond sale would be used to finance or refinance eligible green projects, as described in BPI’s Green Finance Framework, developed four months earlier.

As of 2020, BPI has disbursed a cumulative of P130 billion toward 89 renewable energy projects, P29 billion toward 158 energy efficiency projects, and P32 billion toward 107 climate resilience projects.

Banks like BDO Unibank and Unionbank have also released their own sustainable finance frameworks, which exclude fossil-fuel power generation or transmission from the use of proceeds of their green or sustainability bonds.

These efforts are also all in line with sustainability reporting requirements set by the Securities and Exchange Commission.

But the Center for Energy, Ecology and Development (CEED) said banks should not lump climate and sustainability policies together.

“When we talk about climate guidelines – which is about the Paris agreement – the question is what concrete steps banks are taking to align their investments towards limiting global temperature rise to 1.5° Celsius by the end of the century,” says Gerry Arances, CEED executive director.

“If there is no position or plan on phasing out coal or even a public pronouncement at that, it would be difficult to say that a bank is a ‘sustainable’ bank,” he added.

At the global level, more and more banks are announcing that they will withdraw investments from coal-producing utilities. But activists continue to criticize the financial sector for being slow to act, highlighting how the world’s biggest banks have since continued bankrolling fossil-fuel producers since the Paris climate agreement was ratified in 2015.

The use of coal is the single biggest source of harmful greenhouse gas emissions that induce the worsening climate crisis. Communities hosting coal plants have also been documented to suffer from air, water and land pollution.

Scorecard tracks new coal commitments

The Withdraw From Coal Campaign’s April 2021 Coal Divestment Scorecard shows that while banks have garnered better scores on climate action, their coal financing activities have pulled their scores down.

The scorecard is a coal exposure and policy assessment tool developed by environmental groups to help banks rethink their coal financing activities and assess the risks involved. It is the only one of its kind in the developing world. CEED is among the proponents of the campaign.

The first Coal Divestment Criteria and Scorecard in May 2020 identified at least 15 banks that channelled a total of $13.42 billion to coal companies and coal projects in the Philippines from 2009 to 2019. These banks have either financed projects for power plants, mines, and infrastructure; underwrote coal companies’ various debt issuances; raised capital for coal companies; or directly invested and managed coal assets.

According to the more recent April 2021 issue, BPI remains the country’s top coal financier, having committed to underwrite a bond issuance for AboitizPower Corp., the second largest coal developer in the Philippines. BPI has committed to underwrite over P1 billion of AboitizPower’s new corporate retail bonds to be used to redeem 2014 bonds that were utilized to fund coal plants in Pagbilao, Cebu, and Davao. In total, BPI has funded 15 coal plant projects and six coal developer companies.

BPI clarified that the bank did underwrite AboitizPower bonds whose proceeds were used to redeem the 2014 bonds. The 2014 bonds, the bank said, were used to fund several power plants, including hydropower plants in Manolo Fortich, Bukidnon and Sabangan, Mt. Province.

Moreover, according to the study, BDO, China Bank, and Metrobank had joined BPI as joint issue managers, joint lead underwriters and joint bookrunners for AboitizPower’s newly registered bonds.

The Philippine National Bank (PNB) and BDO retained their ranks as the second and third largest coal financiers in the country. PNB financed nine coal plants, while BDO, the largest bank in the country, financed at least 14 coal plants. The study found that both banks frequently acted as the mandated lead arrangers and lead issuers for a combined 33 deals.

Due to its new coal exposure, China Bank rose five ranks to become the sixth top coal financier in the country, the study found.

The scorecard uses data from the following sources to determine the contributions of Philippine banks to the coal industry: Thomson Reuters Project Finance International; Final Prospectuses and Offer Supplements for the Issuance of Financial Instruments; Philippine Dealing System Holdings (PDS) Group; Urgewald Coal Financiers Database; and the Global Energy Monitor.

The published scorecard does not include a breakdown of each bank’s coal exposure. A check with the finance data of the Global Coal Exit List (GCEL) 2020, published by German-based non-profit Urgewald, showed that at least 10 Philippine banks gave $841 million in loans and participated in $1.3 billion worth of underwriting activities involving at least five coal companies. (Check out the list of coal companies that are on the Global Coal Exit List 2020.)

The study, published in February 2021, showed that 4,488 institutional investors held investments totaling $1.03 trillion in companies operating along the thermal coal value chain. Urgewald data cover two years, from October 2018 – when leading climate scientists recommended limiting global warming to 1.5° Celsius – until October 2020.

Vested relationships, interlocking investments

PCIJ did not find publicly available information on banks’ coal investments vis-a-vis its total portfolio. The BSP does not collect such information. Sustainability reports that banks submit to the SEC include some information on their power generation loan mix but not in comparison with their total portfolios.

BPI’s energy generation portfolio, for instance, is broken down as follows: 45% renewable energy, 45% coal and diesel, and 10% gas.

What is reported to the BSP is a summary of outstanding loans to various sectors in production and housing consumption. The sector “Electricity, Gas, Steam and Air-Conditioning Supply,” according to the BSP, includes both coal-based power generation as well as renewable energy and other energy efficiency projects.

According to BSP data as of March 2021, Philippine banks granted a total of P1.06 trillion to the sector, representing a tenth of the total outstanding loans given by the entire banking system. The share for coal projects should be lower as the figure included other energy projects. The percentage differed for each bank as they had varying exposures to coal.

Finance experts also estimated the figures to be minimal. Lawyer Antonio La Viña said coal investments were so small percentage-wise, which would make it reasonable for banks to let them go, said. La Viña is the executive director of the Manila Observatory, which is also part of the Withdraw From Coal Campaign.

A finance expert, who heads a regional policy think-tank, said coal investments by at least two major banks in the region accounted for under 2 percent of their respective portfolios. The argument put forward by these banks, he said, was the reverse — that they should be given a pass for such small exposure to coal.

In Arances’ view, banks already have internal policies in support of sustainable finance but it would be difficult for them to defund coal because many of these ventures are owned by conglomerates such as San Miguel Corp. and AboitizPower, which are major clients. Many Philippine banks are themselves part of large conglomerates.

“Ang dami na nilang investments na mahihirapan ang isang bangko (They have so many investments, making it hard for one bank). We understand that because it will shake up their whole investment portfolio. So that’s the thing here. Kaya hirap na hirap talaga sila (That’s why it’s so difficult for them).”

For La Vina, it’s all about relationships that banks don’t want to let go. The former environment undersecretary also mentioned the Aboitizes who own Aboitiz Power and Ramon Ang of San Miguel Corp. Aboitiz and San Miguel are the country’s biggest power suppliers.

“For me, it’s more about the vested relationships rather than the real economic value of all of these assets,” he says. “[It’s about] interlocking investments, relationships that they wouldn’t want to let go, or they are afraid that if they stop funding these people for coal they’ll also go somewhere else for other things.”

BPI said it evaluates all financing proposals on the basis of the merits of the project, including financial viability, credit metrics and sponsor support. Projects sponsored by large corporates with strong balance sheets have done well in the past based on credit performance, the bank said.

Large conglomerates with diversified energy portfolios have also put in place their respective ESG frameworks which incorporate, among others, initiatives to pursue more renewable energy projects. These developments are incorporated in BPI’s credit assessment, the bank said.

Ayala Corp., a major coal developer in the Philippines, for instance, announced in April 2020 that it would fully divest from coal by 2030.

Southeast Asia is ‘stuck’

A finance expert, who works with financial institutions and regulators in the region, said the big question was how to help banks in the transition, as project lending is not like a tap that can just be turned on or off.

“A lot of these projects form part of a blueprint and that blueprint has existed for a long time ago and fits with public components,” he said.

It’s also about a credible transition to renewable energy. “Transitioning cannot mean that you say, ‘We need time because the economy is not ready so we’ll take the time to transition.’ It means that you have a serious target,” he said.

The expert sees at least three stumbling blocks: fitting renewable power supply into the power transmission grid, energy security, and political considerations especially between trading partners.

CEED’s Arances backed the expert’s observations, saying the electric grid in the Philippines needed to be developed to match the requirements of renewable energy. A smart grid that can absorb as much intermittent electricity as possible was needed, he said.

“The reality is Southeast Asia is actually stuck if coal consumption in Asean is going to increase,” the finance expert said. Projections from a 2014 study by the Asian Development Bank (ADB) showed that while Southeast Asia would increase its renewable generation share by 8% to 27%, it would also increase its share of coal from 36% to 42% by 2030.

According to the ADB paper, the Philippines is also expected to become the most coal-dependent country in Southeast Asia in 12 years or by 2026.

The current draft of the Philippine Energy Plan (2018-2040) also projects a significant share of coal in the energy mix at 58.9% by the end of the decade. Back in 2014, coal had a 43% share in power generation.

These estimates do not yet take into account the recent moratorium placed by the Department of Energy (DOE) on new coal applications. The moratorium however does not apply to at least 22 proposed coal plants approved for construction.

But the ADB study did find that the growth of renewable energy use in the Philippines would outpace that of coal use, at 151% between 2014 to 2030 against 75% for coal during the same period.

Road to renewable

Not all is bleak, however. Sources interviewed for this story all said that bringing the share of coal down was possible because technology and economic variables had improved for renewables.

The status quo is changing and previous arguments against renewable energy no longer apply. Cost and efficiency for both solar and wind have improved significantly, with prices going down by as much as 60 percent in the last 15 years. Technology has thus made it feasible for more people to adopt renewables.

Bankability, profitability and affordability are all part of the equation, said Arances. Coal is only deemed the cheapest source of electricity because of the current system. Bid requirements for power supply agreements, for instance, are set so high in terms of wattage, making it hard for renewable energy companies to qualify.

The lay of the land in the power sector needs to shift out of coal’s favor first and foremost, according to experts. Key to this shift is the Renewable Energy Act, which was passed in 2008 but whose implementation has been delayed.

In fact, in the same year when PMCJ filed the IFC case, the network also filed a mandamus before the Supreme Court against the DOE, claiming that the department did not draw up renewable energy regulations.

Rivera took note of the issuance of the rules for Renewable Portfolio Standards, establishment of the Green Energy Options Program, and reduction of dependence on fossil fuels.

The Green Energy Options Program, for instance, allows consumers to generate their own electricity and encourages utility companies to offer options to consumers who want their electricity to come from renewable energy.

“Hindi nila nilagyan ng provisions kaya natengga ‘yan for more than 10 years (They did not put provisions in place so it was delayed for more than 10 years),” he said.

PMCJ’s case was brought to the Court of Appeals, which ruled in favor of the complaint. The DOE was ordered to draft implementing rules and regulations in 2019.

The problem is systemic, said Greenpeace Campaigner Khevin Yu. Since the energy system is privatized, all the government can do is to make plans and dangle incentives, which have yet to be implemented since the Renewable Energy Act is still not in full effect. This is one of the major barriers for power companies in tapping renewable energy, he said.

BPI said DOE’s moratorium on the approval of new coal projects was a good start. Different government agencies may consider providing different forms of incentives to boost renewable energy, energy efficiency and even green building portfolios, it said.

Since the passage of the Renewable Energy Act in 2008, the country’s renewable energy mix has remained at about 30% a decade later, with at least 45 more coal projects still in the pipeline. Instead of developing solar power, coal power plants were built.

“What happened was so ironic. Rather than going through a clean renewable energy transition, a dirty energy transition took place,” Yu says.

Greenpeace is now running a campaign to push Meralco, the largest distribution utility in the Philippines, and its power generation subsidiary MGen Power, to move away from coal. In its recent report titled Decarbonizing Meralco, Greenpeace said Meralco relied heavily on dirty power sources, with fossil gas taking up 61% of the company’s energy mix; coal, 27%; and oil, 10%. Renewable energy accounted for a meager 2.6%. The latest data on the company’s current and future power supply agreements showed that fossil fuels would remain dominant at 94% of the mix, with the share of renewables going up by only 6%.

If Meralco moves, it will be a huge game changer for energy transition, according to renewable energy advocates. The pandemic and ensuing lockdowns have exposed the problems of the country’s overreliance on coal as a source of energy. Consumers experienced the controversial “bill shock” last year, which Rivera and Yu said was partly because consumers paid for the cost of oversupply that could not be utilized by industries during the lockdown.

The Philippines imports at least 75% of its coal from Indonesia, Australia, China and Vietnam. The rest of the country’s energy needs are covered by a mix of local energy generators, including coal plants funded by banks.

“If we have renewable energy, we can produce energy here and not import and prevent price fluctuations,” says Yu. “Electric consumers will be much happier than now when every month electricity rates are just going up.”

*This report was written and produced as part of a media skills development program delivered by the Thomson Reuters Foundation. The content is the sole responsibility of the author and the publisher.