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The role of banks as the climate changes

What is the role of a bank in addressing the challenge of climate change? Is it to support government policies? Or should banks be doing more to speed up the transition to a low-carbon economy by prioritising the financing of low or zero-emission technologies that have the potential to disrupt traditional models of emissions-intensive energy generation?

This threat of disruption is a hot topic in financial services today and climate change is another example - as our customers in the natural resources and energy sectors can attest.

"The threat of disruption is a hot topic in the financial services sector today and climate change is another example of this."
Christina Tonkin, Managing Director Global Loans & Advisory at ANZ

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For example, there has been significant growth in solar power in the Australian energy market with the Clean Energy Council reporting households installed a solar PV system every 2.8 minutes in 2014. This means there are more than 1.4 million solar power systems in homes today and 15,000 in businesses.

Small-scale solar was responsible for 15.3 per cent of Australia's clean energy generation and produced 2.1 per cent of the country's total electricity in 2014.

If batteries become cheap and reliable enough to store and use all this energy, it could mean major change for Australia's energy industry - presenting both a threat and an opportunity – for our major domestic energy retailers.

This is not a trend isolated to Australia. In India, the Government has announced ambitious plans to increase solar PV generation from 6 gigawatts of capacity today to 100 gigawatts by 2022, to ensure they meet their pledge to increase non-fossil fuel power generation to 40 per cent by 2030.

Arguably, there'll be little disruption if energy retailers get on board and embrace these new technologies which will otherwise erode their market share. The clever companies understand this and will evolve their businesses to meet the challenge of 'distributed' energy such as solar PV.

But is it the role of banks to be supporting these cleaner forms of energy generation, potentially at the expense of traditional fossil fuel energy generation, which has provided reliable and affordable power for the best part of a century?

From a risk perspective, there are those who argue it would be prudent for banks to make or accelerate this shift. And then there are others who argue banks should stick to what they know best – facilitating economic growth and leaving the public policy decisions to government.

Today, coal provides around 40 per cent of the world's electricity needs. Credible global future energy scenarios, including one by the International Energy Agency, forecast coal will continue to comprise a significant share of the energy mix in the short to medium term.

Even taking into account the disruptive forces at play, the transition to a low carbon economy will take some time. And that's before we consider there are parts of the developing world where much of the population has no access to reliable, safe and affordable electricity – something that as a bank operating in emerging markets, we must be mindful of.

PRAGMATIC MEASURES

We know climate change is a topic of significant interest to many of our stakeholders. I am often asked what role ANZ is playing in supporting the transition to a low carbon economy and in particular whether we are anticipating trends that may affect our customers in carbon-intensive industries. Are we seizing opportunities to finance new low emissions technologies?

ANZ supports the shared goal of governments around the world seeking to limit global warming to no more than 2 degrees above pre-industrial levels.

In doing so, we recognise climate change creates risks and opportunities, that some traditional business models, underpinned by cheap fossil fuels, may be at risk from disruptive technologies.

It's also important to understand that although reducing carbon emissions from power generation is vital, there are many other ways to reduce emissions in arguably a more cost-effective way. Energy-efficient appliances and building design, smart meters and time-of-use pricing can reduce the load on our electricity grid at peak times, reducing demand and carbon emissions at the same time.

In this context, ANZ has announced new measures to support the transition to a low carbon economy. We are making a pledge to support our customers' emissions-reducing activities, introducing new rules on coal lending and making a strong public commitment to play a role in the transition.

STRENGTHENING OUR SENSITIVE SECTOR POLICIES

The UN Climate Change Conference in Paris in December will bring together over 190 member nations to discuss a new global agreement to reduce carbon emissions.

To support the efforts of governments in our markets of operation, we want to encourage the development of new industries and business models, supporting innovators in both small and large businesses to create solutions that will drive the changes needed to achieve a low emissions future.

It is for this reason we conducted a comprehensive review of our “sensitive sector" policies for energy and extractive industries over the past year. This resulted in a new pledge to fund and facilitate $A10 billion over five years for our customers' activities, supporting pragmatic measures that reduce emissions while ensuring economic growth.

These measures include increased energy efficiency in industry, low emissions transport, green buildings, reforestation, renewable energy and battery storage, emerging technologies (such as carbon capture and storage) and climate change adaptation measures.

ANZ will now only consider financing new single-asset coal-fired power plants that use advanced technology and higher quality coal to reduce emissions to at least 0.8 tC02/MWh. This means we will not finance any new single-asset conventional coal fired power plants.

We have strengthenedour due diligence processes which govern our lending to coal mining, transportation and power generation, requiring our customers to meet or migrate towards best-practice greenhouse gas emissions and improved energy efficiency.

We recognise the importance of strong environmental standards set by governments. As a result, as a first step we will assess our customers' compliance with relevant host country laws and regulations on social and environmental issues as part of applying our policies.

Everyone has a role to play in addressing the changing climate and its impact on the economy. ANZ believes these changes are an important step in the process.

Christina Tonkin is Managing Director Global Loans & Advisory at ANZ.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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