Under growing pressure to boycott coal, banks face ‘client dilemma’

South Korea’s leading commercial banks face a growing dilemma, caught between the interests of clients that generate power from coal and a global drive for coal-free financing.

While their loan volume continues to grow in both the coal and renewable energy sectors, pressure is building on Korean lenders to shift their investment rules toward decarbonization.

According to industry data submitted to the National Assembly, the country’s four major commercial banks -- Shinhan, KB Kookmin, KEB Hana, and Woori -- had 472 billion won ($396 million) in their total coal-powered project financing loan balance as of the end of last year, up 46 percent from a year earlier.

Marking the highest on-year rise was Shinhan Bank, which held 124.4 billion won in the corresponding balance, up 90.4 billion won or 266 percent from the previous year, due to its involvement in recent coal-fired power plant projects in Australia and Goseong, Gangwon Province.

Coming in next was KB Kookmin Bank, which saw its coal-finance loan balance climb 63.6 billion won or 133 percent in the same period to total 111.4 billion won as of end-2018.

While Woori and KB Kookmin saw a decline in the corresponding balance in the first quarter of this year, Shinhan and KEB Hana continued to increase their coal financing.

Despite the recent growth in coal finance, banks have also been expanding renewable energy investments, looking to adopt a clean energy paradigm in the long term, according to officials.

In the case of Shinhan Bank, renewables accounted for 252.5 billion won or 51 percent of the total loan balance as of the end of the first quarter this year.

The bank had earlier announced its “Eco Transformation” vision, vowing to invest 20 trillion won in ecofriendly businesses by 2030. KB Kookmin Bank is seeking to invest an additional 305 billion won in six designated renewables projects in the coming years.

The coexistence of coal-driven investment and coal-free financing is largely due to the conflict of interests among the lenders’ customers, observers noted.

“As one of the world’s biggest financiers of coal power, South Korea is under growing pressure to boycott coal financing,” said Lee Jong-oh, director of the Korea Sustainability Investing Forum. But he said local financial organizations are still reluctant to officially shift to decarbonization policies, in fear of offending their clients.

The KSIF civic group was in charge of leading two major public fund operators -- Korea’s Teachers’ Pension and the Government Employees Pension System -- in boycotting coal financing last year.

But other major clients are big power generators that still have significant influence on the industry, he added.

“The state-run Korea Electric Power Corp. and other private players, for instance, hold retirement pension funds amounting to 1.5 trillion won, making it tricky for fund-operating banks to run against their policies,” Lee said.

Experts warned that the apparently contradictory investment portfolios may backfire on Korean lenders.

“Coal power will continue to remain important but its share in Asia is declining in line with governments’ climate change goals,” global credit ratings agency Moody’s Investor Service said in a recent report.

“Even without such policy incentives, the declining costs and increased storage efficiency of renewable power will expand the leverage of non-coal energy supplies.”

Though most Asian countries, including South Korea, would not immediately reduce or eliminate coal energy, they will increasingly be bound by limited funding options, as investors’ risk appetite moves away from new coal power projects, the agency added.

“Many public funds, such as the National Pension Service and the Export-Import Bank of Korea, now hesitate to make new investments in coal projects because environmental issues have strongly been raised during parliamentary inspections over the past two years,” said Lee So-young, attorney and vice chief of local environmental civic group Solutions for Our Climate.

Though relatively free from such pressure, private banks are also gradually moving toward coal-free financing, changing the global investment trend, she explained.

“Many financial organizations, including France’s AXA, Germany’s Allianz and Britain’s HSBC, have vowed not to invest in coal projects, not for ethical reasons but because they view coal financing as not profitable any more for their clients.”

By Bae Hyun-jung and Shin Ji-hye
(tellme@heraldcorp.com) (shinjh@heraldcorp.com)