Consumers who are eager to mitigate climate change can take many actions, such as by reducing the number of flights they take or installing solar panels on their homes. But the planet is in a race against time and individual action alone won’t help most countries reach net zero by 2050.
The goal is to prevent the planet from warming more than 1.5°C above pre-industrial levels.
Pondering this overwhelming problem, Harvard Business School (HBS) professors Boris Vallee and Daniel Green turned to the business world’s actions, and in 2021 began looking for evidence that the coal divestment policies of large banking institutions are effective at reducing carbon emissions.
Coal, after all, is the source of more than a fifth of all CO2 emissions and is more carbon-intensive than any other energy source; phasing out coal-fired power production is therefore critical to reaching net zero. The coal industry is also reliant on large amounts of capital, typically from banks.
Their report indicates promising results: coal firms that face strong divestment policies from their historic lenders reduce their borrowing by a quarter compared to their unaffected peers. This capital rationing leads to reductions in CO2 emissions, as divested firms are more likely to close facilities.
Awareness of this impact could also encourage business, government and civil leaders to further roll out these policies to tackle climate change, and possibly to other industries such as oil and gas.
“To break up the status quo and to decarbonise our economies, we need to think differently and ask new questions,” says Mr Vallee, who has been focusing recently on finance’s possible role in accelerating the transition to a low-carbon economy.
No evidence until now
Although the divestment movement began back in 2006 with a student campaign in the UK, until now, there’s been no proof that the banking industry’s experimental coal divestment policies achieve the desired results.
This evidence of the impact from coal divestment arrives as debate rages in the investment world around divestment vs engagement. Today’s leaders in the finance space face a dilemma: do they use their financial ‘seat at the table’ to convince a company to become greener? Or do they divest their funds, sending a signal to the company and market that dirty industries will find it harder to raise money?
Why does coal divestment work?
In short, money talks.
Mr Vallee and Mr Green’s research reveals that the coal industry has few options for securing alternative debt financing if an existing source vanishes. The number of banks that facilitate coal-related deals is so small — and the relationships so deeply entrenched — that by default, these bankers have disproportionate influence over what gets financed.
banks divesting from coal directly leads to real impact – more than anyone thought
Moreover, coal-fired power plants owned by companies that are exposed to bank divestment policies are more likely to be retired, the research shows.
“What we found in this case is that banks divesting from coal directly leads to real impact – more than anyone thought,” says Mr Vallee. “This means that the financial effects translate into environmental effects. By reducing capital expenditures, facilities are decommissioned and CO2 emissions ultimately fall, as any alternative source of energy is less carbon-intensive.”
For the project, they examined 12 years of data between 2009 and 2021 on banks’ coal divestment policies (tracked by the non-profit group Reclaim Finance), coal company financing transactions and financial statements, and the operating status of coal mines and coal-fired power plants.
They spoke with executives at several banks that have implemented coal divestment bans following the 2015 Paris Accords. The research team also gleaned insights from Berlin-based Urgewald, a non-profit that produces the Global Coal Exit List, which contains three divestment criteria that investors can apply to screen coal companies out of their portfolios.
The research identified about 80 banks around the world that have implemented coal divestment policies, affecting more than half of coal lending activity, according to Mr Vallee and Mr Green.
Not all bans created equal
Currently, the banks that are the most active in coal lending implement weaker divestment policies, according to the HBS research.
One classic weak policy is prohibiting only the worst practices, such as mountaintop removal coal mining, which cover only a small fraction of coal projects.
In contrast, a more sincere policy would phase out all types of coal projects, starting with new projects, then potentially banning new clients, and finally phasing out existing clients by lowering the threshold of revenue that they can earn from coal.
Barbara DeLollis is head of communications at Harvard Business School.
