Australian bank 2022 shareholder climate resolutions:
Finance the transition, not its obstruction

Investors will need to consider the climate performance of three Australian banks ANZ, NAB and Westpac when they vote on shareholder climate resolutions at the banks’ December Annual General Meetings. The resolutions ask the banks to honour their commitments to align lending with the Paris Agreement and stop financing expansionary fossil fuel projects.

Investors are encouraged to carefully consider support for these important resolutions, given the crucial enabling role major Australian banks are playing in the development of new large-scale fossil fuel projects and infrastructure in Australia and globally.

Australian Ethical Investment has co-filed these resolutions at the two banks which we invest in, NAB and Westpac. Based on current information, we propose to vote in favour of those resolutions. Our rationale for supporting the resolutions is set out below. In addition the Investor Briefing on the resolutions prepared by environmental finance organisation Market Forces (which coordinated the resolutions and their filing by over 100 shareholders) is available here: https://www.marketforces.org.au/wp-content/uploads/2022/11/2022-11-Market-Forces-investor-briefing-update-ANZ-NAB-WBC-shareholder-resolutions.pdf

The importance of responsible climate banking

Big banks are essential to help fund the US$4+ trillion per year the IEA has forecast for investment in climate solutions by 2030 to achieve net zero by 2050. At the same time climate responsible banks need to constrain their lending to high emissions activities and companies which are not aligning with a Paris Agreement transition. This is crucial as banks can become a funder of last resort for those companies who are losing access to other sources of capital because of their failure to set and implement transition paths. The practical implications loom large in Australia with oil and gas companies seeking to progress multiple greenfield gas projects which, if developed, will obstruct realisation of the IEA NZE2050 scenario.

Current bank climate lending criteria allow new finance for customers which are developing major new fossil fuel infrastructure out-of-line with Paris

The current lending criteria of the major Australian banks give fossil fuel companies too much time – three and more years – to align their business strategy with a 1.5 degree transition. Banks should not wait this long to refuse to advance or renew funding to climate laggards. Fossil fuel customers should be making capital allocation decisions in line with credible transition plans now. It is not sufficient for customers to simply give general commitments to support the Paris goals.

We can see the case for banks to provide some time for companies and executives genuinely grappling with the challenge of winding down existing high-emissions activities. We see no case for latitude when customers continue to allocate capital to expansion of those high emission activities rather than to the alternative technologies and infrastructure which need to replace them. Recognising the difference between these two cases is crucial from both a climate and investment perspective.

Restrictions on ‘direct’ finance are not enough

While there are some increased restrictions on where the banks will provide direct or project finance for new fossil fuel projects, these restrictions don’t apply to banks’ general corporate lending facilities e.g. ‘working capital facilities’. This is a major loophole. Although this sort of general lending isn’t linked to specific projects, it can be used by the borrower for e.g. expansionary fossil fuel projects. Banks should be testing whether high emissions customers are genuinely aligning with the Paris Agreement – including scrutinising new capital spending – before providing or renewing funding of any type.

Energy supply & security concerns reinforce the need for clear lending restrictions

European gas supply disruption and energy price rises don’t underwrite the financial viability of new long-life gas projects and infrastructure, particularly in the face of lower cost wind and solar and emerging competitors like green hydrogen. An orderly, accelerated transition (with protections for vulnerable workers and consumers) to a fossil-fuel-free energy system will deliver increased energy availability, security and affordability. Banks are playing an important role in that transition by facilitating investment in renewables and energy storage and an expanded and more flexible electricity grid. They should not be funding the projects and companies which are obstructing that transition.

Managing banking risk and opportunity

Paris-aligned lending criteria equip the major Australian banks to better manage and exploit climate risk and opportunity. Instead bank support for business-as-usual exposes them to increased financial risk, not only from direct exposure to high emissions companies with stranded assets and business models, but also from the losses they can expect across their housing, agricultural and other lending due to the impacts of higher levels of climate change – impacts like increased storms, floods and bushfires, and other social and natural capital disruptions.

Banks with credible climate criteria and action plans are also better positioned to exploit the banking opportunities presented by climate transition and adaptation. This extends beyond opportunities related to growth in climate solutions. Banks with climate credibility and expertise are more attractive banking partners for those high-emissions companies genuinely grappling with the transition of their businesses. Banks which are asking the difficult climate questions today, and supporting their customers in answering those questions, will be more secure long term banking partners than a bank which defers those complex questions for another time.

Changes we would like to see

Bank fossil fuel lending criteria should be tightened to demonstrate genuine Paris-alignment in bank lending practices. In particular the banks should address the gaps discussed above which allow use of new or renewed bank funding for expansionary fossil fuel projects out of line with Paris.

Alongside more rigorous lending criteria, the major Australian banks should take the business opportunity to establish themselves as sought-after expert partners in transition funding, through action like:

• Increased transparency about the assessment of Paris-alignment of major high-emissions projects they fund, and refuse to fund. While banks often cite confidentiality concerns for limited disclosure, we know these concerns do not constrain their disclosure about many projects they support, and we see other banks and insurers providing disclosure about transactions they have chosen not to participate in.
• Increased contribution of the banks’ sector and transition expertise to crucial public discussion of the need for stronger and broader climate policy to promote a fair, efficient and orderly net zero by 2050 transition.

 

Current big 4 Australian bank fossil fuel lending restrictions

This table summarises current public bank fossil fuel lending restrictions. Additional metrics and targets may be announced ahead of the AGMs.

Investors should also refer to the Investor Briefing prepared by environmental finance organisation Market Forces which includes their research on fossil fuel lending by the banks which undermine the banks’ commitments to the goal of net-zero emissions by 2050. This is available here: https://www.marketforces.org.au/wp-content/uploads/2022/11/2022-11-Market-Forces-investor-briefing-update-ANZ-NAB-WBC-shareholder-resolutions.pdf

Westpac (14 December AGM)

Oil and gas          

• Customers to have credible transition plans in place by 2025.
• New oil and gas customers to have public Paris aligned goals.
• No direct finance for greenfield oil and gas unless aligned with IEA NZE2050 or necessary for energy security.

Thermal coal       

• Reduce to zero by 2030 (companies >5% of revenue from thermal coal mining).
• No new thermal coal basins.

Electricity generation        

• Reduce intensity in line with 0.23t CO2e / MWh by 2025 and 0.10t by 2030.

 

ANZ (15 December AGM)

Thermal coal       

• No direct finance to new coal-fired power plants, thermal coal mines or expansions. Existing direct lending run off by 2030.
• No new thermal coal customers (>10% revenue, installed capacity or generation)
• Existing customers have until 2025 to disclose Paris aligned transition plans. If diversification not feasible, may still bank if business resilient under Paris aligned transition paths.

Electricity generation        

• 2030 intensity target 0.129t CO2e / MWh

 

NAB (16 December AGM)

Oil and gas          

• Capped oil and gas exposure (2021); reduce exposure from 2026 through to 2050, aligned to IEA NZE 2050.
• No direct finance greenfield projects outside Australia, and only gas in Australia if ‘plays a role’ in energy security. No new customers with predominant focus on oil extraction.

Thermal coal       

• No direct finance for new thermal coal mining projects; for new-to-bank thermal coal mining customers; for new or material expansions of coal-fired power generation facilities.
• Capped thermal coal mining exposures (2019); target to reduce thermal coal mining exposures 50% by 2026; to  zero by 2030

 

CBA (September AGM)

Oil and gas          

• No new oil and gas clients unless public commitment to goals of Paris Agreement.
• Upstream oil: reduce financed emissions 27% by 2030 from 2020 baseline (*achieved FY21).
• Upstream gas: reduce financed emissions 17% by 2030 from 2020 baseline (*achieved FY21).

Thermal coal       

• Reduce financed emissions to zero by 2030 (companies >5% of revenue from thermal coal mining).
• No project finance to new or expanded coal mines or to new coal power
• No new clients with >25% thermal coal revenue

Electricity generation        

• Reduce intensity in line with 0.105t by 2030.

 

 

The wording of the resolutions

The specific wording of the individual bank resolutions is included in the bank notices of meeting. The basic form of the resolutions is the same.

Climate Risk Safeguarding resolution

“Shareholders recognise the substantial transitional and physical risks of climate change and their potential financial impacts on our company. We also note our company's support for the Paris climate change agreement and the goal of net-zero emissions by 2050. Shareholders therefore request the company disclose, in subsequent annual reporting, information demonstrating how the company's financing will not be used for the purposes of new or expanded fossil fuel projects.”

Enabling amendment to the Company Constitution

There is also a resolution to insert the following new sub-clause in the banks’ corporate constitutions:

'Advisory resolutions': "The Company in general meeting may by ordinary resolution express an opinion or request information about the way in which a power of the Company partially or exclusively vested in the Directors has been or should be exercised. Such a resolution must relate to a material risk identified by the Directors or the Company and cannot advocate action that would violate any law or relate to any personal claim or grievance. Such a resolution is advisory only and does not bind the Directors or the Company".

Investors may choose to support the “Climate Risk Safeguarding” resolution through their proxy voting ahead of the meeting, irrespective of how they vote on the constitutional amendment resolution. Australian Ethical intends to vote in favour of both resolutions. The proposed constitutional amendment gives shareholders the right to propose resolutions for consideration at company meetings, provided they meet the requirements of the proposed new clause. Shareholder resolutions give all shareholders an opportunity to consider, discuss and express an opinion on important matters in an efficient and transparent way. Many countries allow shareholder resolutions of this type. Australia already allows non-binding votes on remuneration which have enhanced the quality of company- shareholder engagement without affecting director accountability. The proposed constitutional amendment does not displace the rights and responsibilities of directors for company business decisions. These shareholder resolutions do not bind directors. They simply supplement and make more accessible the range of mechanisms available to shareholders to express their views, such as private meetings, AGM comments and questions, and voting on the election and re-election of directors.

Contact details

For additional information or discussion, please contact Stuart Palmer, Head of Ethics Research, Australian Ethical Investment [email protected] +61 422 007 917.

 

3 November 2022