Private sector investor participation in managed phase-out (MPO) projects is essential for scaling up early coal retirements in the Asia-Pacifc region, according to analysts at Sustainable Fitch, but asset managers remain wary.
Many asset managers and financial institutions are concerned about investing in MPO projects because of the implications for increasing their financed emissions, reputational risks and accusations of greenwashing, according to the analysts.
In Sustainable Fitch’s view, coal phase-out frameworks are still in their early stages, and it will take several years before more robust guidelines are developed for corporates and investors to effectively navigate managed coal phase-outs.
In a bid to help calm investor fears, several international bodies have recently developed frameworks setting out principles, detailed criteria, and financing mechanisms to improve MPO transactions’ credibility, and encourage investor support.
The Glasgow Financial Alliance for Net Zero’s (GFANZ) voluntary guidance on financing early retirement of coal plants, is one example. Also the draft Singapore-Asia and ASEAN sustainable finance taxonomies’ relevant criteria.
The frameworks follow, and seek to improve on, the Just Energy Transition Partnerships signed with South Africa, Indonesia and Viet Nam, and the Asian Development Bank’s Energy Transition Mechanism.
The criteria set by GFANZ, and the Singapore-Asia and Asean frameworks are fairly demanding by regional standards, Sustainable Fitch pointed out.
But the analysts added this is key for ensuring their climate mitigation credentials, as any watering down of requirements would exacerbate greenwashing risks for investors, who are likely to proceed cautiously given the absence of stronger policy signals from national governments.
Despite concerns, early retirement and phase-out of coal-fired power plants continues to gain momentum in Apac, the Sustainable Fitch analysts found.
Progress comes on the back of rising investor interest, international and local stakeholder pressure, and tentative commitments by regional policymakers to reduce reliance on coal.
It will not be possible to achieve the goals of the Paris Agreement without capping and then steadily reducing Apac’s coal generation capacity, the analysts added.
However, examples of actual early coal plant retirement projects in Apac remain rare and multi-stakeholder initiatives to expand decommissioning, and the replacement of coal capacity with clean energy, are in their very early stages.
The variety of entities and stakeholders involved in, or affected by, coal MPO projects means they are likely to take several years to be ramped up, Sustainable Fitch said.
They will also be structured on a case-by-case basis for now, given the lack of a one-size-fits-all financing model.
Most Apac jurisdictions, however, have not made explicit coal phase-out policy commitments.