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RBS curbing fossil fuel financing, taking active approach to climate change

Royal Bank of Scotland Group PLC is the latest major financial institution making moves to exit certain parts of the fossil fuel sector, particularly coal, to address concerns about global climate change.

RBS CEO Alison Rose said on a Feb. 14 earnings call that the company wants to help speed up the transition to a low-carbon economy. The bank will do so by moving away from financing activities in the coal, oil and gas sectors if those companies do not have credible transition plans in line with the Paris Agreement on climate change in place by the end of 2021.

"This is the defining issue of our generation," Rose said of climate change. "We have a responsibility to play an active role in helping find solutions."

RBS had already moved away from financing new coal-fired power plants or new thermal coal mines. It also restricted investments in mining or power companies where more than 40% of the business activities involved coal. In its annual report, RBS said it would stop lending and underwriting to companies with more than 15% of their activities related to thermal and lignite coal unless they have a plan to be aligned with Paris Agreement goals by the end of 2021. RBS plans a full phase-out of coal by 2030.

Similarly, the bank will stop lending and underwriting to major oil and gas producers unless they have a "credible transition plan" aligned with the climate agreement in the same time frame.

On the other hand, RBS will provide an additional £20 billion for climate and sustainability financing between 2020 and 2022, according to its annual report. At least 25% of the company's hubs for accelerating entrepreneurship will be dedicated to businesses with sustainable environmental activities at their core. Executive pay is also being structured to include consideration of climate targets.

RBS recently executed a £1.1 billion securitization deal that allows the bank to recycle capital and increase lending to the sustainable or renewable energy sectors, according to a Jan. 30 news release.

"As the largest supporter of British businesses — and the biggest lender to the renewable energy sector in the UK — we have an important role to play in supporting Britain's transition to a low or zero-carbon economy," Rose said in the statement.

Rose said Feb. 14 that the bank would make its own operations "climate-positive" by 2025 as the institution drives a material shift in its financial activities over the next 10 years. RBS aims to at least halve the climate impact of its financing activity by 2030.

"There is a clear market appetite to shift to more energy-efficient buildings as well as for greater use of renewables and electric vehicles," Rose said. "However, demand is not being met with supply. Our strong market positions and expertise in these sectors requiring transitional investments, be it agriculture or transport, means we are well placed to play a leading role in this transformation and the financing requirements."

The announcement comes amid a broad shift away from the sector. BlackRock Inc., the world's largest asset manager, recently said it would divest from companies earning more than 25% of their revenue from thermal coal. Goldman Sachs Group Inc. recently pledged it would stop funding fossil fuel projects as well.

The financial communities' growing willingness to take action against climate change is rippling through the energy sector. Coal producers largely find it very difficult to even start conversations with some bankers, insurers or other financial services screening for environmental, social and governance criteria. An executive with U.S. coal producer Contura Energy Inc. recently said ESG issues have "caught fire" and are having a real impact on the sector. The oil and gas sector, meanwhile, is quickly rolling out ambitious emissions reductions goals as part of long-term plans shared with investors.

On a call announcing a pledge to cut company emissions to net-zero by 2050, BP PLC CEO Bernard Looney acknowledged that protesters, some investors and even part of the company's own staff see the oil industry as out of step with the rest of society.

"That's an uncomfortable place to be," Looney said. "Let me be very clear today that I get it. The world does have a carbon budget. It is finite, and it is running out fast, and we need a rapid transition to net-zero [emissions]."

The new energy policies from RBS were announced alongside broader changes for the bank including a plan to change the entity's name to NatWest Group PLC in 2020. The bank's new CEO said the new strategy aims to make RBS a "purpose-led organization."