Nedbank Group Ltd., South Africa's fourth-largest bank by assets, on April 22 pledged to stop funding new thermal coal mines from 2025 and will no longer directly finance new oil and gas exploration with immediate effect.
The lender, which has already committed to not support any new coal-fired power plants, also promised to cease financing new oil production from 2035 as part of its 2021 energy policy.
Nedbank has long positioned itself as the South African bank most committed to sustainability and is betting that the opportunity — and financial rewards — to fund renewable energy infrastructure will exceed those related to hydrocarbons despite the country's huge reliance on coal, which provides 88% of its electricity and as an industry has huge political clout.
1st mover advantage
"We believe we can offset any consequential [financial] impact through being a first adopter or first mover and leveraging our credentials as a major financier of renewable energy programs or projects," Nedbank CFO Mike Davis told S&P Global Market Intelligence.
"We will offset any negative or adverse consequences through the transition and financing of new and additional initiatives in the renewable energy and embedded energy segments."
Embedded energy refers to technologies, particularly related to renewable energy, that provide off-grid power such as small-scale solar panels and heat pumps and energy storage devices such as batteries. About 9% of South Africa's population has no access to electricity, according to the World Bank.
As well as quitting funding domestic coal mines by 2025, Nedbank pledged to immediately halt financing coal mines outside South Africa.
"These are not just big steps in the South African context," said Tracey Davies, a director at shareholder activism nonprofit Just Share. "It's not the kind of language you often see from banks anywhere. Of course, it's not perfect, but it really shows a genuine and greenwash-free understanding of the [climate change] situation and the action we need to take to tackle it."
Lending to coal mining and related companies will represent no more than 0.5% of Nedbank's loan book by 2030. Its current ceiling is 1% and it is below that level at present, but could increase up to this limit, Davis said, in order to help ease South Africa's power shortage that has led state-owned utility Eskom to cut power supplies frequently.
"We cannot be irresponsible, non-pragmatic, or put the energy system at risk as a result of not having any capacity to support thermal coal in the short term," Davis said.
Nedbank, which has the best environmental, social and governance score among South Africa's major banks according to both S&P Global and S&P Dow Jones Indices' rankings, says it will continue to finance natural gas production. The bank believes that gas, which generates lower carbon dioxide emissions than coal and oil, is pivotal to transitioning to zero-carbon energy production by 2050.
Another pledge in Nedbank's energy policy is to not finance new "utility-scale" gas-fired power generation projects from 2030 unless these would convert existing coal or oil power plants or would be used as a backup for renewable power stations.
The bank also aims to have no exposure to fossil fuel-related activities by 2045. Amid growing skepticism about net-zero carbon pledges the various trade-offs companies can use to achieve such goals, "for a bank to commit to zero exposure without putting the word 'net' in front of it is globally significant," added Just Share's Davies.
Nedbank's Davis explained the reasoning behind this promise: "It's important to commit to zero as opposed to net-zero; otherwise, you get into a big loop where you're not quite sure what you're committed to."
Nedbank could shorten the time frame to achieve its various targets, said Davis. The bank will increase its funding of renewable energy projects to 50 billion rand from about 32 billion rand currently, and also aims to finance 2 billion rand of embedded energy projects by the end of 2022.
"At this particular point in time, we don't know to what extent we will need to support oil and gas, for example, as a means of moving away from thermal coal," he added.
"The bottom line is that Africa cannot afford not to transition because the impact of climate change will be worse on Africa, and we don't necessarily have the appropriate resources to respond."