Stockholm (NordSIP) – At the start of May, Citi Group and the National Bank of Australia (NAB) came under fire by Ulf Erlandsson (Pictured, left; Svante Horn, senior advisor, right), Executive Chair at the Anthropocene Fixed Income Institute (AFII), who criticised their role in facilitating the coal mining and exports from Newcastle in New South Wales, Australia.
The Sustainability-Linked Loan
Two events triggered the ire of the AFII. The first event was an AUD515 million sustainability-linked loan made by NAB to the Port of Newcastle (PON), whose Waratah and Kooragang terminals had an annual coal capacity of 25Mt and 120Mt in 2019. The sustainability-linked loan was part of a broader AUD666 million refinancing facility for Port of Newcastle funded by a consortium of lenders.
According to the PON, the loan “incentivises Port of Newcastle by offering a lower margin on debt if it hits targets across a range of social and environmental metrics.” PON mentions five metrics tied to a margin reduction for PON. The environmental issue is that only one of the five metrics focuses on emissions and even so only on Scope 1 and 2 GHG emissions, which do not cover the sort of upstream emissions caused by exporting coal, which would be covered by Scope 3 emission metrics.
Scope 1 emissions focus on emissions created by the immediate activities of a business, while Scope 2 emissions focus on the indirect GHG emissions associated with the purchase of electricity, steam, heat, or cooling. Scope 3 emissions meanwhile “are the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly impacts in its value chain. Scope 3 emissions include all sources not within an organization’s scope 1 and 2. (…) Scope 3 emission sources include emissions both upstream and downstream of the organization’s activities.”
“[The PON] is important for purposes of the global climate challenge. The throughput, 158MT in 20201, is equivalent to almost 0.5 gigatonnes of CO2 emissions, meaning that roughly 1-1.5% of global GHG emissions are carried across the quays of Newcastle. The port is a crucial component for the ongoing building of new coal mines in Hunter’s Valley,” Erlandsson says.
Although the AFII describes the other criteria as laudable, it notes that NAB’s status as a green bond issuer is inconsistent with funding the distribution of coal from one of the main sources mining regions in the world.
“Thus, we would consider stripping NAB of any green bond label that might have been applied previously. NAB clearly shows that it is looking to financially profit from a prolonging of one of the world’s biggest coal operations, invalidating any hopes investors might have that the issuer is sincerely looking to contribute positively in the climate challenge. In the light of further construction plans for coal mines in the area, it is important that investors let it be known if they are not willing to co-finance such expansions through the balance sheet of NAB,” Erlandsson warns.
The second event was the issuance of a 10-year US Dollar bond by the Newcastle Coal Infrastructure Group. Taking note of Citi’s role as the main global dealer in the transaction, Erlandsson noted the fact that the global bank’s participation “is crucial to provide cheap capital to the world’s largest piece of coal infrastructure. Over 160 million tonnes of coal, most of it thermal, is shipped through PON’s dedicated coal terminals every year.”
“It is noteworthy that Citi was the only real investment bank syndicating the deal, with SMBC Nikko and NAB as joint leads. We believe it is likely that other global investment banks refrained to participate in the deal,” Erlandsson added.
“Without the Citi origination and syndication teams’ work, the Newcastle coal chain would be less attractive to run,” Erlandsson says. “Without their effort, the new coal mine projects in Hunter’s Valley would face harder economics and might even be unprofitable and cancelled. Every basis point counts!”
“I know there are some genuinely climate concerned parts of Citi, I can imagine their personal and business frustration when the deal teams jump into something like the NCIG deal,” Erlandsson concludes.
Image courtesy of AFII