In the near future, more stringent climate policies will affect economic performance of coal and other fossil fuel assets. According to the new report by Warsaw-based independent think tank WiseEuropa Institute – “The climate finance domino. Transition risks for the Polish financial sector” – this issue is particularly significant for Poland. The country faces a double challenge of high share of coal-based power generation and high investment needs associated with the necessary modernisation of the energy sector infrastructure in the coming years.
Climate change has introduced new categories of risks and opportunities on the capital market. These are already being recognised not only by the largest international investors and rating agencies, but also by international and European institutions. Climate risks include both physical risks caused by the climate change itself and transition risks arising from policies focused on building the low-emission economy. Importantly, ever more attention is placed on the financial dimension of these risks and their impact on the global economy. Recommendations from bodies such as the Task Force on Climate-related Financial Disclosures (TCFD), with the mandate from the G20 Financial Ministers, and the High Level Expert Group on Sustainable Finance (established by the European Commission, which has now proposed an EU Action Plan on Sustainable Finance) are likely to be reflected in the financial market reforms in the subsequent years. Their aim will be to motivate investors to the massive and standardized response to tackle climate risk and enhance opportunities related to the low-emission transition.
In this report, the WiseEuropa Institute has analysed this process with a particular focus on Poland. The report highlights the problem of disregarding climate risks by Polish financial institutions. With international entities focusing on investments in distribution networks and low-emission power generation, Polish banks will have to manage increasing risks related to fossil-fuel based projects. This asymmetry, in turn, limits the ability of the whole financial sector to finance carbon-intensive projects and provides the additional incentive to start addressing concerns regarding the carbon assets in domestic institutions’ portfolios.
The authors also assessed the feasibility and financial implications of alternative energy mix scenarios for Poland. They concluded that a combination of financial drivers makes further coal-based investments increasingly unlikely due to:
• insufficient resources of state-controlled energy companies,
• growing divestment movement among international investors,
• limited capacity of the domestic bond market,
• aversion of banks to the excessive concentration of risks in their credit portfolios.
“If Polish policymakers choose to disregard these limitations, they will increase the fragility of the financial sector, as the exposure to climate risks will be concentrated in domestic financial institutions,” said Maciej Bukowski President of WiseEuropa.
Currently, the share of carbon-intensive energy companies in the total corporate debt held by the Polish banks engaged in the sector amounts to 4%. If foreign-owned banks refuse further financing and the resulting gap is to be filled by the domestic banks, this figure will rise beyond 7%. Further involvement in the financing of new coal projects will increase this figure to 15%, which is comparable with the financing of highly diversified and much larger real estate and trade sectors.
– “High concentration of climate risk in a small number of state-controlled companies may lead to system-level problems for the Polish banking sector,” Bukowski added.
The report presents the strengths of energy mix scenarios which assume rapid roll-out of low-emission technologies. While these are more capital-intensive, the associated financing needs may be covered by a much broader set of investors, involve a much larger group of developers, and result in a sharp decrease in future climate risks.
The publication provides recommendations for the Polish financial sector, which should support its adaptation to the new European approach to sustainable finance. According to the authors, it is necessary to:
• ensure timely implementation of the TCFD recommendations by the financial sector and emission-intensive companies,
• encourage the energy sector to conduct carbon stress tests, which will include the absolute emissions reduction targets and not only the changes in the price of emission allowances,
• put the expansion of renewables and reserve capacities high among the national long-term strategies in order to decrease the country-specific regulatory risk and reduce the cost of financing for new investments,
• enable the participation of more diversified groups of investors on the market, who could engage in more projects: private sector, smaller entities, projects focused on renewables.