Banks Develop Carbon Risk Guidelines
Citi, JPMorgan Chase and
Morgan Stanley formed The Carbon Principles, which are climate change
guidelines for advisers and lenders to power companies. The principles
are the result of a nine-month effort to create an approach to
evaluating and addressing carbon risks in the financing of electric
The uncertainties around regional and national climate change policy
drive the need for the principles, the banks said in a recent release.
The financial institutions, in consultation with American Electric
Power, CMS Energy, DTE Energy, NRG Energy, PSEG, Sempra and Southern
Company. Environmental Defense and the Natural Resources Defense
Council, environmental non-governmental organizations, also advised on
the creation of the principles.
The consortium has developed an Enhanced Diligence framework to help
lenders better understand and evaluate the potential carbon risks
associated with coal plant investments.
The principles recognize the benefits of a portfolio approach to
meeting the power needs of consumers, without prescribing how power
companies should act to meet these needs. However, if high carbon
dioxide-emitting technologies are selected by power companies, the
signatory banks have agreed to follow the Enhanced Diligence process
and factor these risks and potential mitigants into the final financing
"There was full and frank dialogue around the table," said Matt
Arnold, director of Sustainable Finance, which helped coordinate the
development of the Principles and Enhanced Diligence process. "There
was a remarkable amount of debate and exchange of information and views
among the banks, power companies and environmental organizations. The
dialogue resulted in a rigorous analysis of the carbon risks in power
investments, and sets the stage for further discussion."
The principles are:
• Energy efficiency. The signatory financial institutions will
encourage clients to invest in cost-effective demand reduction, taking
into consideration the value of avoided carbon dioxide emissions.
• Renewable and low carbon distributed energy technologies. The
banks will encourage clients to invest in cost-effective renewables and
distributed technologies, taking into consideration the value of
avoided carbon dioxide emissions. They also will encourage legislative
and regulatory changes that remove barriers and promote such
investments (including related investments in infrastructure and
equipment needed to support the connection of renewable sources to the
• Conventional and advanced generation. (This may include power from
natural gas, coal and nuclear technologies.) Due to evolving climate
policy, investing in carbon dioxide-emitting fossil fuel generation
entails uncertain financial, regulatory and certain environmental
liability risks. It is the purpose of the Enhanced Diligence process to
assess and reflect these risks in the financing considerations for
certain fossil fuel generation. The banks will encourage regulatory and
legislative changes that facilitate carbon capture and storage.
"Leading utilities and financial institutions understand that the rules
of the road have changed for coal," said Mark Brownstein, managing
director of business partnerships for Environmental Defense. "These
principles are a first step in facilitating an honest assessment of
electric generation options in light of the obvious and pressing need
to substantially reduce national greenhouse gas pollution."
"To move the needle on global warming, clean energy technologies
need to be developed, demonstrated and deployed as quickly as
possible," said David Crane, president and chief executive officer of
NRG Energy Inc. "Given the capital intensive nature of this challenge,
we welcome these carbon principles as a sign that America's leading
financial institutions are ready to support a massive increase of
investment in clean energy solutions. With the support of both Wall
Street and public policymakers in Washington, the American power
industry can lead the way in achieving the dramatic GHG reductions that
are critical to the health of both our economy and our planet."