US: Coal mining the mountains has investors rattled

Published by MAC on 2010-09-05
Source: New York Times

Lenders Back Off of Environmental Risks

By Tom Zeller Jr.

New York Times

30 August 2010

Blasting off mountaintops to reach coal in Appalachia or churning out millions of tons of carbon dioxide to extract oil from sand in Alberta are among environmentalists' biggest industrial irritants. But they are also legal and lucrative.

For a growing number of banks, however, that does not seem to matter.

After years of legal entanglements arising from environmental messes and increased scrutiny of banks that finance the dirtiest industries, several large commercial lenders are taking a stand on industry practices that they regard as risky to their reputations and bottom lines.

In the most recent example, the banking giant Wells Fargo noted last month what it called "considerable attention and controversy" surrounding mountaintop removal mining, and said that its involvement with companies engaged in it was "limited and declining."

The bank was a small player in the sector, representing about $78 million in bonds and loan financing for such companies from 2008 to April of this year, according to data compiled by the Rainforest Action Network, an environmental group tracking the issue.

But the policy shift by Wells Fargo follows others over the last two years, including moves by Credit Suisse, Morgan Stanley, JPMorgan Chase, Bank of America and Citibank, to increase scrutiny of lending to companies involved in mountaintop removal - or to end the lending altogether.

HSBC, which is based in London, has curtailed its relationships with some producers of palm oil, which is often linked to deforestation in developing countries. The Dutch lender Rabobank has applied a nine-point checklist of conditions for would-be oil and gas borrowers that includes commitments to improve environmental performance and protect water quality.

In some cases, the changing policies represent an attempt to burnish green credentials in areas where the banks had little interest, and there is no indication that companies engaged in the objectionable practices cannot find financing elsewhere.

Still, banking analysts and others suggest that heated debate over climate change, water quality and other environmental considerations is forcing lenders to take a much harder - and often uncomfortable - look at where they extend credit, and to whom.

"It's one thing if your potential borrower is dumping cyanide in a river," said Karina Litvack, the head of governance and sustainable investment with F&C Investments, an investment management firm based in London. "But if they're dumping carbon dioxide into the air, which is not exactly illegal - what do you do? Banks are in kind of a quandary, because they are competing for business, and if they get holier-than-thou and start to play policeman, they risk allowing other banks to take that business."

Environmental risk has been on the radar for lenders since the 1980s and early 1990s, when courts began forcing some measure of responsibility on banks for the polluting factories, superfund sites and other environmental problems that had, to one degree or another, been facilitated by their financing.

Congress passed a law in 1996 that limited the exposure of lenders on this front, but since then, most major banks have developed environmental risk management divisions as part of their commercial banking due diligence efforts.

Now, the rise of murkier issues like global warming, along with increasing scrutiny by environmental groups of banks' investments in many other industries - like oil and gas development, nuclear power, coal-fired electricity generation, oil sands, fuel pipeline construction, dam building, forestry and even certain types of agriculture - are nudging lenders into new territory.

"We're taking a much closer look at a much broader variety of issues, not all of which are captured under state and local laws," said Stephanie Rico, a spokeswoman for the environmental affairs group at Wells Fargo.

Ms. Litvack, of F&C Investments, pointed to large protests last week by many climate activists outside the Royal Bank of Scotland in Edinburgh. At least a dozen protesters have been arrested in demonstrations against the bank's financing of oil sands development in Canada.

The Royal Bank of Canada, meanwhile, responding to intense pressure from environmental advocates denouncing the bank's financing of oil sands projects, hosted 18 international banks in Toronto in February for "a day of learning" on the "regulatory, social and environmental issues" surrounding the oil sands.

Globally, banks and environmental advocates are seeking to make things easier by developing best practices and other voluntary standards. Citigroup, JPMorgan Chase and Morgan Stanley helped initiate the Carbon Principles, which aim to standardize the assessment of "carbon risks in the financing of electric power projects" in the United States.

Several international financial institutions - including HSBC, Munich Re and others - have formed the Climate Principles, which aim to encourage the management of climate change "across the full range of financial products and services," according to the compact's Web site.

In the United States, mountaintop removal mining has become both increasingly common and contentious, as coal companies vie to feed the nation's appetite for inexpensive electricity. An expeditious and disruptive form of surface mining, it involves blasting off the tops of mountains and dumping the debris in valleys and streams below.

A report published in May by the Sierra Club and the Rainforest Action Network estimated that nine banks were the primary lenders for companies engaged in mountaintop removal mining in Appalachia, and that they had provided nearly $4 billion in loans and bond underwriting to those companies - chiefly Massey Energy, Patriot Coal, and Alpha Natural Resources - since 2008.

The Rainforest Action Network, which has headed a campaign to highlight financial institutions with connections to the mining, said this month that the policy shifts were chipping away at the financing.

Citing Bloomberg data, for example, the group noted that Bank of America - listed as recently as 2008 as one of the "syndication agents" on a $175 million revolving line of credit to Massey Energy - has eliminated that and all other connections to the company. The group also pointed to JPMorgan, which had previously underwritten $180 million in debt securities to Massey, but no longer has any financial ties to that company. In May, the bank said it would be subjecting all future engagements with companies involved in mountaintop removal mining to "enhanced review."

Some environmental groups have criticized that and other policies as providing too much wiggle room - and whether any of it has any real impact is an open question. Mining industry representatives say such policies often fail to consider laws already in place requiring coal companies to limit their environmental impact, and to restore former mine sites when they are finished.

Carol Raulston, a spokeswoman for the National Mining Association, an industry group, said that most of the policies in question position the banks to phase out lending over time - and only to companies that primarily engage in mountaintop removal mining. "Companies are still getting financing for their projects," she said.

Roger S. Hendriksen, the vice president for investor relations for Massey Energy, suggested that environmentalists were overstating things, and that his company was having no trouble securing financing.

"While some banks no longer provide financing for companies conducting surface mining, there are many who will," Mr. Hendriksen said. "We have and will continue to replace their services with alternate bank providers with little difficulty."

But Rebecca Tarbotton, the executive director of the Rainforest Action Network, said in a published statement that the banks' moves nonetheless send "a clear signal that these companies have a high risk profile and that other banks should beware."

"Bottom line," she added, "as access to capital becomes more constrained it will be harder for mining companies to finance the blowing up of America's mountains."