Leading Wall Street Banks Establish Carbon Principles
Three of the world’s leading financial institutions announced the formation of The Carbon Principles, climate change guidelines for advisors and lenders to power companies in the United States. These Principles are the result of a nine-month intensive effort to create an approach to evaluating and addressing carbon risks in the financing of electric power projects. The need for these Principles is driven by the risks faced by the power industry as utilities, independent producers, regulators, lenders and investors deal with the uncertainties around regional and national climate change policies.
The Principles were developed in partnership by Citi, JPMorgan Chase and Morgan Stanley, and in consultation with leading power companies American Electric Power, CMS Energy, DTE Energy, NRG Energy, PSEG, Sempra and Southern Company. The Environmental Defense and the Natural Resources Defense Council and environmental non-governmental organizations also advised on the creation of the Principles.
The Principles, according to a press release, 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 (CO2)-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 decision.
Citi, JPMorgan Chase and Morgan Stanley have pledged their commitment to the Principles to use as a framework when talking about these issues with clients. The Principles and associated Enhanced Diligence, according to the press release, represent a first step in a process aimed at providing banks and their power industry clients with a consistent roadmap for reducing the regulatory and financial risks associated with greenhouse gas emissions. The Principles are:
Energy efficiency—An effective way to limit CO2 emissions is to not produce them. The signatory financial institutions will encourage clients to invest in cost-effective demand reduction, taking into consideration the value of avoided CO2 emissions. We will also encourage regulatory and legislative changes that increase efficiency in electricity consumption including the removal of barriers to investment in cost-effective demand reduction. The institutions will consider demand reduction caused by increased energy efficiency (or other means) as part of the Enhanced Diligence Process and assess its impact on proposed financings of certain new fossil fuel generation.
Renewable and low carbon distributed energy technologies—We will encourage clients to invest in cost-effective renewables and distributed technologies, taking into consideration the value of avoided CO2 emissions. We will also encourage legislative and regulatory changes that remove barriers to, and promote such investments (including related investments in infrastructure and equipment needed to support the connection of renewable sources to the system). We will consider production increases from renewable and low carbon generation as part of the Enhanced Diligence process and assess their impact on proposed financings of certain new fossil fuel generation.
Conventional and advanced generation—Investments in conventional or advanced generating facilities will be needed to supply reliable electric power. Due to evolving climate policy, investing in CO2-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. We will encourage regulatory and legislative changes that facilitate carbon capture and storage (CCS) to further reduce CO2 emissions from the electric sector.