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Goldman, Deutsche back Coal India despite their environmental standards

What does all the sustainable banking rhetoric mean if the leaders in finance won't reject coal-mining share offering?



If you're an investor seeking to profit from the coal industry and you're indifferent to the issues of climate change, forest destruction and human rights, Bank of America, Goldman Sachs, Credit Suisse and Deutsche Bank have a deal for you.

The four US and European banks, along with Indian investment banks SBI Capital Markets, JM Financial and Kotak Mahindra Capital Co., are managing a share offering in Coal India, one of the world's biggest coal-mining companies.

They're doing so despite Coal India's dismal environmental record, despite the climate impacts of burning coal, despite allegations that the state-owned firm has run roughshod over tribal communities and despite objections by the Sierra Club, Greenpeace and the Rainforest Action Network, as well as by Indian environmentalists.

They're also doing so despite their own rhetoric about sustainability and corporate responsibility:

Bank of America: "Bank of America has achieved many significant environmental milestones. In the future, we'll continue to use our expertise, capital and influence to drive change."

Goldman: "As a firm, we depend on strong and sustainable economies and communities to survive and thrive. We take seriously our responsibility for environmental and social stewardship."

Credit Suisse: "We are committed to sustainability. … All employees of Credit Suisse bear responsibility for considering environmental and social issues in their professional activities and when taking business decisions."

Deutsche Bank: "We apply high environmental and social standards to our business to support a sustainable future."

Really?

Greenpeace and Rainforest Action Network together urged Bank of America, in particular, to steer clear of Coal India last month. Activists highlighted the issue at the bank's annual shareholder meeting.

As Ashish Fernandes, US-India advisor at Greenpeace, puts it:

"To have the bank persist with its partnership with Coal India leaves one with the impression that 'sustainability' is just a fancy word to CEO Brian Moynihan and his team."

Greenpeace India has published several well-sourced reports on Coal India that allege, among other things, that coal-fired power plants cause 85,000 to 115,000 deaths and many more serious illnesses annually in India; that coal mining practices violate constitutional rights of forest dwellers in rural states; that the company has failed to police its mines to eliminate child labor; and that Coal India has overstated its reserves, creating financial risks for investors. It's difficult to know whether these charges are valid, but independent reporting in The Guardian, The New York Times and The Economic Times of India lends credence to at least some of the allegations.

What's undisputed is that Coal India is one of the world's largest coal producers, accounting for about 80% of India's production. What's more, India plans to build 455 new coal-fired plants with an installed capacity of 519.396 gigawatts, according to a 2012 report by the World Resources Institute. That's more than any country except China, and roughly equivalent to the output of half of the coal plants now operating in the US. No bank or investor that takes the climate threat seriously should seek to profit from such a vast expansion of coal production.

Managing the offering obliges the banks to do their utmost to sell shares in Coal India, putting the company in the most favorable light possible while still disclosing the company's material risks. In other words, I wouldn't expect them to talk much about climate change or human rights on the road show.

When contacted by email, none of the four US and EU banks agreed to make an executive available for an on-the-record interview. (This is one reason why I suspect the environmentalists have a point.) In background interviews, though, spokespeople and others at several banks noted that their client is not Coal India but the government of India.

That's splitting hairs. The Indian government owns 90% of the shares in Coal India. After raising $3.4bn through an initial public offering of 10% of the company in 2010, it now wants to sell another 5% in what is usually called privatization, but is described as "divestment" in India.

People at several of the banks also suggested that selling shares to private investors might improve the company's governance and environmental record. That seems unlikely.

Coal India already faces pressure from coal plant operators to mine more domestic coal because imported coal is more expensive. "If you are opening up the company to private investors, there will be more pressure, not less, to exploit those resources," says Justin Guay, associate director of the Sierra Club's international climate program.

Of course, India is perfectly within its rights to burn coal, not least because as many as 400 million people in India lack access to electricity, according to the World Bank, and the banks are perfectly within their rights to finance it. As Bank of America says on its website:

"If large financial institutions were to unilaterally discontinue financing the coal industry, it would have negative consequences for the US and global economies."

The trouble is, decades of coal production have not done much to bring electricity to India's rural poor. The electricity grid remains a shambles. Prices for power are held down by government rules. Theft of electricity is rampant in big cities.

India should be investing in wind and solar power, not fossil fuels, Guay argues. He's not alone. In an op-ed in The Economic Times of India, Akhil Gupta, the chairman of the Blackstone Group in India, calls for a "rapid solar buildup". A fast-growing company called OMC Power is among those rolling out decentralized off-grid solar in India.

Presumably, Bank of America, Goldman, Credit Suisse and Deutsche Bank have analyzed all of this and concluded that coal is nevertheless the way to go. Only rarely do Wall Street firms walk away from deals because of social or environmental concerns. And the best way to curb coal is by government regulation.

But if the banks feel obligated to do no more than follow the law, why have a corporate responsibility program at all?

As Ben Collins, research and policy campaigner at the Rainforest Action Network put it:

"If the banks involved in this transaction can't say 'no' to a deal with Coal India on environmental, social and governance grounds, then their process for screening the companies that they bank is broken."
 

Source: www.theguardian.com