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Memorandum submitted jointly by PLATFORM, People & Planet and BankTrack (PBR08008)
2. People & Planet is the UK's leading student organisation campaigning on issues of world poverty, human rights and the environment. Since 2006, People & Planet has been running the Ditch Dirty Development campaign, with students calling for a transition of public and private energy financing away from fossil fuels and into renewable energy. 3. BankTrack is a global network of civil society organisations and individuals tracking the operations of the private financial sector (commercial banks, investors, insurance companies, pension funds) and its effect on people and the planet.
4. PLATFORM, BankTrack and People & Planet welcome the Environmental Audit Committee's present inquiry into the 2008 Pre-Budget Report. They are grateful for the opportunity to comment on the following issues in the Committee's remit:
· The risks and opportunities of an economic downturn-and of the policy response to it-for environmental taxation and investment policy; and · The size and nature of the "green stimulus" package announced in the PBR-and the environmental impacts of the other economic stimulus measures announced at the same time, such as funding for roads.
5. The principal conclusions of this Memorandum are as follows:
· One of the most significant outcomes of the recent financial crisis has been the government's acquisition of a majority stake in the Royal Bank of Scotland (RBS); · RBS has been the source of a great deal of controversy over its status as the UK bank that is the most heavily involved in financing the expansion of fossil fuel projects around the world; · The carbon emissions embedded in RBS' project finance are enormous. A report in 2006 calculated that they were greater than the carbon emissions of Scotland itself; · The fact that banks play such a large role in providing finance to projects that are exacerbating climate change has been wholly unaddressed in current government policy; · Given that the government will unveil new banking regulation in the light of the financial crisis in 2008, there is an urgent need that such regulation should include environmental concerns as well as financial concerns; · Many organisations are promoting the idea of a 'Green New Deal' to simultaneously address the triple threat of climate change, peak oil and the current economic crisis; · The public ownership of the majority of RBS provides an institution with capital and financial expertise to play a key role in providing loans as part of the infrastructural overhaul that the economy needs in order to be largely decarbonised; · Instead of taking an 'arms length' approach to the management of RBS, the government should be using its political and financial influence to prioritise climate change as a principle concern in RBS' lending decisions.
The government's decision to recapitalise RBS
6. On 8 October 2008, the Chancellor announced in Parliament that a fund had been established, to allow UK banks to increase their capital position in the face of the global financial instability that threatened the ability of the banks to function properly. Through this fund, the government offered to buy 'preference shares' in participating banks that had been unable to raise sufficient capital on the open market. In addition to the purchase of 'preference shares', the Chancellor announced that, "the Fund will be ready to provide at least another £25bn of capital, to strengthen the balance sheets of any interested bank."[i]
7. On 13 October 2008, the Chancellor announced that of the UK private banks, three would be re-capitalised through the Bank Reconstruction Fund - HBOS, Lloyds TSB and RBS. For RBS, and (subject to the merger) HBOS and Lloyds TSB, the Government has underwritten significant capital raisings amounting to £37bn. The government proposed to take up to £15bn of ordinary shares and £5bn of preference shares in RBS. Following the successful completion of the merger between HBOS and Lloyds TSB, the government proposed to take up to £8.5bn and £4.5bn respectively in ordinary shares, and up to £3bn and £1bn in preferential shares. [ii]
8. On 28 November 2008, following a slow public take-up of shares issued by RBS (only 0.24% of the shares on offer), it was announced that the government would purchase the remaining 57.9% of the shares.[iii] A new company, UK Financial Investments Ltd, chaired by Sir Philip Hampton, was created by the government to manage its investments in the re-capitalised banks.[iv]
The UK's climate commitments
9. The Climate Change Act 2008 for the first time commits the UK to legally binding targets for green house gas emission reductions through action in the UK and abroad of at least 80% by 2050, and reductions in CO2 emissions of at least 26% by 2020, against a 1990 baseline.[v]
10. The aims of the Climate Change Act are stated as being: · "to improve carbon management and help the transition towards a low carbon economy in the UK; and · to demonstrate strong UK leadership internationally, signalling that we are committed to taking our share of responsibility for reducing global emissions in the context of developing negotiations on a post-2012 global agreement at Copenhagen next year."[vi]
The Royal Bank of Scotland and fossil fuel financing
11. The Royal Bank of Scotland (RBS) is one of the most significant funders of the oil and gas sector in the UK. Between 2001 and 2006, RBS provided over $10 billion in oil and gas loans, and structured the loan agreements and acted as financial adviser on over $30 billion of oil and gas projects, according to a report published by BankTrack, Friends of the Earth - Scotland, nef (new economics foundation), People & Planet and PLATFORM.[vii]
12. The carbon emissions "embedded" within RBS project finance to oil and gas projects exceeded 36.9 million tonnes in 2005, equivalent to those of 6.2 million homes (one quarter of UK households).[viii] Embedded emissions are the emissions that will result from fossil fuels produced or brought to the market from operations financed through project finance. The bank's proportion is calculated according to the proportion of the project funded.
13. RBS is also a major investor in the coal industry. Coal is the most carbon-intensive fossil fuel and, according to James Hansen, director of the NASA Goddard Institute for Space Studies, "Coal and unconventional fossil fuels such as tar shale contain enough carbon to produce a vastly different planet, a more dangerous and desolate planet, from the one on which civilization developed, a planet without Arctic sea ice, with crumbling ice sheets that ensure sea level catastrophes for our children and grandchildren, with shifting climate zones that cause great hardship for the world's poor and drive countless species to extinction, and with intensified hydrologic extremes that cause increased drought and wildfires but also stronger rain, floods, and storms."[ix]
14. A report published in August 2008 detailing the involvement of UK banks in the global coal industry, found that RBS, Barclays and HSBC were all heavily implicated in providing funding to coal projects and companies. Of these three banks, RBS had the highest involvement with the coal industry. Between May 2006 and April 2008, HSBC was involved three times in coal loans, Barclays 17 times and RBS 27 times. The total value of the loans was $38 billion for Barclays, $71 billion for HSBC and $96 billion for RBS.[x]
15. In October 2008 in the wake of the financial crisis, among its many instances of project finance, RBS took part in a $500m loan to Great Plains Energy, a US power generator whose coal-fired plants emitted 26.5 million tonnes of CO2 in 2006.
Case studies of RBS finance and environmental destruction:
16. Mountain Top Removal: In October 2006, RBS participated in an $800 million revolving credit facility for Arch Coal,[xi] the second largest coal producer in the US. Arch Coal owns a number of mountain top mines in the Appalachia region,[xii] and utilises the controversial Mountain Top Removal method, using explosives to remove up to 1,000 feet of vertical rock to extract coal. The practice produces vast quantities of coal sludge that is dumped in neighbouring valleys and threatens local communities. Bank of America has recently committed to phase out financing of Mountain Top Removal coal mining because of its impact on the environment and on local communities.[xiii]
17. Tar sands: In 2004 and 2006, RBS-NatWest acted as the lead arranger of loans totalling US$800 million to Canadian oil company Opti Canada for their Long Lake tar sands project south of Fort McMurray in the Athabasca region of Alberta in Canada.[xiv] The oil in the ground at Athabasca is not normal crude oil, it is a much heavier form known as tar sands. Made up of extremely heavy crude oil, sand, clay and other contaminants, it takes significantly more energy to process and emits around three to five times more greenhouse gases as conventional crude oil during processing.[xv] According to a report published by WWF and the Co-operative Financial Services, exploiting all the recoverable unconventional oil reserves in North America could be catastrophic in climate terms, resulting in an estimated increase in atmospheric CO2 levels of between 49 and 65 ppmv.[xvi]
RBS and the public backlash
18. There is mounting pressure on RBS over its record of fossil fuel financing. In August 2008, the Guardian newspaper ran a front-page story with a headline that warned that 'High street banks face consumer boycott over investment in coal projects'.[xvii] In the last two years, student groups and climate activists across the country have protested more than a hundred times at various RBS branches and offices.[xviii] Many Student Unions across the country have passed motions threatening to call a boycott on RBS in the near future should they fail to take more substantive action on climate change. In January 2009 RBS featured in the weekly 'greenwash' column on the Guardian website over its fossil fuel financing, in an article that raised questions over the fact that the bank was now majority public owned.[xix]
19. This public concern over RBS' record in fossil fuel financing is increasingly becoming a source of reputational risk for the bank. Now that the UK government has a controlling interest in the bank and that tax-payers money is being used to plough into new coal, oil and gas projects around the world, there is a strong possibility that RBS' lending habits will be seen as being at odds with the governments' attempts to demonstrate world leadership on climate change, as stated under the Climate Act and become a source of potential embarrassment.
The need for environmental as well as financial regulation in the banking sector
20. On 8 December 2008, the government's proposed Banking Bill formed the centrepiece of the Queen's speech to Parliament. The aims of the proposed bill are to, "strengthen the framework for protecting bank depositors, enhance financial stability through measures to reduce the likelihood of banks getting into difficulties, and improve the tools available to resolve the situation if they do."[xx]
21. Many civil society organisations have called for new banking regulation to include some form of environmental regulation as well as financial regulation. A letter to the Guardian newspaper printed on 14 October 2008 and signed by Friends of the Earth Scotland, PLATFORM, People & Planet, BankTrack, Scottish Action and Education for Action and Development and Indigenous People's Links, proposed that the bail out of UK banks, "should be conditional upon those banks which have benefited making a full disclosure of their fossil-fuel financing, as well as making a commitment to cap and reduce the carbon emissions embedded in their investments and loans."[xxi]
22. In November 08, 20 NGOs from the BankTrack network took part in the BankTrack meeting in Spain to discuss the financial crisis and the response of civil society. The 'El Escorial Statement on Banks and the Financial Crisis' was a policy paper that came out of these discussions, and was a series of recommendations to be made in the context of new regulatory regimes for the banking sector.
23. One of the recommendations was that banks should use 'green screening' for potential finance recipients. The statement said that, "Know Your Customer (KYC) guidelines are anti-money laundering mechanisms used by banks to screen potential depositors. In a similar vein, "Green KYC" guidelines should be developed, which would require banks to conduct environmental and social due diligence for both commercial depositors and borrowers, with the aim of prohibiting lending to corporations that do not comply with environmental and social laws."[xxii]
24. There is also a need to address the issue of environmental transparency as well as financial transparency. The emissions embedded in project finance represent another type of 'hidden risk' in the market. The recent economic turmoil has shown what happens when financial risks are concealed from the market. There is an urgent need to ensure that carbon risks are open and accountable.
25. The 'El Escorial' statement says that "Banks should be completely transparent about their risk assessment processes, decision-making procedures, clients, and transactions. For example, banks should fully disclose their financing activities in the extractive industries and infrastructure sectors, which often have high environmental and social impacts. In light of widespread public distrust about banks' intentions, the issue is no longer how much transparency banks can allow, but how much secrecy they can afford. Such transparency is already best practice among some ethical banks."[xxiii]
RBS and the Green New Deal
26. The Green New Deal, as proposed by a coalition of various civil society groups in the UK aims to promote 'joined up' political and economic thinking in addressing the challenges of climate change, energy security and the financial crisis.
27. Some of the proposals include massive investment in renewable energy and wider environmental transformation in the UK, leading to the creation of thousands of new green collar jobs, reining in reckless aspects of the finance sector - but making low-cost capital available to fund the UK's green economic shift.[xxiv]
28. Such a deal would not seek to stabilise the economic system as it is, but aim to transform it into one that helps solve the pressing social and environmental problems the world is facing. The fiscal spending that is necessary to stimulate crisis-affected economies entering recession should be directed at achieving social justice, the promotion of sustainable production and consumption systems, and the transition of the world's economies onto a low carbon path.
29. Banks, particularly those that are now bailed out with tax money, have an important role to play in this economic transformation. It must be a role based on serving the public interest, rather than safeguarding the profits of the few. Given their power and important role, banks can and should deploy capital in ways that promote the restoration and protection of the environment and help create sustainable economies.
30. The public majority-ownership of RBS provides the UK with a unique opportunity to move forward in meaningfully addressing climate change. The transition to a low-carbon economy requires substantial investment, in renewable energy, public transport infrastructure and energy efficiency measures. The expertise and financial infrastructure of RBS could be usefully harnessed to facilitate the many changes that need to be made in the process of decarbonising the UK economy.
13 January 2009 [i] 08 October 2008 - Statement by the Chancellor on financial stability- http://www.hm-treasury.gov.uk/statement_chx_081008.htm [ii] 13 October 2008 - Statement by the Chancellor on financial markets - http://www.hm-treasury.gov.uk/statement_chx_13_10_08.htm [iii] 28 November 2008 - BBC News - 'Government to own majority of RBS', http://news.bbc.co.uk/1/hi/business/7753845.stm [iv] 3 November 2008 - Treasury Press Notice - http://www.hm-treasury.gov.uk/press_114_08.htm [v] http://www.defra.gov.uk/environment/climatechange/uk/legislation/provisions.htm [vi] ibid [vii] The Oil & Gas Bank - RBS and the financing of climate change: March 2007, p6. Published by PLATFORM, BankTrack, Friends of the Earth Scotland, new economics foundation and People & Planet. Online: http://www.carbonweb.org/documents/Oil_&_Gas_Bank.pdf [viii] Ibid p4 [ix] Letter from James Hansen, Director of the NASA Goddard Institute for Space Studies, to Prime Minister Gordon Brown, 19 December 2007 [x] Cashing in on Coal: RBS, UK Banks and the Global Coal Industry, August 2008, p13. Published by BankTrack, Friends of the Earth Scotland, People & Planet, PLATFORM, Scottish Education and Action for Development, and Stop Climate Chaos. Online: http://www.carbonweb.org/showitem.asp?article=338&parent=39 [xi] Ibid p17 [xii] Arch Coal website: www.archcoal.com [xiii] see http://www.banktrack.org/show/news/bank_of_america_stops_funding_mountain_top_removal [xiv] The Oil & Gas Bank, p14 [xv] BP and Shell: Rising Risks in Tar Sands Investments, September 2008, p17. Published by Greenpeace, Oil Change International and PLATFORM. Online: http://www.greenpeace.org/raw/content/canada/en/documents-and-links/publications/bp-and-shell-rising-risks-in.pdf [xvi] Unconventional Oil: Scraping the bottom of the barrel? May 2008, p5. Published by WWF and The Co-operative Financial Services. Online: http://assets.panda.org/downloads/unconventional_oil_final_lowres.pdf [xvii] 11 August 2008 - Guardian Newspaper - 'High street banks face consumer boycott over investment in coal projects' - http://www.guardian.co.uk/business/2008/aug/11/banking.ethicalbusiness [xviii] see for instance http://risingtide.org.uk/node/230 [xix] 8 January 2009 - Guardian website - 'We own RBS, so are we now greenwashing ourselves?' - [xx] 8 December 2008 - Queen's Speech - Banking Bill - http://www.number10.gov.uk/Page17667 [xxi] 14 October 2008 - letter to the Guardian - http://www.guardian.co.uk/environment/2009/jan/08/energy-fossilfuelshttp://www.guardian.co.uk/business/2008/oct/14/creditcrunch1 [xxii] November 2008 - El Escorial Statement on Banks and the Financial Crisis - http://www.banktrack.org/download/bank_to_the_future [xxiii] ibid [xxiv] http://www.neweconomics.org/gen/greennewdealneededforuk210708.aspx |