Singapore banks face nickel questions

[SINGAPORE] Singapore’s three banks have come under an uncomfortable spotlight for their financing of Indonesia’s Harita Nickel, a mining company whose smelters and refineries are primarily coal-powered.

The attention is timely. As transition finance develops into a more mature business segment for DBS, OCBC and UOB, it’s important for the banks to be more accountable about their roles in hard-to-abate sectors. Without more rigour, the lenders could face a greater risk of greenwashing accusations.

Halfway between Sulawesi to the west and Papua to the east, Harita’s main business sits on the coast of the remote island of Obi. To power the operations – which include smelting and refining – Harita mainly uses off-grid coal plants. These power generation facilities are called “captive” plants because they only serve a specific industrial project area and are not connected to municipal power grids.

A report by environmental group Market Forces says that Harita currently utilises 890 megawatts of coal-fired power plants with an additional 1.2 gigawatts (GW) under construction. The total planned power supply comprises 2.54 GW from 25 coal plants and 1.3 GW from solar.

Although the three banks have pledged not to finance new coal-fired power plants, there’s a catch: The commitment does not include nickel production, even if that production is coal-powered.

Market Forces places OCBC as Harita’s top lender since 2018, with US$635 million provided. UOB is second with US$201 million loaned, and DBS sixth with US$87 billion lent out.

Harita has pledged to reduce greenhouse gas emissions by 30 per cent from 2022 levels by 2030. But 2023 emissions more than doubled to 7.98 million tonnes of carbon dioxide equivalent (MtCO2e) in 2023 from 3.01 MtCO2e in 2022, which Market Forces pointed out was in the wrong direction.

In response, Harita says that “nickel processing requires a stable, high-volume energy source that is not yet fully achievable through renewables alone”.

The company also notes that emissions intensity – emissions per tonne of output – decreased in 2024 from 2023 levels for all products. Details of that decline will be provided in the coming sustainability report for 2024.

On its emissions targets, Harita says in a statement that it remains “committed to a 30 per cent emissions reduction target for all facilities established on or before 2022”. The statement underlines the phrase “established on or before 2022”.

The Singapore banks are not commenting directly on Harita. However, their responses, broadly, highlight that the lenders are committed to enabling a just energy transition in the region and that they ensure clients manage material environmental, social and governance risks as part of responsible-banking policies.

Lacking credibility

The crux of the banks’ positions is that the nickel Harita produces is critical for electrification, especially for vehicles. The emissions that come from Harita’s coal plants are therefore an acceptable price to pay for enabling more decarbonisation elsewhere. Also, Harita has a decarbonisation strategy, so its high emissions now will eventually decrease.

There’s little debate that expecting Harita to become fully renewables-powered immediately would be unreasonable given the location of its operations. Harita has also been making some progress towards lowering its carbon footprint. But it’s fair to ask whether Harita should be more ambitious with its decarbonisation strategy.

The answer is probably yes. Harita’s power plan currently comprises only one unit of renewable solar power for every two units of coal-fired power. If that power mix is guided by economics, Harita’s 2024 profit of about 6.4 trillion rupiah (S$512 million) suggests that the company can afford to pay more for more sustainable energy.

If the reason for building so many coal plants is to ensure that Harita can keep up with demand, it’s worth noting that nickel prices have been languishing because of oversupply. Harita might be better off in the long term using its resources to build a more sustainable operation instead of rushing to extract and sell its assets in a bad market.

Harita’s decarbonisation strategy also lacks credibility. The company says it wants to lower emissions by 30 per cent by 2030, yet its own plans call for building more coal-fired plants in the coming years. That doesn’t square.

What’s also concerning is the company’s apparent clarification that its emissions target may only apply to facilities established on or before 2022. If that’s the correct interpretation of the target, then the target would be a meaningless one. It would be like trying to convince your Mum that your room is tidy now because when you told her on Monday that you’d clean up by the weekend, you were only referring to Monday’s mess, not all the other junk that accumulated from Tuesday to Friday.

Far-reaching consequences

The banks’ responsible-banking policies let them work with brown companies, but with certain safeguards. One is that the borrowers should have credible plans to transition away from the brown bits. It’s not apparent, based on what is publicly known, that Harita crosses the necessary thresholds.

Banks like to argue that engaging with “brown” clients to help them to decarbonise is more impactful than simply offloading unsustainable clients. That’s very true, but the reality is that it’s anybody’s guess how much impact the banks’ engagements are really having on those businesses’ transition plans.

And if the engagements don’t get a client to be ambitious enough, or to meet its goals, does the pendulum then swing back to make offloading or penalties the more impactful move? Furthermore, how are the banks holding Harita accountable for its commitments? Are the banks’ loans to Harita sustainability-linked?

The sustainability of Harita’s nickel also affects its business prospects. Although demand for green nickel remains low for now, the metals market has taken early steps to differentiate between green and non-green origins in pricing and contracts, and regulators and industrial buyers have also started showing interest in being more discerning about nickel.

How the banks deal with Harita can have consequences that reach far beyond just the bank-client relationship.

The banks need to ensure that continued financing for Harita doesn’t lock in the emissions from a couple of dozen coal plants for decades to come, considering that the average lifespan of a plant is about 40 years.

The banks also need to recognise that irresponsible financing of Indonesian nickel extraction exacts a toll on more sustainably produced nickel. A paper led by researchers at the Massachusetts Institute of Technology notes that the cheap nickel coming out of Indonesia has led higher-cost mines in Western Australia and New Caledonia to shut down or cut production. It doesn’t pay to invest in developing low-carbon nickel when you can’t compete against cheaper high-carbon nickel.

“Capital allocated to nickel mining and processing projects systemically undermines sustainability because the alternative offers higher returns with lower risk,” the paper’s authors write.

These are complex issues that the banks will increasingly encounter as they grow their transition-finance businesses. The banks boast of being responsible; they will have to show that they deserve the label.

This article first appeared in BT’s ESG Insights newsletter on Apr 4