Barclays coal plan exposes reach of Biden's Inflation Reduction Act

The Inflation Reduction Act is starting to change the way bankers view their climate targets.

Barclays, one of Europe's biggest coal financiers, said its analysis of the IRA has led it to commit to wind down its funding for coal in the US five years earlier than planned. Chief Executive C.S. Venkatakrishnan told shareholders recently that the bank now expects to phase out its financing of thermal coal power in the U.S. by 2030.

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It's a move that may well spread across more of the finance industry as executives digest the full effect of the IRA, according to sustainable investing veterans. The bill makes it "much easier for those in the finance sector to take a view on what can be backed and what can be profitable," said Ian Simm, founder and CEO of the sustainable investment firm Impax Asset Management.

Signed into law by President Biden in August, the IRA includes $374 billion that's earmarked to speed up the transition to clean energy, get more people to buy electric cars, and turbocharge green technology. The effect will be to bring down the cost of capital for renewable power generation, and ultimately make the sector cheaper and more attractive than fossil fuels, Simm said.

Barclays' decision to adjust its coal targets is a sign that climate legislation has the power to prevail in steering capital, despite efforts by the Republican Party to penalize firms seen as hostile toward the fossil-fuel industry.

UBS Group analysts predicted last month that the climate bill will rewrite the US investment landscape, providing "an enormous amount of money coming down the pipes that will move markets." That coincided with research from Goldman Sachs Group showing that investors have yet to appreciate the full scope of the IRA's reach.

The bill, which also includes money to help retire coal plants, puts the US on a path to slash its emissions and even helps keep alive a long-shot global goal of limiting warming to the critical threshold of 1.5C.

Barclays' new coal target for the U.S., which Venkatakrishnan said he expects to become official at the end of the year, would match its commitments in the U.K. and the European Union. A Barclays spokeswoman declined to elaborate.

The London-based bank's willingness to date to finance some of the world's biggest polluters has made it the target of criticism by climate activists. Barclays has faced protests outside its offices and two shareholder resolutions pushing it to do more on phasing out fossil fuels. From the start of 2019 through last November, Barclays arranged roughly $50 billion of financing via loans and bond sales for fossil-fuel companies, more than any U.K.-based bank other than HSBC Holdings, according to data compiled by Bloomberg.

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Jeanne Martin, who heads the banking program at ShareAction, the nonprofit behind the first Barclays climate resolution in 2020, said the bank's updated coal policy is "welcome." However, the bank "can't stop there," she said. The reduction in financing of oil and gas projects is still needed to "save our chances of keeping warming to 1.5C."

For now, there's a possibility that Barclays' decision to adopt more ambitious coal targets in the US may put pressure on other banks to do more, according to Alec Connon, co-director of the Stop the Money Pipeline coalition. U.S. banks have an "abysmal record on coal," he said. And most don't have a plan to phase out coal while those that do utilize loopholes that allow financing to continue, he said.