HSBC has said all its clients must have a plan in place to divest from coal by the end of 2023.
In its much-anticipated policy on financing thermal coal, Europe's leading banker to corporate Asia laid out its vision to cut emissions in the global fight against climate change. The policy was released on Tuesday.
Coal is contentious for governments across Asia as they look to move away from the cheap and widely used, but carbon-intensive energy source and look to greener options.
Under its plan, HSBC will cut exposure to thermal coal financing by at least 25 per cent by 2025 and by 50 per cent by 2030, although non-EU or non-OECD-based clients could be funded until a global phase-out by 2040, its sustainability chief told Reuters.
Building on an existing pledge not to finance new coal-fired power plants or thermal coal mines, HSBC said the policy would help to phase out existing coal use in line with the science of climate change.
It said the targets would be reviewed annually.
"We need to tackle some of the hard issues head on. Coal is one of the big issues. It contributes 25 per cent of global greenhouse gas emissions," HSBC Group's chief sustainability officer Celine Herweijer said.
"It is not good enough to have a policy on no new coal. We need to turn our attention to the urgent phase-out of coal alongside the scientific timelines".
HSBC said its new policy would apply to all parts of its business, including its $621 billion asset management arm, and cover all aspects of financing, including refinancing and advisory services.
The bank said it would next year announce a science-based target for coal-fired power in line with capping global warming at 1.5 degrees Celsius (2.7 Fahrenheit) above pre-industrial levels, with progress on cutting thermal coal financing to be published annually.
It plans to withdraw services from any client that seeks to expand thermal coal production after January 1, 2021, and no longer finance clients in EU and Organisation for Economic Co-operation and Development markets for which thermal coal makes up more than 40 per cent of revenue, or 30 per cent from 2025, unless the money is explicitly used for clean technology or infrastructure.
HSBC is one of Europe's largest banks and has exposure to the industry in emerging markets in Asia and elsewhere. In recent years the bank has faced pressure from investors and climate activists to slash its funding to those using coal.
At the Cop26 UN climate summit in Glasgow last month, world leaders for the first time acknowledged that fossil fuels are the main driver of global warming.
But nations heavily dependent on coal, including India and China, would only agree to "phase down" coal-fired power, as opposed to completely cutting it out.
While HSBC, in common with peers, had previously set out a high-level commitment to reach net zero carbon emissions across its customer base by 2050, activists had criticised the strength and detail of its policies.
That prompted some investors to throw their support behind a planned shareholder vote on the issue at the company's annual meeting this year, although they withdrew the threat after the company pledged to release details on coal by the end of this year.
While Standard Chartered and NatWest have set tougher targets, HSBC is more exposed to energy clients with a heavy reliance on coal and says it needs to work with them to help them to shift to greener energy.
The bank said its policy would help its clients who are “energy champions” and have the ability and time to transition to zero unabated coal over the next 18 years.
Unabated coal refers to coal that is burnt without capturing the resulting carbon emissions.
The "spirit of the policy" would also cover intermediaries and the parent group of any client that falls outside the policy, and HSBC would ask for a commitment that no finance flowed to that entity, Ms Herweijer said.
"We are not expecting every client to have a credible transition plan ... in those cases, we will have to move away from those relationships," she said.
For clients outside the EU and OECD, HSBC said it would evaluate their transition plans before deciding whether to offer finance, acknowledging the infrastructure, policy and resource obstacles many face compared to developed market peers.
The lender expects clients to publish their own transition plans, although campaigners, including ShareAction, have previously said such language would leave HSBC too much wiggle room.