According to a study by an alliance of NGOs including the Rainforest Action Network and BankTrack, banks’ support for fossil fuels has grown since the Paris Agreement was signed in late 2015, indicating that their lending practices remain insufficient.
According to the report, it found that in the period 2016 to 2020, the world’s 60 largest banks have financed fossil fuels to the tune of $3.8 trillion.
The world’s banking heavyweights have committed to carbon neutrality by the middle of the century, but they note that although emissions will drop gradually, it will take time before they are reduced significantly.
Bank’s net-zero pledges come with reluctance to ditch polluters
It is important to retain high-emitting clients and support them through the transition rather than simply cut them loose, they say.
The Net-Zero Banking Alliance, which includes the 30 largest banks in the United States, Canada, and Europe, have all pledged to reduce their lending and investment climate-change impacts to net-zero by 2050 while publishing interim targets for 2030 or sooner.
Only one firm, France’s La Banque Postale SA, has announced a deadline of 2040.
The commitments are beginning, and banks are coming under more determined pressure from shareholders to take quick action and tighter lending standards.
Investors would be ready to act with resolutions and initiatives ahead of 2022 annual meetings if banks do not make convincing changes, according to Xavier Lerin, a senior banking analyst at ShareAction, which manages investor campaigns.
In the wake of a $2.4 trillion investor campaign pushed by ShareAction, HSBC Holdings PLC has already unveiled a new climate policy earlier this year, including a total coal phase-out commitment.
The last resort is to dump their polluting clients. Shocking right?
Because the cash they manage is the lifeblood for activities ranging from thermal coal extraction to solar power farms, banks ARE the key linchpins in the move to a low-carbon economy. Without them taking more aggressive policies, the shift to a more sustainable world will not happen.
While the financial sector as a whole has low Scope 1 and 2 emissions, it has a significant Scope 3 impact — owing to the pollution produced by clients that banks finance through loans and securities.
Banks are not willing to take an aggressive stance on companies that pollute.
It is important to retain high-emitting clients and support them through the transition rather than simply cut them loose, they say.
The Net-Zero Banking Alliance, which includes the 30 largest banks in the United States, Canada, and Europe, have all pledged to reduce their lending and investment climate-change impacts to net-zero by 2050 while publishing interim targets for 2030 or sooner.
Only one firm, France’s La Banque Postale SA, has announced a deadline of 2040.
The commitments are beginning, and banks are coming under more determined pressure from shareholders to take quick action and tighter lending standards.
In the wake of a $2.4 trillion investor campaign pushed by ShareAction, HSBC Holdings PLC has already unveiled a new climate policy earlier this year, including a total coal phase-out commitment.
While the financial sector as a whole has low Scope 1 and 2 emissions, it has a significant Scope 3 impact — owing to the pollution produced by clients that banks finance through loans and securities.
According to a May study by non-profit CDP, emissions from banks’ financial activities are approximately 700 times greater than their operational emissions. In the Scope 1 and 2 categories, only 17 of the 30 banks have achieved carbon neutrality.
JPMorgan Chase & Co., Morgan Stanley, and Barclays PLC have all published interim decarbonization goals for specific, high-emissions portfolios, with many more to come in 2022.
The Net-Zero Banking Alliance, a trade association established by the United Nations, agreed to establish interim targets within 18 months of signing up and then publish progress reports every two years.
The alliance members unanimously agreed that they will only finance new energy projects that do not produce more emissions than the energy they will replace, with a focus on decarbonizing their operations in the meantime.
“This is a landmark day for the banking sector and our Net-Zero Banking Alliance,” said Banque de France Governor François Villeroy de Galhau, who also chairs the alliance.
“We are fully committed to supporting the transition to a low-carbon economy by 2050 and will continue to work together to reduce our sector’s emissions.”
It is important to retain high-emitting clients and support them through the transition rather than simply cut them loose, they say.
But senior bankers warn that it will take time before banks’ climate efforts will be reflected in their emissions profile.
“We’re not talking about a year-on-year reduction in financed emissions,” said Citigroup’s Valerie Smith, the firm’s chief sustainability officer, at the FT Global Banking Summit on Nov. 30. Banks need flexibility as they start a time-consuming process of assessing clients and assisting carbon-intensive businesses in preparing for change.
Imène Ben Rejeb-Mzah, head of group corporate social responsibility methodologies and data at BNP Paribas SA, said in an interview that the bank will focus on engaging with clients and assisting them through their transition. The bank will terminate links with businesses that do not develop a strategy compatible with the Paris Agreement as a last resort, she said.
“We will not lose clients because we are going to send a signal that there is an exit strategy,” Ms Ben Rejeb-Mzah said. “It’s not you or me — it’s us. There is a road map.”
Global banks insist they have been thinking about climate change for years.
Since 2013, more than 70 existing clients have exited the coal business to date.
The banks are working with the Carbon Tracker Initiative, a think tank focused on climate risk, to help them better assess their portfolios, executives said at the summit.
“To make sure that our own approach is coherent and scalable enough over time, we’ve asked Carbon Tracker to help us assess our portfolio and identify stranded assets,” said Mark Cutifani, the CEO of Anglo American PLC, a mining company.
“I don’t think we can disconnect our sector from the physical world in which it operates.”
What is actually happening?
While observers have welcomed banks’ 2050 net-zero pledges as an important first step, the true test of their commitment will emerge in the details of their interim targets and how their lending policies change.
Another “must-have” is to set absolute carbon reduction targets rather than just intensity goals based on emissions relative to total energy financed or other criteria, this will ensure that banks focus on decreasing production in carbon-intensive industries rather than merely optimizing carbon efficiency.
Targets alone will also not be sufficient unless backed by robust policies and clear expectations spelled out for clients.
The carbon target alone will not be sufficient unless backed by robust policies to see that there is clear accountability for those who are responsible for reducing emissions.
Several financial institutions have started to impose stricter standards for fossil fuel lending, including UniCredit SpA, Crédit Agricole SA, Société Générale SA, and BNP Paribas, which have set deadlines for the complete abandonment of thermal coal.
If banks are to align their portfolios with a net-zero by 2050 strategy, more stringent restrictions on oil and gas will be required. According to BankTrack, an NGO, the International Energy Agency has predicted that there is no space for additional oil and gas development in its net-zero scenario, implying that bank fossil fuel rules will be insufficient unless they are updated.
“If net-zero emissions is the goal, then this means no new fossil fuel infrastructure anywhere in the world,” said Shelagh Whitley, of the Overseas Development Institute, an international development think-tank. “The existing policy framework that banks are using to respond to climate change will not be enough.”
Is there positive momentum?
Although most of the heavy lifting has yet to be completed, other sources said that the recent wave of net-zero commitments is evidence of growing momentum.
“It’s evident that the path is going in a certain direction — greater financial sector obligations and demands for transparency [and] reporting will put additional pressure on [financial institutions] to reshuffle their portfolios,” according to Moody’s assistant vice president Maria Malyukova. That, in turn, raises the chances of “a more rapid energy transition than we’ve seen in the past.”
“There is a sound business rationale for net-zero emissions,” the Carbon Tracker Initiative’s chief executive, Anthony Hobley, said. “It also brings considerable reputational and regulatory risk if net-zero donors fail to think through their role as major players of climate change.”
The net-zero agenda is more ambitious than the Paris Agreement, which seeks to limit global warming to “well below” 2 degrees Celsius.
“The net-zero agenda is more ambitious than the Paris Agreement, which seeks to limit global warming to ‘well below’ 2 degrees Celsius,” he said.
According to Reuters, HSBC Holdings PLC became the latest bank to join the net-zero bandwagon, vowing to eliminate emissions from its global operations by 2030.
In a separate move, the bank said it would provide $100 billion in financing for low-carbon projects over the next decade.
“HSBC has long been a leader in environmental finance and this commitment is another important step in our ongoing work to support the transition to a net-zero economy,” said HSBC CEO John Flint.
The announcements come as the global banking sector is coming under increasing pressure to align its lending practices with the goals of the Paris Agreement.
Earlier this year, a group of more than 200 investors with $26 trillion in assets urged banks to set net-zero emissions targets.
In response, a number of banks, including JPMorgan Chase & Co., Deutsche Bank AG, and ING Groep NV, said they would set emissions reductions targets.
The task of reducing net emissions to zero will be even more challenging for the aviation and shipping industries, which have been excluded from the Paris Agreement.
BankTrack has called on banks to divest from butane, LPG, and other fuels used by ships, as well as financing for new aircraft.
“Banning net-zero is not the answer,” said Ms. Whitley of the Overseas Development Institute. “The net-zero debate is about net emissions — it’s not about net access to finance.”
Banks will have to do more, “driven by carrots and sticks, stakeholders and government,” according to Capco’s Charles Sincock.
However, the large banks have established a strong base, setting an example on climate change that is difficult to disregard.