On 21 April 2022, the Net-Zero Banking Alliance marks its first anniversary. Since launching in April of 2021, the Alliance has seen tremendous growth: in just a year, more than 100 banks have joined and committed to decarbonizing their lending and investing activities by 2050. Last spring, the Alliance launched its award-winning Guidelines for Climate Target Setting for Banks. The Alliance Secretariat’s sector and implementation work tracks are currently developing additional guidance to further assist members in navigating their decarbonization journeys.
At the same time, however, the pressure for urgent climate action has only grown. Just this year, reports from Working Groups II and III of the United Nations’ Intergovernmental Panel on Climate Change (IPCC) outline the critical milestones that the global community must achieve to curtail the most severe effects of climate change. There is simply no time to waste, and no room for anything less than the highest of ambitions.
The NZBA was founded on two central beliefs: first, that to avert catastrophic climate change and its accompanying social and financial instability, all parts of the global economy must totally transform their operations to limit global heating to 1.5 degrees Celsius; and second, that banks, as facilitators of capital within that economy, have a key role to play in achieving this ambition. With this underlying perspective, the Alliance wishes to mark its first anniversary by presenting its vision for change – how its members will approach decarbonization within their own activities, and the impact it expects to have on the broader global economy.
Today, as the Alliance completes its first year of action, we look ahead to the coming year and put forward the following vision for change as we undertake the next phase in our net-zero commitment.
Execute the commitment
The Alliance’s primary catalyst for achieving the net-zero transition is the target setting and reporting process embedded within its central Commitment Statement. In signing the NZBA Commitment, banks agree to set targets that are:
- Robust: targets must identify carbon reductions across priority economic sectors
- Ambitious: targets must align with the 1.5°C warming ambition of the Paris Agreement
- Science-based: targets must follow a pathway that allows for no/low overshoot of the 1.5°C ambition, as defined by the best-available science-based climate scenarios
For members who joined the Alliance in April 2021, their first set of intermediate 2030 targets are due to be reported in October of 2022. These targets will be our first glimpse of the path ahead, and we look forward with anticipation to the ambitious decarbonization plans that our members will put forward.
Critically, Alliance members’ targets must adhere to accepted science if they are to achieve real impact on global warming. The Alliance’s Guidelines require banks to set 2030 and 2050 net-zero targets that align with no/low-overshoot 1.5°C transition pathways, as specified by credible science-based climate scenarios. This requirement is not prescriptive regarding which scenario must be used, in reflection of the continually evolving state of best-available science, and it will continue to evolve over time as methodological and data approaches develop. In their current iteration, the NZBA Guidelines’ required use of “credible science-based climate scenarios” encompasses – but is not limited to – both the IPCC P1/P2 and IEA NZE2050.
But setting ambitious, science-based targets is simply the first step. To achieve these targets, banks must undertake a tremendous amount of internal work – not least of which includes aligning leadership and lines of business, setting up data collection and reporting processes, navigating a patchwork of reporting standards, engaging board members and shareholders, and managing an evolving regulatory landscape. It will also require banks to engage proactively with their clients.
Engage with clients for real economy impact
The NZBA’s vision for change is rooted in the idea of achieving real economy decarbonization by aligning the providers of capital with a net-zero trajectory. This is the same foundation that governs our sister UN-convened alliances and our partners in the Glasgow Finance Alliance for Net Zero (GFANZ). As signatories to the Alliance, a significant proportion of the global banking industry is signaling a profound shift in perspective to their clients, employees, policymakers, regulators and other stakeholders.
To achieve their targets, banks must necessarily engage with their real economy clients to educate, share priorities, and encourage transition. Alliance banks will pursue this engagement in a variety of ways, which may include offering products and services to support clients’ transitions, supporting innovation, encouraging the near-term deployment of existing viable technologies, assessing material climate risks, and scaling up the financing of credible, safe, and high-quality climate solutions that are compatible with other Sustainable Development Goals. Additionally, while portfolio targets will provide concrete metrics for banks to aim for, banks will supplement their portfolio targets with sector targets, and ideally policies, that more broadly support their clients’ transition.
The NZBA does not plan to dictate how members choose to set policy or engage staff and clients in their net-zero transition but will support them by identifying best practices and developing sector guidance.
Finance the energy transformation
While the Alliance’s sights are set on a net-zero future, it also recognizes that currently the global economy is very firmly rooted in a fossil-fuel dependent model. The International Energy Agency reports that about 80% of global energy consumption comes from fossil fuel sources, with electricity demand growing by 5% in 2021.
Considering this dependence, Alliance members must navigate the global energy transition with care. In keeping with its perspective on client engagement, the Net- Zero Banking Alliance does not advocate for divestment of existing positions, as divestment limits the opportunity to positively impact company behaviors and accelerate transition to green technologies.
Rather, the Alliance encourages members to conduct client engagement with highly fossil fuel dependent clients, with the intention of improving the client’s sustainable value creation and supporting their transition to low-carbon and net-zero business operations. Such engagement will require banks to evolve new capabilities and knowledge and to form new partnerships, taking a multi-stakeholder approach. In line with a net-zero trajectory, banks are additionally expected to direct increasing amounts of capital towards low-carbon technologies in order to make these solutions accessible at scale.
“As current events make all too clear, our continued reliance on fossil fuels makes the global economy and energy security vulnerable to geopolitical shocks and crises. Instead of slowing down the decarbonization of the global economy, now is the time to accelerate the energy transition to a renewable energy future. Fossil fuels are a dead end – for our planet, for humanity, and yes, for economies.”
– Antonio Guterres, Secretary General of the United Nations, at launch of IPCC Working Group II report, 28 February 2022
Navigate a just transition
Amid economy-wide change, there is the possibility that the benefits created by that change will not be equally shared by all parts of society. The Alliance recognizes that a so-called ‘just transition’, one that ensures employment opportunities and protects vulnerable communities, must be achieved in tandem with decarbonization goals.
This perspective informs the Alliance’s conservative approach to fossil fuel divestment. Given the global market’s dependence on fossil fuels, rapid divestment carries the potential for extreme market shocks that could profoundly impact the world’s most vulnerable people and undermine a just transition. The Alliance instead chooses to partner with GFANZ in development of guidance for responsible retirement of these assets and seeks support from government and broader society to accelerate readiness and scalability of new technologies and safeguard the interests of vulnerable communities.
Work with others
By engaging clients and collaborating with actors across the entire financial and real economy value chains, Alliance members seek to enhance the supply side of finance into climate solutions, to increase liquidity, and to lower financing costs across sectors through systemic change.
As part of GFANZ, the Alliance is part of a movement that brings together all parts of the financial system, including ratings agencies, data providers, and methodology developers, to help build an enabling financial infrastructure. A vital aspect of this infrastructure is transparent and standardized climate reporting information, which is already taking shape via the newly formed International Sustainability Standards Board (ISSB). Recent evolutions in this area, including proposed requirements from the U.S. Securities and Exchange Commission (SEC), the Federal Deposit Insurance Corporation (FDIC), and the European Banking Authority (EBA), indicate a rising groundswell of support for more detailed climate disclosure and risk analysis. The Alliance welcomes the further global harmonization of standards and reporting and looks forward to supporting its progression.
Yet even as it pursues this ambitious transition, the Alliance relies on a broader group of partners that must all operate in conjunction to deliver a net-zero future.
Of critical importance, Alliance members urgently call on governments to meet them in committing to the Paris target of 1.5°C. The Alliance additionally requests that governments take immediate action to enact transition policies, sponsor climate-focused legislation, and spearhead climate change adaptation projects, strengthen community resilience, and reduce citizens’ vulnerability to the climate change that is already occurring. Governments must take a leadership role in achieving the net-zero transition.
To ensure that the net-zero transition is coordinated across the globe, the Alliance looks to central banks and supervisors to align on consistent frameworks and methodologies, provide specific climate-focused stability mandates, and establish a level global playing field that addresses the imbalances between developed and developing countries.
The Alliance also depends on businesses that will foster innovative technological development and pursue new products and services.
Lastly, the Alliance relies on civil society groups, research organizations, and universities to provide challenges, build methodologies, conduct research, raise ambition, and investigate areas for improvement.
Vision for the future of net-zero transition
Even as the Net-Zero Banking Alliance marks its first anniversary, we observe the critical state of geopolitics in Ukraine, and the increased precariousness of the global fossil fuel energy supply as a result of events there. We believe the repercussions of these events on the global fossil fuel market further support the critical need for an ambitious and expedient net-zero transition. At this time of uncertainty, the Alliance recommits to its net-zero ambitions, bringing greater focus, innovation, collaboration, and dedication to the transition.
At this anniversary, the members of the Net-Zero Banking Alliance reflect on the urgent action of decarbonization and look forward to an exciting second year of net-zero action.