New net-zero commitments by leading banks can help carve the way to a green global economy
The financial sector is finally picking up the pace in its response to the climate emergency. Central banks are taking steps to better assess climate-related risks, and asset managers responsible for over a third of the world’s assets, including giants like Vanguard and BlackRock, committed to set a net zero path. Similarly, through the UN-convened Net-Zero Asset Owner Alliance, Wespath (US) and the Church Commissioners for England laid out plans to reduce the carbon intensity of their investment funds by 35% and 25% respectively by 2025, adding to the likes of insurance heavyweights Allianz and AXA and bringing to a total 20 of the 37 member asset owners that have set targets.
However, the banking sector has risked falling behind in the race to net zero by 2050. One report in March showed that less than half (45%) of banks took action to align lending portfolios last year.
Now, the global banking community has taken a significant step in catching up. Convened by the UN, the industry-led Net-Zero Banking Alliance (NZBA) was founded in late April by 43 banks from 23 countries across 5 continents, with assets of US$28.5 trillion – and the membership ranks continue to swell. This is an unprecedented commitment by banks to play their important role and do their part in decarbonising the real economy in line with the scientific call for action to limit global average temperature increase to maximum 1.5°C over pre-industrial levels by the end of the century. The NZBA is joining the UN Race to Zero campaign, and forms an integral part of the new Glasgow Financial Alliance for Net Zero, chaired by UN Special Envoy on Climate Action and Finance, Mark Carney. 40 of the NZBA founding members are also signatories to the UN Principles for Responsible Banking – the leading framework establishing the norms for sustainable finance.
From lending to investment portfolios, this new commitment will see rapid decarbonisation, based on robust, science-based methodologies, across banking assets. Given the urgency required for climate action it also, importantly, binds signatories to set and report against interim targets in line with the science for 2030 or sooner and so make a significant contribution to this critical decade of action.
The commitment is designed to ensure that banks engage with their clients’ decarbonisation reforms, promoting real economy transition across multiple high-emissions sectors. To this end, signatory banks will set transparent goals which account for their areas of most significant climate impact – the most GHG-intensive and GHG-emitting areas in their portfolios – within 18 months of joining the coalition. Within 36 months, they will set targets for all, or a substantial majority of nine carbon-intensive sectors: agriculture; aluminium; cement; coal; commercial and residential real estate; iron and steel; oil and gas; power generation; and transport.
Careful consideration has been given to establishing realistic and constructive timeframes with the founding members. The model is designed to avoid disincentivising banks which are at an early stage of their decarbonisation journey, while respecting the scientific decarbonisation scenarios to limit global temperature increase to 1.5°C by the end of the century. Inevitably, some banks have already set comprehensive targets, while others have made little progress as yet towards decarbonisation. A bank just now embarking on this journey needs time to undertake their portfolio assessment, build an emissions profile of their lending portfolios and investment activities, establish a baseline and develop realistic targets, while aligning with all other UN Sustainable Development Goals to the extent possible. Allowing a period of up to 18 months from signing to set targets makes the commitment accessible to banks that are just out of the starting blocks on their journey to reduce operational and attributable emissions across their balance sheet.
Tackling fossil fuels
The Alliance does not go as far as some campaigners might like and demand an immediate divestment from the fossil fuel sector, however it does compel members to prioritise high-emitting sectors, and immediately begin aligning their lending and investment portfolios with science-based pathways to net-zero by 2050 or sooner. They will do so according to the Guidelines for Climate Target Setting for Banks, which has been developed by banks who signed the Collective Commitment to Climate Action and underpins the Alliance. Based on the science, these guidelines require all NZBA members to set scenario-based intermediate targets for 2030 at the latest, across multiple carbon-intensive sectors of the economy. This is expected to lead to significantly reduced lending to those GHG-intensive and high emissions industries which do not have an accelerated decarbonisation transition plan in place.
Decade of action
We are at the start of the decade of action where setting and achieving demanding climate targets will accelerate the transition to a net-zero economy and lead to transformational real world impact. A study of 300 large corporates that committed to science-based targets in the last five years found they were reducing emissions at an even faster rate than that demanded by a 1.5°C pathway.
The global pandemic has shown how quickly industries can adapt when faced with disruption. It’s time for the banks and the wider finance sector to play their critical role in mobilising the trillions of dollars needed to transition to a global zero emissions economy and deliver the Paris climate goals.
Eric Usher is Head of the UN Environment Programme Finance Initiative, which convenes the Net-Zero Banking Alliance, the UN-convened Net-Zero Asset Owner Alliance and has announced its intention to convene the Net-Zero Insurance Alliance.