5 November 2021
On the heels of COP 26 Finance Day, banking industry leaders met in Glasgow to discuss the leadership role of the banking sector towards net-zero under the UN-convened Net-Zero Banking Alliance (NZBA) – a game-changing commitment through which the banking sector is joining forces and mobilising capital at scale to tackle climate change, the defining issue of the 21st century.
Addressing the climate crisis requires drastic transformation of the world’s real economy – including food production, energy generation, transportation and infrastructure – and replacement of outmoded technology with low-emissions alternatives. This systemic change requires investment at an order of magnitude and speed that is unparalleled, with an estimated US$ 100 trillion of investment needed over the next 3 decades for a clean energy future.
The NZBA brings together over 90 banks with a collective US$ 66 trillion in assets, representing 43% of banking assets worldwide to support this rapid transformation of the global economy. Banks in the Alliance commit to using robust, ambitious, science-based targets to decarbonise their lending and investment portfolios on a 1.5 degree climate trajectory to achieve net zero emissions by 2050.
“Right here is where private finance draws the line,” said Mark Carney on Wednesday, as he announced the US$ 130 trillion in assets across 450 financial institutions which are now firmly committed to net zero under the Glasgow Financial Alliance for Net Zero (GFANZ) – which includes the Net-Zero Banking Alliance. “We now have the essential plumbing in place to move climate change from the fringes to the forefront of finance so that every financial decision takes climate change into account.”
“This will go down in history as one of the most significant outcomes from this COP – that massive wave of capital in the Glasgow Financial Alliance for Net Zero’ – Nigel Topping, UN High Level Climate Action Champion for COP26
Participants on Thursday’s banking panel spoke to the strength of the Net-Zero Banking Alliance, highlighting how it enables banks to join forces to take a consistent, international approach to net zero, promoting alignment on key issues such as measurements and disclosures. By working together, banks can build a common language and share best practices on technical developments such as carbon accounting, offsets, target-setting and scenario use.
Critically, the panelists noted that the NZBA convenes a common voice of the industry, enabling them to collectively engage with regulators and policy makers for the supportive environment that the banking community requires to implement net zero across jurisdictions. Banking leaders drew attention to the need for an enabling policy environment at the national and international level, calling on governments to set frameworks and public policies that incentivise green financing and bring clarity on the pathway ahead for the real economy.
Banks and regulators both noted the tension between the need to consolidate approaches and reduce fragmentation while still needing to experiment as the financial system learns and builds capacity together to seek best-practice, for example on how climate change risks can be reflected in the capital framework, with careful consideration given to stress testing scenarios. The Bank of England highlighted their recent PRA report on climate-related financial risk management and the role of capital requirements, which sets down their current thinking on the topic as well as their strategy and planned future work.
Several panellists highlighted the need for a just, orderly transition of the global economy – a transition which is not simply about divesting, but instead fully engaging with corporate and retail clients to accelerate the transition, making it affordable and simple to help people and businesses prosper even as the economy undergoes a rapid, seismic shift. The panel also spoke to emerging markets, one of the key themes at COP26 this year, highlighting the need to ensure a healthy flow of capital to those areas that need it most, a view echoed in the G20 Policy Call to Action, recently issued by the GFANZ Principals group.
“If banks are serious about net zero it is quite clear they can no longer finance the expansion of infrastructure, technologies and business models that we know are incompatible with the 1.5°C climate goal.” Inger Andersen, Under-Secretary-General of the United Nations and Executive Director of UNEP in a speech delivered by Remco Fischer, Climate Lead at UNEP FI
Walking the Talk
Credibility, transparency and delivery are critical components of any commitment to ensure trust is maintained and strengthened between financial institutions and the societies they serve.
Speakers highlighted how the Net-Zero Banking Alliance guides banks along a steep emissions reduction pathway, in line with scientific, credible low/now overshoot climate scenarios, including those laid out by the Intergovernmental Panel on Climate Change (IPCC). These scenarios are time-bound, and so dictate to some degree the transition timeline of financial portfolios. The commitment includes annual, public reporting requirements on both absolute emissions and emissions intensity – a transparent and robust pathway to absolute reduction in order to achieve the net-zero future the world needs.
“[Sustainability and climate] has now gone mainstream […] but the question is now pace. It’s not enough to make commitments, you have to follow through as well.” Alok Sharma, President for COP26 in an address to both member states and non-state actors.
Immediacy of action is also baked in, with banks setting their first targets in high emissions sectors within 18 months of signing. These targets are for 2030 at the latest, so a maximum of 8 years from today, leaving only a short window for banks to react to reach their first milestones. “We need to walk the talk, and the sooner, the better”, said one panelist, urging peers who are not yet part of the NZBA to join and, critically, to get started as soon as possible. “It takes time [to implement] – it’s a journey, clients need to be engaged, capacity built, emissions need to be measured and more. It’s not just an investing exercise, it’s really about helping clients.”
Remco Fischer, Climate Lead for UNEP FI echoed this sentiment, saying: “the task won’t be easy, but it is necessary. For a stable climate. For a thriving, safe and biodiverse natural world. For a planet free of pollution. All of which we need for human health, prosperity and peace.”