The financial industry is uniquely positioned to enable the net-zero transition and thus prioritise business that contributes to a sustainable future. As net-zero commitments are reshaping the direction of financial flows, companies’ ability to raise funds is now closely tied to their climate targets and strategies.

This article presents UNEP FI’s sixth recommendation on credible net-zero commitments as outlined in a UNEP FI input paper to the G20. The eleven recommendations, alongside this series of articles, aim to support policymakers in understanding the progress in net-zero finance to date and how to scale up the global transition to a net-zero economy.

Redirecting financial flows

The distinctiveness of financial institutions’ activities leads to variations in their emissions baselines and reduction objectives. Banks, asset managers, pension funds, insurers and others have different structures and operate across various economic sectors and regions. This influences their timing and extent of portfolio alignment with the climate transition. Yet, they all have a common imperative to align their target-setting approaches with the global 1.5°C pathways that encourage the real-economy actors they finance to achieve net zero.

It is worth noting that this may occasionally be at odds with the financial institutions’ own carbon footprint, but where more carbon intensive investments are made (for example to decommission a coal plant or reduce emissions from necessary material industries like cement over low carbon investments in technology) with the objective of aligning with 1.5C outcomes, this nuance should be celebrated.

Many inspiring leaders are at the forefront of driving the net-zero transition, understanding the urgency of mitigating climate risks and embracing the economic potential of the transition. Financial institutions can be drivers by increasingly considering environmental and climate-related information of their counterparties, such as sustainable business objectives, emission reduction targets and transition planning, as part of achieving their own transition objectives.

Balancing divestment and engagement

While a financial institution can focus on rapidly eliminating emissions from its portfolio, there is a concern that others may step in willingly to provide financing. This transfer of engagement opportunity hampers the financial industry’s contribution to the climate objectives. Divestment versus engagement should always be carefully considered. A thorough understanding of a company’s or sector’s decarbonization potential can help find this balance.

To facilitate the transformative shift needed to achieve net zero, financial institutions need information from their counterparties. To accelerate progress, transparent reporting of transition strategies and planning by governments, regions, companies and sectors is crucial.

In conclusion, to bolster global net-zero leadership and maximize real-economy impact, regulatory frameworks should promote transition finance and enforce the disclosure of climate commitments and transition trajectories. This will enable financial institutions to effectively channel resources towards sustainable initiatives and ensure transparency in measuring the progress towards net zero.

Download UNEP FI’s G20 input paper to access the full set of recommendations for credible net-zero commitments from financial institutions.

Download the UN Secretary General’s High Level Expert Group Integrity Matters Report to access the full set of recommendations for all economic actors.