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ESG & sustainabilityNovember 22 2022

Is momentum building or diminishing on bank decarbonisation?

As the Net-Zero Banking Alliance continues to expand, lenders are caught between the urgency of the climate crisis, accusations of greenwashing, and the practical — as well as political — challenges of setting decarbonisation targets. Marie Kemplay reports.
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Is momentum building or diminishing on bank decarbonisation?

There are several positives to take away from the Net-Zero Banking Alliance’s (NZBA’s) progress report, its first since the group was launched in April 2021. For instance, 90% of member banks that were due to submit intermediate 2030 net-zero targets by October 21 had done so by the end of that month. The alliance has also expanded from 43 banks to 122, representing $72tn in assets — an estimated 40% of the global industry’s total.

But there are also those who suggest the NZBA’s progress so far has not been remotely good enough. Responsible investment campaign group ShareAction published its own assessment describing the targets from many of the alliance’s largest banks as “inadequate”. It also highlighted a lack of what it describes as “overarching” interim targets to ensure emissions reductions are on track for 2030, a lack of targets for some emissions-heavy sectors and inconsistent metrics.

Remco Fischer, climate lead at the UN Environment Programme Finance Initiative, which convened the NZBA, responded that “while we find common ground on many of ShareAction’s technical analyses” its assessment “often fail[ed] to reckon with” the complexities of the banks and the environment they are operating in, and “does not accurately represent” how NZBA approaches that complexity.

A US-based banker at an international lender part of the NZBA adds: “The idea that banks can map every sector overnight is not reasonable. We are working to map two, three sectors a year and it's still an incredibly challenging undertaking. We're hiring people, scouring ledgers, trying to get audit quality data that has never been tracked before. We will map all the sectors in the 36 months given by NZBA, but to expect all the commitments to be realised within a year is naive.”

With a darkening global economic climate, a vocal, Republican-led anti-environmental, social and governance (ESG) backlash in the US (which will likely remain unaffected by midterm elections that showed better-than-expected results for Democrats) and significant energy security concerns in the wake of Russia’s invasion of Ukraine, the context is arguably becoming even more challenging.

Growing opposition

Banks have been in the spotlight for their financing of fossil fuel companies for years. The most recent Banking on Climate Chaos report, published in March by a group of NGOs including the Rainforest Action Network and BankTrack, found that 26 of the world's largest lenders increased, rather than decreased, their financing of fossil fuels between 2020 and 2021, with the biggest expansion showed by Wells Fargo and Royal Bank of Canada. Since the Paris Agreement, the top 60 banks globally provided a total of $4.6tn to the fossil fuel sector, led by JPMorgan and the US and Canada's largest names. All of them, and most of the world's largest banks, are now part of the NZBA and, therefore, the Glasgow Financial Alliance for Net Zero (GFANZ).

In October, GFANZ released its own progress report, which described its member alliances, including NZBA, as “independent initiatives subject only to their individual governance structures”, with “sole responsibility” for changes to their membership criteria. Where previously it had been a requirement of GFANZ membership that its sectoral alliances (and therefore their members) must comply with strict criteria set by the UN’s Race to Zero campaign, which include committing to phasing out “development, financing and facilitation of new unabated fossil fuel assets”, instead alliances would now “take note of” guidance from Race to Zero.

This shift followed multiple media reports that some US banks, such as Morgan Stanley and JPMorgan, were concerned that being signed up to GFANZ (and therefore Race to Zero criteria) created legal risks for them. A senior executive at one bank said: “I am close to taking us out of these global green commitments,” according to the Financial Times.

Such concerns came off the back of mounting anti-ESG sentiment in the US — in particular, a coalition of attorney generals from 19 states led by Missouri’s attorney general, Eric Schmitt, launched an investigation into six US banks and their membership of the NZBA, prompted by its expected negative impact on the US fossil fuel industry. Mr Schmitt commented: “We are leading a coalition investigating banks for ceding authority to the UN,” with other attorney generals also suggesting that the banks’ NZBA membership may represent “collusion” and a breach of consumer protection laws.

I don’t fundamentally think it makes a difference whether NZBA is tied to Race to Zero criteria or not

Annabel Ross

Additionally, more than 20 Republican states, including Texas, West Virginia and Utah, have also either taken or threatened action against financial institutions with policies to reduce greenhouse gas emissions, including adding them to so-called blacklists removing their eligibility to be appointed for state contracts.

However, while the removal of a formal linkage between Race to Zero and NZBA, and the other GFANZ alliances, is clearly a watering down of criteria, there is debate about how much difference in practice it will make.

“I don’t fundamentally think it makes a difference whether NZBA is tied to Race to Zero criteria or not,” says Annabel Ross, an independent sustainable finance consultant and former banking lead at Cambridge Institute for Sustainability Leadership. “NZBA banks have pledged to take action towards net zero, and have interim progress targets, so I don’t think Race to Zero will be the maker or breaker of that success.”

Legal scrutiny

Another senior US-based banker describes the move as a “technicality to address the antitrust issue”. He suggests that “if banks wanted to avoid scrutiny, they would not have engaged in discussion about how to fix the issue that was making them nervous. They would have taken the exit.” There is also a genuine commitment to addressing these issues he notes, not least because he insists that banks set decarbonisation targets because it makes commercial sense, not as a public relations exercise. “They can see the growing financial risks on the horizon,” he adds.

In response to a general question about US banks’ commitment to NZBA, Mr Fischer said: “All of [the US banks] are still there, they are still in the alliance. And based on our preliminary analysis, they are at this point doing all that they promised to do when they entered.”

The fact that these kinds of discussions about legal risk are taking place can perhaps be taken as evidence that the decarbonisation agenda is entering a new phase, where institutions can expect scrutiny, from all sides of the debate, to be more intense.

Daniel Klier, a former global head of sustainable finance at HSBC and now CEO of data provider ESG Book, suggests that recent events “shine a light on the challenges the move to net zero is facing. We are going through an important moment in history as we are moving from commitments to execution”.

He adds that “most of us agree that the transition to a low-carbon economy will deliver growth, shape the future of industry, and create millions of jobs. But the transition will not come without choices; the days when you can have your cake and eat it are now over.”

the transition will not come without choices; the days when you can have your cake and eat it are now over

Daniel Klier

Ms Ross adds: “The fact that banks are concerned about legal risks represents the fact that these are real issues, which do have very real consequences. On the one hand, you don’t want banks to be so afraid of the consequences that they shy away from making these commitments, but equally these can’t be ‘fluffy’ commitments that don’t mean anything.”

However, the emerging anecdotal trend of so-called green hushing — firms deliberately being less vocal or more cautious in their public statements and commitments on sustainability issues — is a cause for concern for some.

Green hushing

For the second US-based banker, the fact that the current climate, particularly political interventions in the US, makes banks less likely to be vocal on ESG issues is far more concerning than what happened with GFANZ and Race for Zero. “I don’t think individual banks will change their actions, or that their intentions have changed, but I do think it will impact public discourse. That is a loss because you lose the advocacy for why these issues are important, and the potential accelerating effect of that,” he says.

The challenging backdrop of high-profile pushback in the US and increased nervousness about scrutiny more broadly demonstrates the clear risks to the tentative action that has been taken so far.

For banks to push further on this agenda, the NZBA has been clear that it expects other key players within the economy to step up too, with the press release accompanying its progress report pushing governments, in particular, to “take a leadership role”.

Mr Fischer goes further, suggesting that “there is currently a big gap in ambition between what NZBA and other alliances in GFANZ are committing to do versus what governments are committing to do.

“Collectively, governments’ concrete climate plans and strategies currently align with a global temperature increase by [the year] 2100 of above 2.7 degrees Celsius. In contrast, the level of ambition that NZBA banks have committed to and currently are [putting into action], via the formulation and publication of tangible targets, aligns with a global temperature increase by 2100 of 1.5 degrees Celsius,” he says.

“Banks cannot solve climate change by themselves,” he adds. “What the private sector can do through these platforms is signal to the broader environment — governments, their clients, their shareholders — what their vision is and that it is a vision that they are taking seriously by creating targets and transition plans that they are [executing].”

There are others who feel that regulators should be playing a greater role in holding the line. At COP27, former governor of the Bank of England Mark Carney made a series of requests for policy-makers from members of GFANZ, which he spearheaded. These include the alignment of financial regulation with net zero by making net zero transition plans mandatory, which would detail how institutions plan to decarbonise and help to hold them accountable.

In a LinkedIn post discussing the contents of the NZBA’s progress report, James Vaccaro, executive director of the Climate Safe Lending Network and GFANZ's advisory panel member, wrote: “The call to action for governments doesn’t include financial regulation – which feels like a missed opportunity to help ‘level-up’ the policy to support a net-zero aligned financial sector for all participants.”

Pioneer penalty

Talking to Sustainable Views, Mr Vaccaro added: “Doing the really hard stuff means going beyond the simple win–wins. It might mean forgoing income from harmful activities.

“If banks were to show leadership by taking that step, only to see the business pass to a competitor, they might not achieve the real-world impact they want and lose out commercially as well. Whereas if regulation makes those harmful activities harder for everyone, it reduces the ‘pioneer penalty’ and would stimulate a more rapid transition.”

He also stresses the importance of NZBA being a “race to the top” – a leadership initiative that motivates banks to do better “highlighting the inspiring examples of ideas, interventions and breakthroughs that others can learn from” rather than ones that focus on disqualifying banks from being part of it. However, he cautions that it must maintain integrity around its core purpose, otherwise it would risk turning off its most committed members.

There are few illusions out there about the scale of the work that still needs to be done if banks are to achieve net zero by 2050, including their intermediate 2030 targets. Chair of the NZBA steering group Tracey McDermott also acknowledges in her foreword to the progress report that “shocks to the global economy — through inflation, war, disrupted supply chains and pandemic recovery — are threatening the global consensus on the need for urgent action”.

The first round of intermediate 2030 targets only represents each participant bank’s highest priority areas. Still to come are sector-specific decarbonisation targets across all nine, or a majority of them, industrial sectors identified in the alliance’s guidelines within the first 36 months of joining (within the next 18 months for those banks who joined in April 2021). As the clock ticks down to 2030, banks are also required to report annually on progress towards their targets.

The NZBA progress report concedes that at this stage “it is currently not possible to make a judgement on the quality of targets […] nor is it reasonable to speculate on the likelihood of an individual member meeting their intermediate targets”. However, Mr Fischer suggests that over time it will be possible to monitor the progress of individual banks.

With immediate energy security issues still high up the agenda, economic turbulence expected to continue and with the political climate in the US looking unlikely to settle down, it remains to be seen how bullish banks will be.

Additional reporting from Silvia Pavoni. This article first appeared in Sustainable Views, the Financial Times Group’s platform on ESG policy and regulation. 

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