Jeanne Martin is senior campaign manager of the banking standards team of ShareAction. This contributed content represents the views of the author, not those of Canary Media.
Global financial institutions are on notice — and on deadline — to end their backing of fossil-fuel extraction and other industries responsible for the emissions putting the world at risk of catastrophic global warming. Whether the commitments made in response to this imperative amount to real change or mere delay tactics hinge on the fine print, however.
Last week saw the launch, with great fanfare, of the Net-Zero Banking Alliance, which comprises 43 banks from 23 countries. The NZBA is part of the United Nations Framework Convention on Climate Change's “Race to Net-Zero” initiative. But will it really help the banking sector race to net-zero? Or is it yet another industry initiative designed to keep the handbrake on?
Let’s start with the positives.
Ye shall not rely on unproven technologies
The U.N.'s Intergovernmental Panel on Climate Change warned back in 2018 that relying on carbon dioxide removal technologies, rather than striving to reduce carbon emissions as soon and as deeply as possible, “is a major risk in the ability to limit warming to 1.5° Celsius” over the next century, the target set by the IPCC to avert the most catastrophic impacts of global warming.
Many financial institutions have glossed over this uncomfortable finding — and it’s not hard to see why. The more you can "remove" CO2 from the atmosphere in the second half of the century, the more CO2 you can emit now and the less you need to disrupt current business models.
Encouragingly, the NZBA is not included in this cohort. Its guidelines require banks to align their activities with “no-overshoot” or “low-overshoot” climate scenarios, meaning they have to dramatically reduce emissions in the next two decades, rather than relying on CO2 removal technology to clean up their mess later.
While banks’ interpretation of this requirement will vary, it is a step in the right direction. Now the focus will shift to ensuring that signatories of the NZBA actually follow suit.
The Net-Zero Banking Alliance states that some guidelines are “optional” or “optional but strongly recommended.” That’s a worrisome caveat for an initiative that is already voluntary in scope and lacks enforcement capacity.
And it is not always readily apparent where the guidelines fall short.
For example, banks are required to set 2030 and 2050 reduction targets covering the emissions embedded in their financing, which is a positive step. But these targets only cover banks’ lending; extending them to include underwriting is merely optional, albeit recommended.
Banks provide just as much fossil-fuel financing through underwriting as through lending, making this a significant omission — especially as some banks are already in the process of setting targets covering both underwriting and lending.
For example, Barclays recently published a new methodology allowing it to set emissions reduction targets for its utility and energy sector clients. Its targets cover both underwriting and lending activities. HSBC recently committed to doing the same in the face of pressure from investors.
Another example of the NZBA’s problematic use of options concerns banks’ use of offsets, which are basically a way for banks to compensate for financing high-carbon activities by investing a similar amount in low-carbon activities.
The NZBA guidelines argue that offsets “can play a role to supplement [decarbonization] in line with climate science.” They recommend — but do not mandate — that offsets only be used “where there are limited technologically or financially viable alternatives to eliminate emissions” and where offsets are “additional and certified.”
This leaves far too much room for interpretation, however, and is likely to be exploited by banks that have no intention to curb their financing of high-carbon activities.
Fossil fuels: The elephant in the room
Banks are a primary funder of fossil fuel projects and companies that fuel climate chaos and threaten the lives and livelihoods of millions. A recent report estimated that in the five years since the Paris Agreement was signed, the world’s 60 biggest banks have financed fossil fuels to the tune of $3.8 trillion (all monetary values shown in USD).
This is starting to change, however, as shareholders, customers and society as a whole put more pressure on banks to phase out financing of fossil fuels. The past few months alone have seen HSBC bow to shareholders and commit to phasing out coal, shareholders speak up at the annual general meetings of banks such as Intesa Sanpaolo and Santander, and a group of 35 investors representing $11 trillion in assets call on global banks to phase out financing for activities that contravene the Paris Agreement.
Yet the NZBA is silent on this critical question, failing to set explicit commitments from banks to adopt robust coal and fossil fuel policies. That’s a major concern, given the track record of its signatories.
Of the 21 banks signed up to the NZBA that are scored in Reclaim Finance’s Coal Policy Tool, only two of them — BNP Paribas and Societe Generale — have committed to end their exposure to coal by a specific date, taken a relatively strong position on coal developers and placed some restrictions on companies.
By contrast, three of them — KB Financial, SEB and Shinhan — do not even have robust project finance exclusions in place. These banks are failing at the first climate hurdle, and the alliance is failing to move them in the right direction.
Days after the NZBA was launched, a group of 17 investors representing $4.3 trillion in assets under management and/or advice called on Barclays, Europe’s largest fossil fuel financier and a signatory to the NZBA, to phase out coal and oil sands. This is the kind of standard the NZBA should have set itself.
Where is JPMorgan?
The NZBA initiative was co-launched by the United Nations Environment Programme Finance Initiative and the Sustainable Markets Initiative. A closer look at the members of the SMI reveals that JPMorgan advised on the NZBA.
It’s hard to imagine that JPMorgan, the world’s largest funder of fossil fuels, had a positive influence on the NZBA. At the same time, its work on advising the initiative does not seem to have convinced the bank of the value of joining in, since JPMorgan is not a member. This should raise red flags about its intention to deliver on its decision to “adopt a Paris-aligned financing commitment.”
As the lifeblood of the economy, banks have a major role to play in averting the worst consequences of the climate crisis. So far, the banking sector has failed to do its part. If private-sector banks want to be seen as part of the solution, they need to get a lot more ambitious. If not, it’s time for regulators to take over and provide a proper solution. This should include introducing regulations that incentivize banks to:
1. Publish short-, medium- and long-term emission-reduction targets aligned with the 1.5° C goal that encompass all of their financed emissions (lending, underwriting and investments).
2. Stop financing Paris-misaligned activities and publish fossil-fuel phaseout plans, starting with coal.
3. Take concrete action to reduce their carbon footprint, rather than relying on offsets.
(Article image courtesy of Floriane Vita)
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