Finance

Banks are finally out of the blocks in the urgent race to meet net zero

Central banks are taking steps to better assess climate-related risks, and asset managers responsible for more than a third of the world’s assets have committed to set a net-zero path. Similarly, through the UN-convened Net-Zero Asset Owner Alliance, Wespath 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.

However, the banking sector has risked falling behind in the race to net zero by 2050. One report in March showed that fewer than half (45%) of banks took action to align their 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 five continents, with assets of $28.5tn — 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 at most 1.5°C over pre-industrial levels by the end of the century.

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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. Forty 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.

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 that account for their areas of most significant climate impact — the most greenhouse gas-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 time frames with the founding members. The model is designed to avoid disincentivising banks that 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.

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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 that do not have an accelerated decarbonisation transition plan in place.

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 a transformational real-world impact. A study of 300 large corporates that committed to science-based targets in the past five years found they were reducing emissions at an even faster rate than that demanded by a 1.5°C pathway.

The pandemic has shown how quickly industries can adapt when faced with disruption. It is 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 of 43 banks from 23 countries.

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