Stockholm (NordSIP) – In an article published in the ECB’s occasional Paper Series at the start of April, eight analysts at the central bank reviewed the net-zero commitments disclosed by the world’s largest banks, and the associated risks of misrepresentation. The authors summarise their findings as “Promising beginnings, significant room for improvement.”
The report focused on the net-zero commitments of global systemically important banks (G-SIBs) contained in their publicly available disclosures as of late 2022. Only 25 of these 30 G-SIBs had made public net-zero commitments as of that date.
It should be noted that although all the authors are members of staff of the ECB, this study is a research article conducted by the analysts, not an official policy report or position paper by the ECB.
Vague Commitments
The report notes that large banks have recently increased their stated ambitions and disclosed further details regarding their net-zero targets. There is also growing convergence on the use of net-zero commitments, with for example the vast majority of G-SIBs forming part of the Net-Zero Banking Alliance (NZBA).
Despite this progress, however, some of the information available in G-SIBs’ disclosures still raises questions at this stage with respect to the consistency of these net-zero commitments. The authors warned that limited information sharing, tentative or merely aspirational language and commitments to unclear goals such as “carbon neutrality” were problematic from a regulatory perspective.
Net-Zero Scenario Convergence Problems
While banks widely use the tool of portfolio alignment to illustrate their net-zero convergence, the study highlights several areas where the choice and use of underlying scenarios and pathways can be improved.
Banks often select scenarios or pathways that do not reflect their portfolio allocation or geographical exposures. Another issue emerges from banks use if outdated scenarios or benchmarks, or use their own methodologies without providing evidence for their scientific credibility.
Sectoral Exposure
Some gaps also arise with regard to financial institutions’ exposures to certain sectors, as the portfolio coverage of metrics and targets does not systematically allow conclusions to be drawn on the bank’s alignment with the net-zero trajectory.
The report warns that banks often report their exposure to certain high-emitting sectors but do not cover the rest of their balance sheet, making net-zero assessments difficult. Targets sometimes only cover a narrow selection of sectors or a limited range of activities or subsectors. While many banks have developed and implemented exclusion policies, on closer inspection it is often unclear how such policies contribute to net-zero alignment.
Improving Target-Setting
Target-setting could be improved substantially, as the targets are not sufficiently comparable, and the methodological description of the targets is often very vague. We found that while banks have made significant progress in setting and disclosing targets, they have very divergent approaches regarding the selection of base years and interim targets.
It is noted that this may currently be due to data gaps and ongoing methodology development. The unclear use of carbon offsets and credits is a further point we noticed, as well as the focus on specific portfolios in the balance sheet and the non-inclusion of facilitated operations in
The Dangers of Greenwashing
The issue of greenwashing continues to occupy policymakers, with the report warning that a concrete, singular definition of greenwashing is still lacking, despite the fondness of regulators, NGOs and other stakeholders for it.
Such ambiguity however does not exist in the EU. The Taxonomy Regulation refers to greenwashing as “the practice of gaining an unfair competitive advantage by marketing a financial product as environmentally friendly, when in fact basic environmental standards have not been met”. Similarly, the Sustainability Finance Disclosure Regulation (SFDR) defined greenwashing as “the practice of gaining an unfair competitive advantage by recommending a financial product as environmentally friendly or sustainable, when in fact that financial product does not meet basic environmental or other sustainability-related standards”
The report identified potential legal consequences of greenwashing allegations, including the possibility of regulatory or administrative actions for greenwashing claims, action with regard to misleading marketing campaigns by banks or civil claims for misleading statements, often based on consumer protection law. In the EU, national legislation incorporates the Unfair Commercial Practices Directive, which inter alia deals with misleading commercial practices. In some countries, the applied standard is particularly strict when statements refer to environmental benefits.
The report illustrates the legal consequences of greenwashing with a discussion of five case studies of suits brought in Australia, the UK, France and the Netherlands.
