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    Gaping Holes in Banks’ Net-Zero Strategies

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    Stockholm (NordSIP) – The role of banks in the transition to a low-carbon global economy is scrutinised in a new report produced by the Transition Pathway Initiative Centre (TPI Centre), which part of the Grantham Research Institute on Climate Change and the Environment, based at the London School of Economics and Political Science (LSE).  Although banks typically have relatively low corporate emissions, they can have a significant impact on the net-zero transition via their financing activities.

    The TPI Centre evaluated 26 international banking groups, 10 US super-regional banks, and two US custodian banks using its proprietary Net Zero Banking Assessment Framework (NZBAF) alongside a quantitative assessment of the banks’ carbon performance.  The NZBAF was developed in collaboration with the Institutional Investors Group on Climate Change (IIGCC) and sustainability non-profit Ceres.  It aims to measure the effectiveness of banks’ decarbonisation strategies, management of climate risk, and emissions disclosure practices.

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    The overall picture presented by the analysis is one of a banking sector that is still far short of what is needed to support the low carbon transition.  Most banks have put in place disclosure processes for their own emissions but with only partial coverage of financed emissions.  Half of the peer group is publicly committed to achieving net-zero by 2050.  However, these long-term targets are called into question by their poor NZBAF and carbon performance scores.  The NZBAF framework examines ten areas, such as net-zero commitment, sectoral greenhouse gas (GHG) reduction targets, exposure and emissions disclosure, and others, the scores of which are underpinned by 72 sub-indicators.  None of the 38 banks assessed in the 2024 report scores on more than 50% of these sub-indicators, with the peer group on average registering a score on only 15% of these.

    Targets do not match reality

    Overall, the banks’ carbon performance is also poor, with just 19% of the group able to show sectoral pathways aligned with the goals of the Paris Agreement.  A negligible 3% are able to demonstrate compliance with the most ambitious 1.5-degree warming target.  Moreover, the banks GHG emissions disclosure is beset by significant blind spots.  The TPI Centre estimates that only 22% of the banks’ total revenues are covered by targets and the associated reporting.  Only 7 of the 38 banks report on their capital market activities, which means that financed emissions are simply excluded from the remainder.  There also appears to be a bias towards disclosing on more highly scrutinised sectors like electricity generation, oil and gas, and the motor industry.  This leaves high-emitting sectors such as food systems, aviation, cement and steel manufacturing, and extractive industries excluded from the banks’ reporting.

    European and Japanese banks generally outperform their North American peers, with Barclays, BNP Paribas, Crédit Agricole, HSBC, and ING Bank having set the most targets in place.  North American JP Morgan Chase also scores well in this respect, although it and others in this leading pack remain some of the biggest financiers of new oil and gas projects.  Although the researchers found that most banks do evaluate their borrowers’ low-carbon transition prospects, these appear to have little bearing on financing conditions.  This is compounded by an absence of climate-related voting policies for investee companies, and a lack of commitments to phase out the financing of fossil fuels.  The results show that most banks lack a coherent decarbonisation strategy.

    Small steps but far more is needed

    Among the more positive observations in the report is the fact that most banks have at least acknowledged the need to treat climate risk as material, with most having setup some kind of relevant higher-level governance structure.  Unfortunately, it seems these steps do not go much further, with few able to explain in concrete terms how they handle climate risk or make sure their board and executives are climate competent and incentivised accordingly.

    The TPI Centre hopes that this latest report will encourage banks to improve their decarbonisation strategies by expanding their climate commitments and policies to cover all areas of their business.  They are also urged to complement their stated long-term climate goals with short-term, better-aligned sectoral targets.  Banks must also implement genuine, robust accounting of financed emissions, which for many of this peer group represent the bulk of their carbon footprint.  The TPI Centre also calls for the elimination of the various geographical limits and revenue thresholds that act as loopholes for the continues financing of harmful fossil fuel developments.

    Image courtesy of Siggy Nowak on Pixabay
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