This post was written by Gabriel Malik, Project Manager, Impact Investor at EDF + Business
This week, Citi released new interim decarbonization targets, based on a series of climate commitments from some of the world’s largest banks at the end of last year. From Goldman Sachs to HSBC, banks closed 2021 with important initial steps toward long-term emissions cuts, highlighting the ambition of the growing net-zero finance sector.
To build on this progress in 2022, banks will need to take a stronger stance on climate proactive Instead of ecological hosts reaction market participants.
So far, 101 banks – with assets of up to $67 trillion – have joined the Net-Zero Banking Alliance, convened by the United Nations in April 2021. But only a small portion of these banks have launched emissions targets funded for a specific sector.
Passive participation in industry climate coalitions does not imply leadership. Instead, to effectively navigate the energy transition, banks should implement transparent decarbonization plans for 2030—with particular attention to the following three actions.
1. Setting minimum standards for carbon-intensive financing.
Even banks with plans to decarbonize for 2030 have not yet attached consequences to their emissions reduction targets for high-impact sectors — corporate clients can access capital regardless of their climate records.
To enhance their energy conversion strategies, banks must set minimum standards for ongoing financing of carbon-intensive businesses, and make clear to clients that loans and underwritings will be curtailed for projects that fail to remove barriers.
Almost every major US bank is already restricting financing for Arctic oil and gas exploration, development, and production. This prohibition and others are set out in the banks’ environmental and social policy frameworks.
Adding new, sector-specific climate provisions to these well-established frameworks can help banks address risks associated with the energy transition. For example, banks could institute a “no new routine burn” rule for the oil and gas sector — withholding funding for oil exploration that lacks a management plan for associated natural gas.
Minimum standards like these can – with obvious consequences for poor transition planning – lead to effective management of climate risk across sectors such as energy, transportation, and power generation and help banks achieve their net-zero targets.
2. Providing climate-friendly advisory services.
Banks can also build on their initial steps by incorporating climate principles into their advisory services. Most of the banks’ commitments to reduce financed emissions focus on lending and underwriting – ignoring the massive advisory work for clients, which is a large part of their business.
From the fourth quarter of 2020 through the fourth quarter of 2021, banks around the world raised nearly $3.7 billion in fees from mergers and acquisitions in the power and energy sectors. In 2021, according to data from Refinitiv, five of the six largest US banks received more than $500 million in fees from mergers and acquisitions in oil and gas exploration and production alone.
From an environmental perspective, many of these transactions were a net loss, as companies with relatively strong climate mandates sold dirty assets to companies less interested in transition planning. As a result, mergers and acquisitions have frequently shifted emissions from industry leaders to industry laggards.
Citi acknowledged the importance of climate-compliant asset sales in its new TCFD report. To address this issue further, banks can incorporate climate goals into their advisory services. Addressing methane emissions in the purchase and sale of oil and gas assets, for example, could enable banks to reduce climate-related shift risks for their clients.
With climate protection safeguards built into mergers and acquisitions, banks can catalyze better decarbonization on the path to net zero.
3. Pushing for smart climate policy.
Ultimately, banks’ ability to meet their long-term climate goals will depend on the introduction of supportive federal and state climate policies. As the Glasgow Financial Alliance for Net Zero (GFANZ) notes in its call to action on climate policy, “Actions by financial institutions, while important, are not a substitute for actions by government, and certain responsibilities cannot be transferred to finance.”
Banks can enhance their net-zero plans by making climate policy advocacy more central to their decarbonization strategies. While the largest US banks have joined GFANZ and made high-level statements on the importance of climate policy, few publicly and consistently lobbied for measures necessary for a successful energy transition. For example, EPA’s proposed methane regulations, a major opportunity to reduce emissions, have been largely ignored by the banking community.
To help reduce climate-related financial risks, banks should consider adding climate experts to their legal and regulatory affairs departments or linking government relations staff with internal sustainability teams. Across these efforts, banks should focus on both direct and indirect leverage.
In the past year, Citi, Morgan Stanley and Bank of America have taken strong steps to improve climate policy advocacy for their trade associations. These efforts must continue into 2022 – with an increased focus on the specific regulatory and legislative measures needed to reach net zero emissions by 2050.
If banks are serious about meeting their climate ambitions, interim decarbonization targets like the ones we saw last year should serve as the basis for more comprehensive plans to cut emissions that could guide net zero banking in the coming years.