We’re accustomed to big banks and their grand announcements about heading off the climate crisis. They’ve promised to cut net emissions to zero, offering great proclamations that what’s good for the planet is good for business. Yet, until recently, there hasn’t been much pragmatic talk about how these formidable institutions intend to make net zero policies happen. This year, major banks, including Citigroup and BBVA, say they are joining forces with others in the financial biz to address sector-wide challenges associated with the net zero transition.
The difficulty is that, to support global ambitions to reach net zero by 2050, these net zero transition plans must be science-based and include credible interim targets and implementation tactics. Those requirements move beyond clever marketing announcements and need tangible details, milestones, and intended results. These 30-year goals must reference hard data points so investors can differentiate between deliverables and greenwashing.
Background to Net Zero Transition Plans
Governments and private-sector firms around the world have committed to achieving net zero with the goal of limiting global warming to 1.5 degrees C. Nearly 200 countries signed the Glasgow Climate Pact 2021, through which they resolved to “pursue efforts to limit the temperature increase to [1.5 degrees C].” 137 countries, representing 91% of global GDP, have made a net zero commitment along with thousands of companies, cities, regions, and other organizations, according to the Glasgow Financial Alliance for Net Zero (GFANZ).
What is net zero? Net zero is a term that refers to a state when anthropogenic emissions of greenhouse (GHG) gases to the atmosphere are balanced by anthropogenic removals. Organizations are considered to have reached a state of net zero when they reduce their GHG emissions following science-based pathways, with any remaining GHG emissions attributable to that organization being fully neutralized by like-for-like removals exclusively claimed by that organization, either within the value chain or through purchase of valid offset credits.
What is a 1.5 degrees C-aligned pathway: This 1.5 degrees C-aligned pathway would require dramatic emissions reductions over the next 10 years—starting now, giving at least 50% probability of success based on current knowledge of limiting global warming to below 1.5 degrees.
What is GFANZ? The Glasgow Financial Alliance for Net Zero is the world’s largest coalition of financial institutions committed to transitioning the global economy to net zero GHG emissions. The private financial sector has the scale to mobilize the necessary capital and financing with more than 500 financial institutions, representing around 40% of global financial assets, committed to the goal of net zero by 2050 through membership in one of the financial sector-specific alliances comprising GFANZ. Their purposes are to expand the number of net zero committed financial institutions and to establish a forum for addressing sector-wide challenges associated with the net zero transition, helping to ensure high levels of ambition are met with credible action.
In June, 2022, GFANZ released its recommendations and voluntary guidance for Financial Institution Net-zero Transition Plans which identifies 4 approaches to support real economy GHG emissions reductions:
- Climate Solutions: financing or enabling entities and activities that develop and scale climate solutions
- Aligned: financing or enabling entities that are already aligned to a 1.5°C pathway
- Aligning: financing or enabling entities committed to 1.5°C-aligned pathways
- Managed Phaseout: financing or enabling the accelerated managed phaseout of high-emitting physical assets
These 4 key financing strategies are positive actions to decarbonize the real economy and include financing and related services to enable and support:
- climate solutions
- companies already aligned to net zero
- the transition of companies committed to aligning
- the managed phaseout of high-emitting physical assets
Because these actions could temporarily increase client and portfolio emissions in the short term, GFANZ acknowledges that using only portfolio emissions footprint metrics may not reflect the extent of transition activities the financial institution may be supporting. Tony Rooke, head of transition finance at this, the world’s biggest climate finance coalition, told Bloomberg he expects 2023 to be “the year of the transition plan.”
Citi Task Force on Financial Disclosure
Citi is part of the Net Zero Banking Alliance (NZBA), which is part of the broader GFANZ. The company says it has drawn from GFANZ’s guidance in developing its approach, but note that there may be some areas where it deviates if a particular recommendation does not make sense for Citi, given its businesses and unique geographic footprint.
Citi’s climate management governance structure reflects a period in which the low-carbon transition presents new challenges and unique opportunities that Citi insists “we are embracing across the firm.” Recognizing that its global clients “seek to both develop and take advantage of these opportunities,” Citi says it has reorganized key business teams to provide cross-sector expertise and financing. Citi relates that it is also focused on managing the risks that climate change presents to the firm through updated climate risk management processes as well as through their Net Zero Plan.
Val Smith, Citigroup’s chief sustainability officer, explained, “You can see how this is building: First you set a net-zero commitment, then you build up governance structures and develop an initial set of metrics and targets around loan portfolio decarbonization, and then you make a plan for how you will implement, or operationalize, those commitments.”
Banco Bilbao Vizcaya Argentaria (BBVA) has published its clients’ progress toward decarbonization in the initial version of its climate transition plan. The bank is one of the first in the world to apply the recommendations by GFANZ to define a transition plan. Emissions declined in all sectors with published decarbonization indicators. BBVA’s goal is to finance this emission reduction by its clients.
“This is the first TCFD report in which we are incorporating several GFANZ recommendations on putting together a transition plan, a central aspect when it comes to enhancing understanding of how BBVA is tackling the transition through our investors, shareholders, supervisors, regulators, customers, civil society organizations and other interest groups,” the BBVA Chair, Carlos Torres Vila, stated in the letter introducing its fourth report. The bank says the document demonstrates its “strategy with respect to the fight against climate change and what measures are being taken.” The Spanish lender says it is monitoring clients’ decarbonization strategies and incorporating them into its risk-assessment tools.
New governance for BBVA includes creation of a Sustainability Alignment Steering Group; identification of leaders in each sector in charge of defining a Strategic Plan for the Sector and associated key indicators; and, integration of business and risk processes. In all cases, progress toward proposed objectives is not expected to be linear in the short-term, although BBVA says there have been reductions in all decarbonization indicators.
Since 2021, the sustainable finance mobilization target is part of the indicators used to calculate variable remuneration of all BBVA group employees. The report notes that 20% of the long-term incentive to be applied to the “risk takers” group (personnel with a significant role in the risk profile). It also includes, among other things, meeting ESG goals, decarbonization (15%), and gender diversity (5%).
Final Thoughts about Net Zero Transition Plans
Net zero commitments are quickly becoming a strategic imperative for financial institutions. Specific decarbonization goals are the necessary next step to reach before the critical 2050 date. Any target that allows for financing of fossil fuel expansion cannot be considered 1.5°C-aligned, as 1.5°C scenarios have no room for new oil, gas, or coal.
A Reclaim Finance report in January revealed members of the Glasgow Financial Alliance for Net Zero (GFANZ) have continued financing fossil fuel expansion. It has become clear that the progress being made isn’t quite enough. Given all the gaps being exposed along the way, greenwashing has become a main concern when looking deeper at financial institutions’ commitments. Shareholders must continue to be diligent and read between the lines so that grandstanding doesn’t hold sway over meeting difficult but important net zero milestones.
Until the world’s largest banks stop providing the money fossil fuel companies need, the environment will continue to degrade. We need to hold their proverbial feet to the fire — a fire that they’ve created with their financing.
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