Net Zero & Decarbonization

Climate Assessment and Net-Zero Targets: A Must-Have for Banks in the Age of Climate Change

Climate Assessment and Net-Zero Targets: A Must-Have for Banks in the Age of Climate Change

The impact of climate change is being felt around the world and across different economy sectors, including the financial services industry. It has a crucial role to play in addressing climate change (e.g. through climate assessments), both in terms of mitigating its impact and adapting to its consequences. 

According to the InfluenceMap report “Finance and Climate Change – A Comprehensive Climate Assessment of the World’s Largest Financial Institutions” most of the largest banks around the world still show a significant lack in taking meaningful short-term action to address the climate crisis. Instead they continue to be involved in financing fossil fuel industries and are members of industry associations that oppose sustainable finance policies.

The InfluenceMap report results: How the Largest Banks are Addressing Climate Change and the Path to Net-Zero

The report shows that while 97% of assessed financial groups have committed to net-zero goal by 2050 as per March 2022. Only 37% of them have set any short-term targets and even fewer financial institutions  have their fossil fuel financing policies set in line with the IPCC guidelines. 

Only very few of them, for example BNP Paribas, Allianz and AXA, are standing out from the rest of the industry by taking any ambitious positions and actively participating in sustainable finance policy. At the same time, the asset management arms of these financial institutions hold at least $222 billion in shareholdings in companies involved in fossil fuel production value chains, which is equivalent to 5% of the total assets under management that were assessed. 

Furthermore, a  lot of banks lack transparency which leads to understatement of information on banks’ support for high-emission sectors. The majority of them also lack adequate biodiversity strategies and fail to consider biodiversity in their risk assessments of potential clients and projects. 

From Risk to Opportunity: The Importance of Climate Assessment and Net-Zero Targets for Banks

The importance of conducting climate assessments and setting net-zero targets should be very obvious for banks and the whole financial sector, yet it doesn’t look like it is. 

First of all climate change poses significant risks to the financial sector, including physical, transition, and liability risks. Banks face these challenges due to climate change, including impacts on assets and operations from extreme weather events. Liability risks also arise from potential legal claims against banks for failing to address climate change. 

However, by addressing climate change, banks can create opportunities to attract and retain customers. By conducting assessments and taking real sustainable steps banks could manage these risks better in advance and ensure long-term sustainability. Moreover, it could enhance their reputation and create opportunities for banks to innovate and grow. Investing in renewable energy projects and offering green financing products, generating revenue and enhancing customer loyalty – all of these stand in line with green banking and could provide profit for the financial sector. What’s more, the banking industry, by cutting itself off from financing fossil fuels and finally commiting to their own climate goals, could make a big difference in the fight against climate change. 

Going Green: the Challenges of Transition to a Low-Carbon Economy

Transitioning to net-zero can be a challenging task for banks as we know. They often have large and complex portfolios that include investments in a variety of sectors, some of which may be carbon-intensive. These investments and strong connections to the fossil fuel industry make it impossible for banks to truly transition to net-zero. 

Even the most ambitious climate goals set by the financial sector will mean nothing if banks continue to finance the destruction of the planet by doing business with the fossil fuel industry – for example: J.P. Morgan, Citigroup, and Bank of America are still the top 3 financial institutions with the highest absolute value of fossil fuel financing, while having 2030 targets. 

Citigroup was the first one to announce a 2030 coal phaseout for power generation and has set revenue thresholds for coal mining companies at 25% for its lending and advisory services. However, the bank has continued to finance some of the world’s largest coal producers, such as Vale and Shanxi Coking Coal Group, with $400 million in lending and $150 million in bond underwriting.


How Banks Can Prepare for the Transition to a Low-Carbon Economy

True green transition means significant changes to banks’ business models, strategies, and operations. Not only cutting off from the fossil fuel business, but also investing in renewable energy projects, offering new green financing products, and adopting new technologies and processes to reduce emissions and improve energy efficiency. Moreover, transitioning to net-zero may require banks to work closely with their clients to help them reduce their carbon footprint and transition to a low-carbon economy. This may involve providing financial and technical assistance to help clients adopt sustainable practices and technologies. 

Despite all these steps may look like challenges for banks, there are also significant opportunities for them to take advantage of the transition to a low-carbon economy. For example, banks can benefit from increased demand for green financing products and services, which can help to generate new revenue streams and enhance customer loyalty. 

Additionally, banks can leverage their financial expertise and networks to support the development of renewable energy projects and other sustainable infrastructure. This could involve collaborating with stakeholders, sharing best practices and knowledge, engaging in policy discussions, and supporting the development of new sustainable finance initiatives. That way the banking industry could not only help to address climate change but also set trends and new paths in business creating new opportunities for the industry itself.

The Quo Vadis of Banks on the Path to Net-Zero: Conclusions from the InfluenceMap Report

Looking back at the report the process of the green transformation of the banking sector seems to have significant improvement potential. According to the document 97% of the world’s largest financial institutions have committed to the net-zero by 2050 policy, yet 100% of them are members of groups lobbying against implementing climate protection laws. 

Given this data, it is hard to talk about any green transformation in the banking and finance sectors. Very few of the world’s largest banks actually set any specific and binding climate goals, and even if they do – they still maintain close business relationships with companies from the fossil fuel- and mining industry. Most of the activities of banks in the field of supporting climate protection might have to be strengthened in order to meet the ambitious goals by 2030 and 2050. 

Nonetheless, the banking sector has great potential in helping to combat climate change and could really support actions to this end. The amount of money they put in the coal and fuel industry, if put in renewable energy projects, improving sustainable infrastructure or reducing their carbon footprint, would make a significant change in the global fight against climate change.