Green Finance

Green Finance Briefing: When it comes to net zero, actions are yet to speak louder than words

  • Europe has been leading the way in terms of climate change policy, but banks there are also struggling with the transition to net zero.
  • As pressures mount on the financial system, more banks will need to quantify their Scope 3 emissions and look under the hood of what they're financing.

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Green Finance Briefing: When it comes to net zero, actions are yet to speak louder than words

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For this edition of the Green Finance Briefing, I’d like to take a look at what’s been happening across the pond. 

Europe has been somewhat of a policy leader when it comes to addressing climate change, despite its internal disagreements. Credit is due for setting a more environmentally-conscious agenda even when their North American partners were not so keen on doing so just an administration ago. 

But even if things in Europe are moving in the right direction and slowly (but thankfully) dragging the rest of the world with it, the scale of the challenges posed by climate change still requires it to act much faster. 

And European banks are yet to show decisive action, despite making pledges and joining the Net Zero Banking Alliance. Climate change campaigners argue that big banks continue to pump billions in new fossil fuel projects despite being a part of a green banking group.

Since joining the alliance last year, 24 big banks have provided $33 billion for new oil and gas projects, with more than half of that amount ($19 billion) coming from four of the founding members -- HSBC, Barclays, BNP Paribas and Deutsche Bank, the campaigners said.

A new report by Oliver Wyman shows that in Europe, only 8% of companies, weighted by their total outstanding loans, currently have targets to align with the well-below 2°C pathway promised under the Paris Accord. 

This contrasts with “ambition” figures: banks representing 95% of all corporate lending in Europe have ambitions to align with the Paris agreement, and over 70% of the biggest asset managers want to be in line by 2050 as well. 

But this mismatch between wishes and reality is quite big - €4 trillion in size to be more precise, according to the report. The figure represents the gap between what banks plan to align with the accord and the current available demand for such financing. 

This capital is also relatively concentrated, with nearly half the sum sitting in Europe’s top ten banks. Other top 40 European banks are estimated to hold another €1.1 trillion.

However, this gap also means that companies that are putting sustainability to their forefront are able to raise capital on better terms.

ambitions for Paris-aligmnent in financial services

But the report also revealed another silver lining: seven of the top ten European banks made a commitment through the Science Based Targets initiative, which provides technical assistance and expertise to help companies set emissions reduction targets grounded in climate science. 

This means that despite still being involved with the fossil fuel industry, top European financial institutions are beginning to set science-based targets using CDP temperature ratings. Conversely, none of the top ten US banks have SBT targets.

A recent report from the Science Based Targets initiative showed that, between 2015 and 2019, companies with SBTs reduced Scope 1 and 2 emissions by 25%, even as global emissions rose by 3.4%. This shows that science-based targets can work, and that integration of climate data with financial data could pave the way forward in order to reach net zero emissions by 2050. 

It’s clear that climate change requires fast action, and the finance industry is making bold commitments. The vast majority of European assets now are committed to being ‘Paris-aligned’, and implementing target-based systems are important steps forward that can resonate among the global banking community. 

Nevertheless, there’s still a long way to go before actions catch up with ambitions

Chart of the week

When climate change comes into play with the financial system, the damage can be vast, if not managed in a time-conscious and risk-averse manner, writes Lubomila Jordanova in a new blog post. She is the CEO of Plan A, an ESG reporting software company. 

As we’ve discussed before, the environmental bill of a bank spreads wider than Scope 1 and 2. It’s oftentimes Scope 3 activities, meaning indirect emissions not owned by the company itself, that are hardest to quantify and change and represent by far the largest environmental impact. 

Pledges were made at COP26, but there’s still a lot to be done in terms of standardization around ESG products, regulation and more detailed disclosures. Banks will certainly be talking more about Scope 3 in the future. 


Quote of the week 

Investors are growing more enthusiastic about green investment products, but there is also some criticism – especially when it comes to returns. 

For example, while last year’s global equity index recorded double-digit returns, some of the world’s largest alternative clean energy operations, such as wind and solar farms, ended the year well in the red

The boom in wind and solar power might not be translating into value for shareholders, argues Simon Edelsten, co-manager of the Artemis Global Select Fund and the Mid Wynd International Investment Trust in a Financial Times article

“Just because a sector is growing is no guarantee that it will generate healthy returns. We all want a world that is safe to live in when we retire – but we also need to be able to afford to live in it. You do not necessarily need to compromise your values to generate a return, but you may need to look more deeply for rewarding opportunities.”

What we’re reading 

  • EU to propose green investment label for gas and nuclear energy, source says (Reuters)
  • US climate envoy John Kerry meets with world’s largest greenhouse gas emitters (CNN)
  • Is the West a ‘climate hypocrite’ when it comes to other countries? (The Guardian)
  • Fossil fuel companies say they want to help fight climate change. Here's what they should do (TIME)
  • U.S. markets regulator flags risks for ratings firms in ESG boom (Reuters)
  • A CEO guide to net zero (BCG)
  • If the U.S. wants to fully tackle inflation, it needs to tackle climate change (MSN)
  • Top North American banks form consortium to address climate risks (Finextra)

What we’re writing 

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