Green Finance, Member Exclusive

Green Finance Briefing: The stroll to zero – finance has a long way to go

  • At COP27, there were no commitments to phase down or reduce fossil fuel use in the final overarching deal, and there was no breakthrough in the rules of finance either.
  • GFANZ faces a serious question: what is the purpose of a net-zero alliance when members are allowed to continue investing in fossil fuel expansion?
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Green Finance Briefing: The stroll to zero – finance has a long way to go

The Glasgow Financial Alliance for Net Zero (GFANZ) was founded a year ago at COP26 to mobilize the entire financial sector around a common goal: achieving the investment levels required for a transition to net-zero by 2050 in order to limit warming to 1.5 degrees C.

But since then, the initiative failed to capitalize on the momentum and deliver on the types of changes that are required by its ambitious goal. GFANZ moved the needle, but progress remains slow despite the climate pledges abound in the finance sector. 

At COP27, there were no commitments to phase down or reduce fossil fuel use in the final overarching deal, and there was no breakthrough in the rules of finance either. 

It's important to note the progress, however. After all, at the start of 2021, not a single bank had any science-based 2030 targets that included their financed emissions. 

The Net Zero Banking Alliance, a subgroup of GFANZ which contains a group of banks representing about 40% of global banking assets, touts a growing member count of 122. 

The group's asset management division is growing too, with Net Zero Asset Managers up from 220 signatories to 291 signatories, together representing $66 trillion in assets. Of these, 169 set interim targets covering at least one or more asset classes, up from 43 signatories in November 2021. 

No rush

According to the International Energy Agency (IEA), in order for the world to limit warming to 1.5°C (2.7°F) by 2050, there should be no additional investment in new fossil fuel supply. Therefore, further investments in this sector would counter meeting that target. 

Banks and FIs have a huge role in this. Energy companies seek financing from banks – either as loans or bond and equity issuances. Also why it is imperative for banks to include both lending and underwriting in their targets.

Despite the pressure for more immediate bold changes, finance dictates its own pace. It took a significant step with GFANZ, establishing commitments and ideating plans that are turning out to be easier said than done.

Progress remains limited, according to a Sierra Club report where the environmental organization studied the climate targets made by the biggest US banks in the Alliance – JPMorgan Chase, Citi, Wells Fargo, Bank of America, Morgan Stanley, and Goldman Sachs. 

"While some banks have set targets and committed to new policies which are more aligned with the types of changes that will be necessary to reach their goals, as a whole, all six US majors fall significantly short," the report said. 

All six of the major US banks have published interim targets for reducing emissions by 2030 in two key sectors: oil and gas and power generation. They also provided guidance for their financing activities in key sub-sectors and high-risk geographies, including arctic drilling, coal mining, and coal-fired power generation.

In GFANZ, while 31 of its 122 banks set targets for oil and gas, just eight have set a 2030 emissions reduction target for the coal sector, which appears to be a blind spot for the Alliance

But the targets seem further away when billions of dollars continue to be funneled in these sectors. And the war in Ukraine complicates matters. As Canadian and European banks retreated, U.S. banks’ exposure to oil and gas increased in H1 2022 on the back of higher energy prices, with complex trade-offs between energy security, affordability and environmentalism.

Targets set by banks must fit certain criteria 

Many more things need to be implemented, according to Sierra Club. At international level, there are exclusion policies which restrict financial services for upstream and midstream oil and gas, and exclude financing for companies expanding oil and gas. The US is behind on this as well – the only exclusion policy for the oil and gas sector that has been adopted by any of the major US banks is an Arctic project exclusion policy. 

The finance industry has just begun this journey and has a long way to go. There's no way banks can turn the tap off overnight, but this needs to happen sooner than they think. 

As CEO of Climate First Bank Ken LaRoe put it, 'just don't renew the loans'. That would factor in the real externalities, and make it more difficult and expensive for dirty energy companies to keep doing what they're doing.

Chart of the day

Climate Tech VC tracked 135 new climate investment funds with an explicit decarbonization focus and found that:

  • $94B of new private climate AUM across 132 VC, Corporate VCs, Growth, Infra, and Private Equity funds since Jan 2021
  • While the count of new climate funds was nearly identical between FY’21 and ’22 YTD (65 and 63), the $AUM more than doubled from $30 billion FY’21 to $64 billion ’22 YTD
  • A majority of the $AUM is concentrated in a few, mega funds. ~20% of the count of new funds are >$500 million, but control ~80% of the $AUM
  • Following some standard deployment assumptions, they expect that $6 billion of the reserved capital from VC and Growth funds has been plowed into climate companies. Which means that there’s $37 billion of investable dry powder ready to deploy

What we're writing

Debunking carbon credits and voluntary carbon markets, with BeZero Carbon CEO Tommy Ricketts

Carbon markets can facilitate a larger flow of funds towards climate solutions, but they need more standardization in order to ensure credits remain qualitative and don't allow for greenwashing.

Data Snack: Benchmarking sustainability efforts by banks across economies

Banks are moving towards sustainability in a variety of ways, including digitizing their processes, offering sustainable products, assessing portfolios and educating customers.

An intro to environmental sustainability in banking

Sustainability is a business conversation - climate change is bound to create a shift in resources, bringing with it a reallocation of capital away from the status quo.

What we're reading 

Climate stress tests underestimate risks, warns finance watchdog 

Tools used by financial regulators to gauge the impact of climate change on the financial system are probably underestimating the potential damage because of incomplete data and inadequate scenario analyses, according to Financial Stability Board, a watchdog group.

Climate tech could provide laid-off engineers with a soft landing

Leaders in climate tech are trying to help workers find soft — and meaningful — landings. Former senior leaders at Lyft, Stripe, and Twitter who now work in climate have been coordinating over the past week with workforce development groups including Climate Draft, Terra.do, MCJ Collective, and Work on Climate.

COP27: Better regulation needed to complement initiatives like Gfanz

As the first week of this year's UN climate talks has ended, with new funding mechanisms announced and progress reports released, questions remain about the efficacy of net zero alliances and voluntary targets.

Is momentum building or diminishing on bank decarbonisation?

As the Net-Zero Banking Alliance continues to expand, lenders are caught between the urgency of the climate crisis, accusations of greenwashing, and the practical – as well as political – challenges of setting decarbonisation targets.

UN panel lays out red lines against greenwashing

A UN panel rolled out a host of guidelines that would define credible net zero emissions targets and set out checklists for companies and cities to meet.

NYT Opinion: The global carbon surveillance state is coming

One of the most fascinating developments from COP27 is a new online tool released by the nonprofit coalition Climate Trace that allows us to see emissions in near-real time.

Goldman Sachs fined $4M over ESG investment policy failures

Goldman Sachs’ asset-management unit failed to implement written policies and procedures for ESG research in one product, the SEC said. The fine is more than double the $1.5 million penalty the SEC levied on the bank’s peer, BNY Mellon, in May.

A $300 billion bond market holds the key to solving the climate crisis

China's green debt swells beyond $300 billion, but investors and regulators are confronting a troubling reality: It’s almost impossible to know how the money is being spent – or whether it’s having the intended impact.

Too few rules on fossil fuels? The limitations of Mark Carney’s GFANZ alliance

GFANZ faces a serious question: what is the purpose of a net-zero alliance when members are allowed to continue investing in fossil fuel expansion?

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