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?
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.
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
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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?