Credibility

The “Credibility” of a bank’s net-zero commitment and likelihood it will be achieved depend on two key factors: First, commitments are more credible when they are embedded into a bank’s governance structure. Implementation of emissions reduction targets, green finance and corporate engagement is more likely to be successful with effective oversight by senior leadership and remuneration policies that align incentives and serve as accountability mechanisms. In addition, credible net-zero commitments should not use carbon credits toward portfolio emissions as a replacement for reducing actual emissions.

Credibility Takeaways

• Net-zero commitments need stronger oversight. Banks have arranged governance structures for senior leadership to provide oversight of net-zero commitments. However, most of them provide only partial oversight; key senior authorities often are not involved, or they oversee general climate-related matters not tied to limiting warming to 1.5 C.
• Incentives for senior leadership to achieve net zero are lacking. Banks commonly tie executive compensation to a limited range of metrics related to achieving net-zero targets, with an emphasis on sustainable finance goals. The majority of banks lack a comprehensive set of metrics to adequately reward performance on other key aspects of net zero.
• Carbon credits are still commonly counted toward emissions reduction targets. Only six banks have explicitly stated that they do not use carbon credits toward portfolio emissions reduction targets. The remaining banks either apply them to targets or do not disclose their usage.

Senior Leadership Oversight

How well a net-zero commitment is integrated into a banks’ strategy and business model depends on the degree of oversight responsibility and involvement from senior leadership. If both the CEO and Board oversee climate-related issues and are held accountable for the implementation of net zero (including via compensation structures), then they are more likely to reorient business practices toward sustainability. In addition, the establishment of environmental committees, positions and other governance structures can deepen expertise on climate issues and collaboratively advance sustainability goals.

In the figure above, banks are “aligned” if both senior executive and Board leadership have oversight responsibility of the net-zero commitment or limiting warming to 1.5 C; “partially aligned” if only one provides oversight or if both have oversight responsibility of climate-related matters that are not tied to limiting warming to 1.5 C; and “not aligned” if there is no disclosure available.

Executive Compensation

The executive leadership of an institution guides its strategy and decision-making, including the implementation of its net-zero commitment and sustainability initiatives. By aligning executive compensation incentives with key performance indicators (KPIs) related to achieving net zero, a firm is more likely to reach its net-zero goals. Specifically, compensation incentives tied to short-term, tangible results can help address concerns about senior management announcing vague, long-term commitments to which they will likely not be held accountable. (The average CEO tenure is just seven years, while net-zero commitments are being set for 2050.)

In our tracker, banks are “aligned” if senior executive compensation specifically incorporates KPIs linked to net-zero performance in its determination. They are “partially aligned” if compensation is tied to general “sustainability” or ESG objectives but not specifically to net zero, or if compensation incorporates some but not all of the key aspects of net zero. Banks are “not aligned” if there is no policy tying senior compensation to net zero or sustainability goals or the information is not disclosed.

Carbon Credit Exclusion from Portfolio Emissions Reduction Targets

Companies often offset or compensate for their GHG emissions by purchasing carbon credits for emissions that were avoided, reduced or removed elsewhere through external projects (such as reforestation or methane capture). Carbon credits will likely play a limited but important role in meeting global net-zero goals. However, they should be seen as a supplement to banks’ emissions reduction efforts — not a replacement for them.

Relying on carbon credits to meet interim emissions reduction targets risks conflating emissions offsets with actual emissions reductions. Banks’ top priority should be to reduce their clients’ actual emissions as much as possible by shifting lending practices and financial flows. They could use carbon credits to neutralize any residual emissions that could not be addressed through available decarbonization options. Carbon credits may be used as a supplementary resource when companies want to go above and beyond their value chains and help society achieve global net-zero emissions.

Banks are considered “aligned” if they do not apply carbon credits, including those purchased at a client or portfolio level, toward their portfolio emissions reduction targets. Banks are “not aligned” if they apply carbon credits to reduce their portfolio emissions or do not disclose their use.