Implementation

Commitments to reach net zero and reduce emissions are important first steps. But are banks doing enough to achieve their goals?

The second theme, “Implementation,” explores the key levers banks can use to influence real-economy emissions and meet their emissions reduction targets. This includes shifting financing away from carbon-emitting assets inconsistent with a net-zero future and reallocating it toward climate solutions, as well as corporate and political engagement to support decarbonization.

Implementation Takeaways

• Commitments shouldn’t be taken at face value. Banks have set large “headline” sustainable finance targets and are reporting progress in reaching them. However, the actual impact may be smaller than reported. Banks often count a broad range of activities toward the targets, including some that are further removed from real-world emissions reductions. They also do not share standardized approaches, which hinders comparability.
• Banks disclose their sustainable finance activities, but neglect to disclose their fossil fuel finance. This incomplete reporting prevents stakeholders from assessing the transition away from “brown” to “green” finance. It risks painting a rosier picture than reality, while downplaying activities that undermine banks’ net-zero commitments. Banks need to disclose both sides of financing under the same methodology so that stakeholders can have a more accurate picture.
• Reported financing activities are not aligned with net-zero pathways (such as those proposed by the IEA). Banks are far from achieving the 10-to-1 ratio of green to fossil fuel finance needed to scale up clean energy enough to reach net zero. While most banks have adopted coal phaseout policies, the same cannot be said for oil and gas.
• Banks need to engage more effectively with corporate clients in high-emitting sectors to influence their transition plans and finance their implementation. The banks in this sample who are implementing leading engagement strategies are concentrating their efforts on specific clients based on their sectors or their relative level of climate-related risks for maximum impact of real-world emissions reduction. Effective engagement includes establishing clear escalation policies and being willing to withhold financing and advising for projects and clients misaligned with net zero.
• Banks’ policy engagement must be net zero-aligned, too. The ability of banks and their corporate clients to meet their net-zero targets heavily depends on public policies. Banks should conduct and publicly disclose a climate review of their trade associations and take necessary steps to ensure all their policy engagement actions align with the Paris Agreement.

Sustainable Finance

To achieve their net-zero commitments, banks must realign balance sheets and facilitation practices by shifting away from emissions-intensive economic activities like fossil fuel financing. They must also increase sustainable finance, allocating and mobilizing significantly more capital toward a zero-carbon and resilient economy. And it needs to be both; banks cannot take an either/or approach.

These financing changes will be critical to replace the existing fossil fuel-dependent economy with zero-carbon technologies and solutions that can meet the world’s climate goals. Several estimates indicate that total climate finance investments needs to reach around $5-$6 trillion per year by 2030, with flows coming from private sources expected to range from $2.6-$3.9 trillion. Banks can also target the accelerated phaseout of high-emitting assets via early decommissioning, further promoting the decarbonization of the real economy and their own portfolio emissions.

Here, we look at the sustainable finance amounts reported by banks alongside their fossil fuel finance. The tracker compares the ratio of green to fossil fuel finance to assess how banks are transitioning their business practices toward alignment with net zero.

"Sustainable finance" includes lending, underwriting and advisory services that banks provide to their corporate clients in three areas: green, social, and other sustainability-linked finance.

• Green finance supports climate action (including mitigation and adaptation) and other environmental objectives (such as biodiversity protection) by supporting projects tied to environmentally sustainable and zero- or low-carbon activities.
• Social bonds and loans are used toward projects that result in positive social impacts, such as those dedicated to affordable housing, job training or food security.
• Sustainability-linked finance is tied to predetermined sustainability targets (which can include green and social goals) and offers corporations flexibility on where to spend the proceeds to reach such targets. If the targets are not met, financial costs are imposed via higher interest rates.

The figures above show annualized and aggregate data, as well as the percentage accrued toward targets to facilitate comparisons across different sizes and business models of bank. However, a direct comparison between annualized sustainable finance among banks requires caution, given the variety of methodologies and definitions used by banks to count their sustainable finance. The figures provide details on the categories of financial instruments and mechanisms included by each bank, as well as the sustainable finance standards or taxonomies used that can improve comparability.

Green vs Fossil Fuel Finance

While banks have increased their green finance in recent years, the scale is still far from being aligned with net-zero scenarios. And banks continue to provide major financing and facilitation services to the fossil fuel industry. This undermines global climate goals as well as their own net-zero commitments.

The figure below compares banks’ green finance to their fossil fuel finance on an annual basis for the 2018-2022 time period, and benchmarks them against the investment ratio recommended by the IEA.

The IEA has sets clear boundaries for the phaseout of fossil fuels: If the world is to reach net-zero emissions by 2050, all investment in new fossil fuel supply must stop immediately. Coal power generation needs to be phased out in advanced economies by 2030 and globally by 2040. Oil-fired power generation must also follow a phaseout schedule by 2040, while fossil gas power generation needs to fall to very low levels by 2040. Use of fossil fuels must also be reduced for other sectors, such as transportation and buildings, with sales of new internal combustion engine cars ending by 2035 and all new buildings becoming zero-carbon in operation.

The UN-backed Race to Zero campaign, the recommendations of the UN High-Level Expert Group on the Net Zero Emissions of Non-State Entities, and SBTi’s position on fossil fuel finance all agree that financial institutions should swiftly phase fossil fuel financing down and out. This requires terminating new financial flows toward projects or companies involved in the coal value chain and the expansion of new unabated oil and gas capacity. The timelines to phase out of fossil fuel financing should vary by region to account for just transition and energy access concerns.

What does this transition look like in dollars and cents? Bloomberg New Energy Finance estimated the ratio of investment in low-carbon to fossil fuel energy supply should reach an average of 4-to-1 between 2021 and 2030 and 10-to-1 for the 2041-2050 period. The IEA recommends increasing investments for clean energy (including supply, energy efficiency and end use) to a 10-to-1 ratio by 2030. Investors have asked banks to disclose such ratios and JPMorgan and Citigroup have committed to share them. The shift of financing has already resulted in banks earning more fees from green finance than fossil fuels.

But despite progress, banks are still far from financing clean energy at the levels needed and are too heavily involved with fossil fuels. Far from achieving a 10-to-1 ratio of clean energy to fossil fuel finance, our analysis shows banks are currently at a 1.3-to-1 ratio.

Moreover, green finance numbers may be overrepresented compared to fossil fuels, because they sometimes include additional financing instruments and mechanisms that are not represented in banks’ fossil fuel figures. While most banks include corporate lending and underwriting activities under green finance, some tack on additional financing instruments and mechanisms. These could include consumer financing (such as electric vehicle loans), investments in sustainable investment products, and other trading and markets-related activities (such as market making and commodities transactions). The figures highlight the categories of financial instruments included by each bank. Additionally, we have indicated the level of alignment between the green finance figures and the IEA’s definition of clean energy investment to allow for a more direct comparison with the recommended 10-to-1 ratio. Fossil fuel finance data is based on the Banking on Climate Chaos report, as banks have not disclosed transparently their fossil fuel-related numbers. (Green finance is self-reported by banks.)

Any in-depth comparison should take into account that banks included in the sample operate with different business models and in different geographies, each with their own political and economic conditions. The figure above provides some of the key details that can enable better informed comparisons and analysis, although greater transparency and standardization are still needed to improve comparability.

Fossil Fuel Phaseout

Fossil fuel production depends on banks for loans, bonds, equity offerings and advisory services. Banks therefore have the capacity to drive significant change in this sector — and not just by withdrawing capital. They can engage with clients to support their transitions away from fossil fuels and toward clean energy and zero-carbon business opportunities. Banks can also support the early decommissioning of fossil fuel assets such as coal plants. This may cause portfolio emissions to rise in the short term, however, it can result in substantial real-world emissions reductions if done in line with net-zero pathways and with rigorous verification.

When necessary, banks should stop providing lending and advisory services to fossil fuel companies altogether — especially when they are engaged in activities incompatible with net-zero pathways and a sustainable future. Although the efficacy of divestment in secondary public markets is still debated, there is evidence that foreclosing bank lending and capital market access can result in an increase of funding costs. It can, for example, contribute to early retirement of coal.

As seen in the figures below, some banks have started implementing a range of different phaseout policies for fossil fuels.

The phaseout of thermal coal has been widely adopted by banks in the sample, with defined timelines and geographic boundaries. Some banks have adopted a timeline that is more aggressive than the one proposed by the IEA, targeting a global phaseout by as early as 2025. Others include some exceptions or are planning for phaseout on a limited scope that falls behind peers and the IEA’s net-zero scenario. Timelines for thermal coal phaseout also vary in developed versus developing countries; this is to be expected given that developed countries are in a stronger economic position to retire coal, and that developing countries must balance their decarbonization timelines against rapidly growing energy access needs and economic development goals.

Phaseout policies for oil and gas are not as widely adopted as for coal. Instead, banks have adopted different degrees of exclusionary policies for exploration of unconventional oil and gas (such as fracking) and environmentally sensitive areas (like the Arctic Circle). Additionally, banks vary in the types of financing (project-level or general corporate-level) and services (advisory services) they include in their exclusionary policies.

While banks may have international clientele, they exist in domestic circumstances. Domestic fossil fuel sectors and their national economic relevance are reflected in banks’ policies. For example, U.S. and Canadian banks, operating where shale and natural gas are a major resource, do not exclude exploration for shale oil or fracking, which are more commonly excluded by European banks. Similarly, Chinese banks follow the national policy of stopping financing coal expansion overseas, but not at home. The underlying domestic environment and the relative importance of fossil fuels on the national energy mixes and energy sovereignty are important factors on the likelihood of banks introducing exclusionary and phaseout policies.

Whether it is achieved through engagement or divestment, changing the behavior of fossil fuel clients doesn’t just reduce societal harm. It also avoids the stranding of assets; reduces banks’ exposure to climate-related risks; reduces systematic risk related to climate instability that affects overall economic returns; and reorients capital availability toward more sustainable activities.

Corporate Engagement

Engagement is one of the key levers at banks’ disposal to support their clients’ transitions to a zero-carbon economy and reduce emissions in the real economy.

Banks generally lend to and advise corporations in all sectors of the economy. This makes them uniquely well-placed to engage companies on their net-zero transition plans, as they can see how the transition might play out across the whole value chain and economy. Similarly, banks can have significant influence over political activities through lobbying and membership in trade associations. Their financial support has the potential to sway national politics and regulations for or against climate action.

Engagement with clients and portfolio companies involves active dialogue regarding their net-zero transition plans. This includes plans to shift capital investments and operations toward climate solutions, reduce emissions and protect nature. Banks can both influence these transition plans and provide the financing necessary to set them in motion. Engagement methods vary, ranging from education initiatives on climate risks to high-level meetings aimed to influence company decision-making in shaping their transition strategies. Such methods can be applied across an array of clients or be tailored to major corporations within high-emitting sectors.

Examples of activities in each engagement method:

• Education & Information: running an engagement campaign for clients about climate change performance, product/goods or services impact on climate change.
• Collaboration & Innovation: encouraging innovation to reduce climate change impacts and working in partnership with asset owners on decarbonization goals consistent with Net Zero by 2050.
• Compliance & Onboarding: integrating climate change in client management systems.
• Information Collection: collecting client or portfolio company climate change and/or carbon emission data at least annually.
• Engagement & Incentivization: helping assess client exposure to climate-related risk, engaging with clients in GHG intensive industries or engaged in high emitting activities on their decarbonization strategies, supporting better climate-related disclosure practices, encourage clients to set a science-based targets, offering financial incentives for clients to reduce the financial institution's downstream emissions and/or exposure to carbon-related assets.

Each approach has its merits and limitations, but targeted engagement with major corporations in high-emitting sectors can be the most effective approach because it concentrates efforts for highest impact. This is the approach that Climate Action 100+, the largest coalition of investors organized for climate action, has taken: It focuses on 166 critical corporations that contribute the most to GHG emissions. Similarly, financial institutions should prioritize sectors critical to the net-zero transition, such as fossil fuel, power generation and transportation. Engagement efforts should be carried out transparently and monitored for effectiveness of real-world impact.

Effective engagement relies on applying appropriate escalation measures, including the option to withdraw financing and terminate relationships when clients are unwilling or unable to adapt to the risks and opportunities of the net-zero transition. Banks effectively engaging to support their net-zero goals are poised to benefit from the large demand for financing and advisory services needed by clients to execute their transition plans.

Most banks in our sample have disclosed their engagement practices to the CDP’s Climate Change, Financial Services dataset, which includes a framework to disclose engagement targets and methods. A total of eight banks did not disclose their engagement via CDP; of those, two describe engagement in their company reports. For consistency, only the CDP-reporting institutions are shown in the table with engagement characterizations. The table above categorizes different methods of client engagement between banks and their clients. 

Policy Engagement

Banks can have a significant influence on public policy and regulations through their lobbying and membership in trade associations. However, some influential trade associations hold oppositional views to climate change and the policies that governments enact to address it. They often engage in the political process via public statements, lobbying and communication campaigns, among other tactics, to hinder climate action.

Banks should align their political expenditures and engagement with their net-zero commitments. It is counterproductive (and misleading) for them to claim commitments toward net zero while funding trade associations that hamper or hinder climate action — as has been the case in the United States.

Banks should perform a thorough climate review of trade associations to determine whether they are aligned with the goal of limiting global warming to 1.5 C, and whether the banks are consistent in their climate approach in the political sphere. Country context also matters. Different political systems have different avenues for corporations to influence policymakers. Some financial institutions claim that their membership in non-climate-aligned trade associations is an opportunity for positive influence. More transparent disclosures in a climate review would provide the information needed to assess whether that engagement is having a positive impact.

In the figure above, banks that perform a climate review of their trade association memberships either publicly or through the CDP platform are considered “aligned.” “Partially aligned” banks only disclose their memberships. “Not aligned” banks are those that do not disclose any information on memberships or do not conduct policy engagement through trade association memberships.