Hard Work: Reading Bank's Climate Disclosure Reports is Absolutely Intense
By James Vaccaro, February 28, 2022
It’s reporting season and banks are updating more than just their financial performance; they’re giving updates on their climate targets. Their climate and environmental reports are so big they have their own space (often well over 100 pages) to go into the details of decarbonisation. But even with all this data and disclosure, it can often leave the reader with more questions than answers.
There’s no question there is greater climate awareness. In a recent study of major banks ranked as the largest funders of fossil fuels, they are all talking more about climate change in general, but on closer inspection were quite vague when it comes to initiatives to counter it.
There’s also more confusion now about what a target even means. When people are told the target is to reduce by 50%, that sounds reasonably clear - so you will ‘cut your emissions by half’ is what most would understand. But there are some targets which give absolute reductions and others which reduce ‘emissions intensity’ on the basis that there will be a lot more ‘green investment’ that will ‘dilute’ the emissions of more polluting investments. However it is really hard to know what these intensity targets will result in without knowing what the growth rates will be. It’s entirely possible that a bank could add a lot of green investment to its legacy fossil fuel energy portfolio and reduce its emissions intensity by 30-40% but not actually reduce its overall level of emissions at all. If everyone did that then we’d actually be making no progress towards the necessary global emissions reductions:
Here’s a snapshot of a few of the climate target updates (we may cover more next month). We could try to make a comparison, but for reasons we explain below, it’s not easy to do so, and these figures shouldn’t be seen as a judgment about sufficiency or otherwise.
Let’s examine why these aren’t necessarily comparable. HSBC seems to be cutting at a faster rate than Barclays, but HSBC doesn’t include its off-balance sheet transactions (where a lot of financing takes place) whereas Barclays does. And off balance sheet transactions are pretty huge for both institutions.
When looking at the overall level of reduction, the intensity targets don’t mean that emissions would actually fall by that amount. In fact, since there is an expectation of rapid growth in the power sector - especially in emerging economies between now and 2030, the actual decline in emissions from power may be significantly lower, depending upon which countries you are in.
And most importantly, when taken together, these numbers are not adding up to the ‘fair share of 50% emissions reductions required globally’ that were announced as part of the Race to Zero.
For illustration purposes, take HSBC’s announcement (which has some of the highest percentages):
Its current power portfolio produces 10.1MtCO2e - a 75% reduction in intensity would mean at most a reduction to 2.5Mt (probably not as much of a reduction since the power sector would grow)
Its oil & gas portfolio produces 35.8MtCO2e - a 34% reduction brings that to a little over 23MtCO2e
Add it all up and you get a maximum reduction of 44%. But that doesn’t include other sectors (including the hard-to-abate sectors) and it doesn’t include off-balance sheet financing which covers underwriting and capital markets activity. Nor its syndicated loan activities where revenues from fossil fuels bonds have been 3x more than for green bonds.
All told this comes up well short of the fair share of 50% by 2030. And given that these banks are amongst the leaders in the Net Zero alliances, it’s not clear who would be picking up the counterbalancing reductions to get us to 50% globally.
And despite calls for ‘consistency and comparable data’ banks aren’t doing the best job in modeling the way forward by choosing their own criteria for what gets included and how the targets are defined.
Science is helpful here: we really do need to make at least 50% reductions in absolute emissions globally between now and 2030. And if you’ve been financing a lot of high-carbon activity in the past then your ‘fair share’ is going to be a long way north of 50% since the slack is hardly going to be taken up by banks who are financing a lot less high carbon activity to begin with. And if you’re in a country where the NDC is for 60% or 70% then you absolutely need to be doing the same or better as a starting point - especially since the NDCs add up to around 2.4-degrees at present.
At the end of COP26, countries had to agree to ‘have another go’ next year and ratchet up ambitions. It would seem that banks will have no choice other than to do the same.
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