Net-Zero Banking: Doing the Time Warp

By James Vaccaro, April 2021

The launch of Net Zero Banking Alliance took place this month with 43 banks now officially in the Race to Zero, committing to net zero portfolios by 2050. The UN Principles for Responsible Banking (which has over 200 signatories) commits banks to aligning to the Paris Climate Agreement. But this wasn’t as specific or detailed as the guidelines for how to achieve alignment as this new commitment which sets out a path to 1.5-degree alignment across full scope-3 emissions, with banks required to:

transition all operational and attributable GHG emissions from our lending and investment portfolios to align with pathways to net-zero by mid-century, or sooner, including CO2 emissions reaching net-zero at the latest by 2050, consistent with a maximum temperature rise of 1.5°C above pre-industrial levels by 2100. This approach will take into account the best available scientific knowledge, including the findings of the IPCC, so we commit to review and (if necessary) revise our targets at least every five years after the target is set.

GHG emissions here refer to banks’ Scope 1, 2 and 3 emissions. Banks’ Scope 3 emissions should include their clients’ Scope 1 and 2 and Scope 3 emissions, where significant, and where data allow.

Many banks who have participated in Climate Safe Lending Network programs were amongst those who committed. There’s no denying that this is major milestone and one that will inevitably followed by many more banks in the lead up to COP26. And what’s great to see is that despite the backstop date of 2050, many are signing up commitments that get to net zero faster – Handelsbanken and Vancity committing to 2040. If this is really going to be a race to the top, then it would be great to harness some of the competitive drive within banking to help push ambition further. 

Thinking back five years, just after the ratification of the Paris Agreement, this would have been seen by many banks to be unthinkable. Many banks (some who are now signed up) contended back then that we’d still have a majority fossil fuel economy by 2050, or that banks had little agency to shift their clients’ actions. They’re now publicly declaring they are on a path to 1.5 degrees. That is progress. It gives a great platform to turn commitment into near term action, which will undoubtedly be the hard bit.

It’s so funny, that we don’t talk anymore…

What’s rather strange about how the new Net Zero Banking Alliance came about is the way in which it burst on the scene with no engagement from outside banks. Even at the launch event there were no opportunities to ask questions and the host had ‘disabled the chat’ (in every sense of the term. Like any object that is not fully transparent, it has a shadow. NGOs, excluded from the process were quick to offer a sharp critique of the shortcomings of the commitment. They referenced the recent report which pointed out that many of the banks, including some who signed this, were still increasing their exposures to fossil fuels. Others have pointed out that 36 months is too long to wait before detailed sector-level targets are set for the whole portfolio, and are concerned that an exclusion of off-balance sheet activity might lead to a loophole that renders the undermines the principle behind the commitment.

As a finance engine of the real economy, banks are critically important to a rapid and just transition. It’s because their trajectory is so significant that it’s important that it is a global conversation with a range of stakeholders rather than being seen as a private club. Banks may find it difficult but would benefit enormously by engaging with scientists, governments, NGOs, investors, and others in a constructive systemic conversation. That’s the next goal for the Climate Safe Lending - enabling conversations across a diverse network who have the role and drive to build strategies together. Like fish, we can’t see the water we swim in nor the mental models, assumptions and biases that we often take for granted in neatly curated zoom rooms and social bubbles. The Climate Safe Lending Network exists to give people a chance to show up in a different way – to explore and co-create based on a shared vision, rather than negotiate on the basis of preconceived ideas.

A little less conversation, a little more action

So now the commitments have been made, what happens next? No doubt there will be pressure on others to sign up. But that’s not the hard part. The real test is how to convert the commitments into strategy; to turn words into action. It means doubling down on Taking the Carbon Out of Credit. We set out our Climate Safe Lending pathway last year including the three horizons of action. It seems we are now making very rapid progress on the commitment and measurement via the Partnership for Carbon Accounting Financials, and the Science Based Targets Initiative. The next phase means addressing practical strategies for taking action:

And it’s the first of these, stopping the flow of finance to fossil fuels, which is seemingly the most difficult for some banks and the highest priority.

Breaking up is hard to do

Many people still express the view that ‘every company will need to transition’ in order for us to address climate change. But that flies in the face of every transition in industrial history (counter-examples welcome) where change is more often led by disruptors and innovators, not by incumbents. Some from the prevailing paradigm do transition – some more successfully than others. But many don’t – and ultimately fail and are replaced. There is a lot of very encouraging activity between banks and power companies right now, for example linking incentives via sustainability-linked loans to encourage and accelerate the transition to renewable energy. There’s companies, like Ørsted, who have gone through a complete transformation having started as an oil and natural gas company. And engagement with these companies is important to help those committed to making the change work do it in a way that best supports local communities.

But engagement has an end point and time is running out. Since banks can impose conditions on loans, they can step up their engagement to the next level. How much patience can a bank have with a company who don’t get on a net-zero 1.5-degree pathway? Why can’t the bank structure finances to separate out new investment activity and insist that this can only be into renewable sources? And why can’t banks give an ultimatum for engagement beyond which there is a more consequential retraction from the relationship?

In the competitive paradigm, some banks have collectively learned to justify action on the basis that if they acted positively their competitors would benefit. Maybe that paradigm might shift, maybe it won’t. And if it doesn’t then perhaps voluntary agreements are never going to stop the flow of fossil fuels before it’s too late. Maybe it needs enforceable legislation to remove competitive threats from being a barrier to action. Perhaps the 43 banks who have signed up to the Net Zero Banking Alliance could reflect on whether Net Zero banking regulation – one of the top proposals in our research report Financial Stability in a Planetary Emergency – is going to be essential to make sure we’re all in the Race to Zero together.

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