Financing 1.5°C: The Big Banks have Set Climate Targets—Now What?

A lot has happened in the financial sector since RMI launched the Center for Climate-Aligned Finance (the Center) a year ago. Particularly in North America, banks increased their climate ambitions: As of June 2020, not one of the 10 largest private banks (by total assets) across the United States and Canada had made a 2050 net-zero commitment. Today, all 10 of them have signaled net-zero ambitions and/or 1.5°C-aligned targets. Many are set to announce interim emissions targets in the next 12 months. So, what comes next? If the past year was about announcing climate targets, the next is an opportunity for the financial sector to show real progress toward reaching them.

To understand the financial sector’s progress on climate alignment, we recently looked at how many of the world’s largest financial institutions have made net-zero commitments (i.e., commitments to use their firms’ levers of influence to move the global economy toward net-zero emissions). Our analysis, detailed in our recent paper Coming into Alignment, covered the 119 firms with $500 billion or more in total assets, surveying private banks, asset managers, asset owners, and insurers.

We found that while the ideals of climate alignment within the financial sector are increasingly mainstream, they are not yet universal; less than 40 percent of these firms have made 2050 net-zero (or equivalent) commitments. While net-zero commitments are common among major Europe- and North America-based financial institutions, we identified gaps among Asia-Pacific-based institutions and the world’s largest asset owners (e.g., pension and sovereign wealth funds).

Our biggest challenge was deciphering between different firms’ net-zero commitments. The variation and ambiguity in language made it difficult to assess things like whether a climate target applies to an individual business unit (like commercial banking) or the entire firm. As a result, it is difficult to compare the ambition of commitments across firms, measure progress against individual firms’ commitments, and evaluate whether the sector’s various fragmented commitments are enough when pooled together.

We also recognize that financial institutions’ net-zero commitments are no guarantee they will influence the decarbonization of projects and companies in the real economy in time to avoid the worst effects of the climate crisis. That work—the hard work—is only just beginning; and the Center is here to help financial institutions accelerate climate alignment at the firm-, sector-, and system-level to decarbonize the real economy.

At the Firm Level

Climate action means different things to different firms: A Japanese bank has different levers to decarbonize the real economy than an American asset manager. Many financial institutions, including large banks in the United States and Canada with 2050 net-zero commitments, are set to announce interim emissions targets in the coming months.

In tackling the net-zero transition, firms are not going it alone: The Glasgow Financial Alliance for Net Zero (GFANZ) comprises and coordinates financial subsector alliances of asset owners, asset managers, banks, and insurers. GFANZ brings together groups of financial institutions to set climate ambition, define minimum standards for action, and solve issues of target-setting. We look forward to details on how they plan to align their lending and investment decisions, advisory services, capital markets activities, and non-revenue generating efforts like stewardship and advocacy, to climate goals.

In our Zeroing In report, the Center distilled recommendations from representatives at banks, asset managers, and asset owners to help decision makers at financial institutions take steps toward net-zero lending and investing. These included measures leaders could take within their own organizations, such as linking compensation to climate alignment KPIs and integrating climate-related activities into employee training regimes.

We welcome the forward-looking approach banks are beginning to take on climate action. However, as our Coming into Alignment analysis shows, banks are not the only financial institutions grappling with the challenges of making and implementing net-zero commitments. Therefore, in the upcoming year we plan to bring together asset managers and other key stakeholders for Alignment Insights Labs aimed at accelerating asset managers’ understanding of, and capacity to achieve, climate alignment.

At the Sector Level

While financial institutions begin transforming themselves to meet the challenges of the climate crisis, decarbonization of high-emitting sectors like shipping, steel, and aviation will likely not be achieved without collective action. This means financial institutions must work together with their peers, clients, customers, and regulators to overcome barriers such as first-mover disadvantage. For example, if an investment bank chooses not to underwrite an equity-raise for a high-emitting aviation client, the client may simply move to a competitor, equating to no planes retrofitted, no sustainable aviation fuel developed, and no emissions saved.

Climate-aligned finance agreements like the Poseidon Principles for shipping give bankers and investors the tools to influence their clients’ decarbonization journeys. The Center is coordinating the development of a similar agreement for the steel sector, which is being developed by an ING and Société Générale-led working group. Similar climate-aligned finance agreements for other high-emitting sectors are in the works. This work is part of the Mission Possible Partnership, a coalition of more than 400 companies accelerating industrial decarbonization across seven hard-to-abate sectors in the next decade. These sector-focused agreements can help financial institutions implement their net-zero commitments by identifying emissions hotspots in their lending and investment portfolios and collectively incentivizing their clients to decarbonize.

At the System Level

While CEOs reorient their institutions toward climate goals at the firm level, and heads of sector desks come together to create sector-level finance agreements, there is also work to be done to create an enabling environment for climate alignment at the financial system level. Overcoming barriers to climate alignment will require collaboration among firms as well as engagement with and action from regulators and policymakers.

One such barrier we identified is a lack of consistent, transparent data. We are pleased to see efforts among regulators to address this barrier, such as climate change disclosure rulemaking proposed by the US Securities and Exchange Commission (SEC) and the European Commission. In June, we submitted several recommendations to the SEC, including ways to measure progress toward climate targets. Additionally, 180 investors with nearly $2.7 trillion in assets under management joined 155 companies and 58 nonprofit organizations—including RMI—in asking the SEC to protect investors from the systemic and financial risks associated with the climate crisis.

While we await potential regulation on climate-related financial disclosure, another system-wide trend is activist shareholders increasingly pressuring public companies to take climate action. This year, shareholders of private financial institutions and of energy companies again pushed management teams to implement climate strategies aligned with the goals of the Paris Agreement—with varying degrees of success.

What Happens Next?

On the one-year anniversary of the Center, we recognize the significant shift that has taken place in the past 12 months. Financial institutions are increasingly meeting the moment by beginning the journey toward climate alignment.

At the firm level, institutions can imbibe a new climate orientation into company DNA and employee culture, focusing services on underserved communities or those prevented from just access to capital. At the sector level, they can provide climate-aligned solutions to their clients in heavy industry. And at the system level they can signal to regulators, shareholders, and portfolio companies that they are taking a proactive—rather than reactive—role on climate. The financial sector has committed to climate progress, now it is time to make it happen.