Navigating The Financial Industry’s Blurred Lines Between Climate Commitments & Greenwash
As climate commitments among large financial institutions have rapidly become the new normal, so has the criticism of those targets. A Reclaim Finance report in January that revealed members of the Glasgow Financial Alliance for Net Zero (GFANZ) have continued financing fossil fuel expansion echoes a common refrain from the NGO and activist community: target setting is still disconnected from real world financing and the ambition required to reach 1.5°C scenarios. Below, we share our latest insights on the state of play in climate targets among the world’s largest financial institutions, noting the ongoing tension between meaningful progress and persistent gaps in ambition and action.
Climate Commitments Rise; Interim Targets Increase by 5X
Net-zero targets are a relatively new phenomenon. For example, GFANZ, an alliance for financial institutions committed and working towards net zero, was created in 2021. In the same year, RMI’s Coming into Alignment report found that 38% of the world’s largest financial institutions (LFIs) had made a net-zero commitment. Since then, our data shows a significant increase to a 73% commitment rate by the end of 2022. This shows how net-zero commitments are quickly becoming a strategic imperative for financial institutions.
However, a commitment to net zero only accounts for a small portion of work to be done and doesn’t necessarily mean an institution is on track to supporting a 1.5°C scenario. An important next step to underscore proposed ambition is the setting of interim targets; in other words, specific decarbonization goals to reach before the critical 2050 date. This is another area where we have seen significant improvement from financial institutions. In 2021 only 12% of LFIs had set an interim target, but by the end of 2022 this number increased to 65%. This increase now represents an impressive 89% of LFIs with a net-zero commitment having also set an interim target.
Some institutions have set general, overarching targets for their interim decarbonization, but others have strengthened their targets further by specifying ambition and pathways for key high-emitting sectors. These sectoral targets are also a growing trend: our data finds 60% of LFIs with an interim target also had sectoral targets set by the end of 2022. Power, oil and gas, and automotive sectors were the most common sectors addressed. Overall, our data shows interim targets are emerging fast, but are characterized by a heterogeneous mix of ambition levels, sector coverage, and preferred metrics.
Credibility In Question
While our data on climate commitments is signaling notable progress, the climate community continues to scrutinize how credible this new ambition is. As noted in the Reclaim Finance report, the fossil fuel sector is an area of particular interest. Any target that allows for financing of fossil fuel expansion cannot be considered 1.5°C-aligned, as 1.5°C scenarios have no room for new oil, gas, or coal. As such, scrutiny on the differences in ambition and composition of financial institution targets, as well as the gap between ambitious targets and the financing reality is merited. The Sierra Club exposed the financing reality of large banks since 2016 and found fossil fuel financing to be on an upward trend despite the COVID-induced decreases in 2020. Since many of the top financiers mentioned in such reports have set climate commitments, their credibility is rightly being questioned.
This question of target-setting credibility extends to target coverage and measurement. The World Benchmarking Alliance found that out of 400 financial institutions studied, less than 2% had interim targets that covered all financing activities. This lack of coverage restricts how much a target will likely achieve. If only lending activities are on track to be Paris-aligned, for example, other financing activities running at business-as-usual have the potential to diminish progress. Attention has also been called to the types of metrics being used in some targets: intensity-based targets, as opposed to absolute emissions reduction targets, could lead to banks meeting their targets while emissions continue to grow.
It has become clear that the progress being made isn’t quite enough. Given all the gaps being exposed along the way, greenwashing has become a main concern when we look deeper at financial institutions’ commitments.
How Can FIs Avoid Greenwashing Criticism?
As noted in our Six Trends to Watch in 2023 blog, there is increasing scrutiny (regulatory and otherwise) on greenwashing. New and refined regulation and voluntary standards, as well as client and activist attention, will raise expectations on a diverse range of greenwashing topics, including fund-labeling, disclosure, and climate-related risk management practices. Banks using target-setting as a channel for good publicity are therefore walking a thin line between demonstrating their commitment and being accused (publicly and privately) of using targets as a greenwashing tool.
As 2030 looms, we are reaching the point where it is imperative to see a distinguishable change in the way financial institutions operate if they claim to be on the road to net zero. To start, targets should be updated to address as many of the lingering concerns as possible. Additionally, it is up to these institutions to publish clear transition plans that show how they will implement their commitments from here on out. Commitment has become commonplace, but it is time for climate action to gain the same traction. Targets do not have to be greenwash, and the necessary changes are possible.
Commitment has become commonplace, but it is time for climate action to gain the same traction.
It’s Time to Back Up Commitments with Action
We have already seen examples of progress that reach beyond mainstream target-setting and greenwashing concerns. For example, shortly after the launch of the Sustainable Steel Principles (SSP), a comprehensive methodology for measuring and disclosing climate alignment in the steel sector, several of the SSP signatories — ING, UniCredit, and Société Générale — together with two other commercial banks signed a mandate letter for €3.3 billion (approximately $3.5 billion) in senior debt for H2 Green Steel, the development of a hydrogen-powered green steel plant. This shows how sectoral climate commitments can begin to shape financing decisions that have the potential to accelerate transition.
While a black-and-white approach to fossil fuel financing can miss some key nuance, other tools are available to reduce emissions in this sector. Cutting finance for fossil fuel expansion is one essential step, but managed phaseout strategies are also required to wind down existing fossil assets in a controlled and financially feasible way. The $20 billion package of public and private finance to shift Indonesia away from coal, and toward clean energy, sets new precedent for large-scale transition financing.
Projects like these are paving the way in the right direction and prove that there is no excuse to greenwash. The financial sector is providing examples of progress, but there is so much more work to be done.
© 2021 Rocky Mountain Institute. Published with permission. Originally posted on RMI.
By Elizabeth Harnett & Asia Salazar
Featured Image courtesy of Modeling– Urban climate impacts, Credit: Andy Sproles/ORNL, U.S. Dept. of Energy
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