3 Keys to make JP Morgan’s climate commitment a success

When JP Morgan, the world’s largest oil and gas financier, commits to achieve a Paris-aligned lending book, you know it’s no ordinary year. With company after company in sector after sector committing to achieve net zero emissions by 2050 or sooner, the business imperative to lead on climate is clear.

The bank’s decision comes after years of sustained stakeholder pressure – and is the latest in a wave of climate commitments in the absence of federal leadership. With Morgan Stanley’s net zero financed emissions pledge and now JP Morgan’s Paris-aligned goals, others will be expected to raise their climate ambition across the competitive corridors of Wall Street.

As the big banks get on board, the question will turn to how they will deliver on their commitments. The world needs action now, and specifics are required to translate a high level pledge into a concrete program that links access to capital to corporate climate performance.

Thomas Edison said that genius is 1% inspiration and 99% perspiration. For the finance sector, the debate is about to shift from the inspiration of an aggressive climate target to the perspiration of making it real.

As JP Morgan and other banks begin this journey, here are three ways they can ensure successful implementation.

1. Leverage the data

The greatest carbon footprint comes from the industries that banks finance, an issue that has attracted increasing scrutiny from advocates, investor activists, and journalists. That’s why it’s encouraging that both Morgan Stanley and JP Morgan aim to apply their commitments to the companies they lend to, including all-important “Scope 3” emissions, such as the carbon dioxide emissions from oil and gas burned in cars, trucks, and power plants.

Establishing consistent, comparable, and quality data on emissions of banks’ clients is therefore an important piece of foundation for operationalizing a portfolio level commitment such as JP Morgan’s. Reporting regimes such as TCFD and finance sector efforts like Partnership for Carbon Accounting Financials, which includes Morgan Stanley and others, hold promise.

But the quest for perfect data cannot delay action now. We know which sectors contribute the most to the climate crisis. And the difference between corporate climate leaders and laggards in high impact industries like oil and gas, transportation, and electric power is increasingly clear. Leveraging currently available data well is as important as generating yet more of it.

2. Establish metrics with consequences

Net zero by 2050 is the right Paris aligned goal, but thirty years is a long time away. The 2020’s are the defining decade in the fight against catastrophic climate change, and JP Morgan is starting down a sensible path by committing to establish sector-specific targets for 2030. They’ll also need to add 2025 targets, given the short tenure of management teams and the urgency of climate change.

The Paris Agreement requires massive reductions of greenhouse gas emissions. That’s why firms like JP Morgan should ensure that any use of intensity based targets is backed up with guarantees of reducing absolute emissions as much as needed to achieve net zero emissions by 2050 in line with the Paris goal of limiting warming to 1.5C.

Banks must link metrics to consequences to create strong incentives and influence corporate decision-making. Banks should also inform companies in carbon intensive sectors of what climate targets they must meet to remain eligible for loans, and how climate performance will affect loan terms.

3. Drive climate policy forward

Climate change poses a systemic risk to the financial world, which demands systemic solutions. That’s why one-off investor/corporate engagement, while necessary, is not sufficient.

Banking executives should actively support the government policies and regulations that will help their firms and their clients get to net zero as quickly and cost effectively as possible. Strong government policy is a tailwind for Paris-aligned innovation and investment.

For example, sector specific regulatory opportunities present low hanging fruit, from reinstating and extending methane controls to tackling wasteful natural gas flaring, and from implementing clean car standards to accelerating the shift to clean electricity and zero emission vehicles. Banks have a role not only in speaking out for effective policies, but also in using their leverage with management teams to make responsible climate lobbying the new normal.

New leadership for a new decade

Net zero commitments aren’t just a momentum story; they’re backed by fundamental drivers of customer demand, shareholder pressure, and risk management. It’s time for Wall Street to put capital to work in new solutions to the financial sector’s costliest challenge. Paris aligned lending is an important start, but the devil’s in the details.

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