Big banks are making big climate promises. 3 ways to tell who will deliver.
Last week, Citi released new, interim decarbonization targets, building on a flurry of climate commitments from some of the world’s largest banks at the end of last year. From Goldman Sachs to HSBC, banks closed 2021 with important initial steps toward long-term emissions reductions, highlighting the finance sector’s growing net-zero ambition.
To build on this progress in 2022, banks will need to take an even more robust stance on climate, becoming proactive environmental stewards rather than reactive market participants.
So far, 101 banks — with $67 trillion in assets — have joined the Net-Zero Banking Alliance, convened by the UN in April 2021. But only a small fraction of those banks have released sector-specific financed emissions targets.
Passive participation in industry climate coalitions does not signify leadership. Instead, to navigate the energy transition effectively, banks should implement transparent 2030 decarbonization plans — devoting particular attention to the following three actions.
1: Set minimum standards for carbon-intensive financing.
Even banks with 2030 decarbonization plans have not yet attached consequences to their emissions-reduction goals for high-impact sectors — corporate clients can access capital regardless of their track records on climate.
To strengthen their energy-transition strategies, banks should set minimum standards for continued financing of carbon-intensive business activities, making it clear to clients that loans and underwriting will be curtailed for projects that fail to clear the bar.
Every major U.S. bank already restricts financing for Artic oil and gas exploration, development and production. This prohibition and others are laid out in the banks’ environmental and social policy frameworks.
Adding new, sector-specific climate provisions to these established frameworks can help banks confront risks associated with the energy transition. For instance, banks could establish a “no new routine flaring” rule for the oil and gas sector — withholding financing from oil drilling that lacks a plan for managing the associated natural gas.
Minimum standards like these — with clear consequences for weak transition planning — could drive effective climate-risk management across sectors such as energy, transportation and power generation and help banks meet their net zero objectives.
2: Offer climate-aligned advisory services.
Banks can also build on their initial steps by integrating climate principles into their advisory services. Most bank commitments to reduce financed emissions focus on lending and underwriting — overlooking their vast client advisory work, which accounts for a significant portion of their businesses.
From Q4 2020 through Q4 2021, banks around the world collected approximately $3.7 billion in fees from mergers and acquisitions in the energy and power sectors. In 2021, according to data from Refinitiv, five of the six largest U.S. banks took in more than $500 million in fees from mergers and acquisitions in oil and gas exploration and production alone.
From an environmental perspective, many of these transactions were a net loss, since companies with relatively strong climate mandates sold dirty assets to companies less concerned with transition planning. As a result, mergers and acquisitions frequently transferred emissions from industry leaders to industry laggards.
Citi has acknowledged the importance of climate-aligned asset sales in its new TCFD report. To tackle this issue further, banks can integrate climate goals into their advisory services. Addressing methane emissions in the buying and selling of oil and gas assets, for example, could enable banks to reduce their clients’ climate-related transition risks.
With climate safeguards embedded in mergers and acquisitions, banks could better catalyze decarbonization on a path to net zero.
3: Push for smart climate policy.
Ultimately, banks’ ability to meet their long-term climate goals will depend on the introduction of supportive federal and state climate policies. As the Glasgow Financial Alliance for Net Zero (GFANZ) notes in its call to action on climate policy, “Action by financial institutions, while critical, is no substitute for action by government, and certain responsibilities cannot be shifted to finance.”
Banks can bolster their net zero plans by making climate-aligned public policy advocacy more central to their decarbonization strategies. While the largest U.S. banks have joined GFANZ and issued high-level statements on the importance of climate policy, few have lobbied publicly and consistently for measures essential to a successful energy transition. For example, proposed EPA methane regulations, a key emissions-reduction opportunity, has been largely ignored by the banking community.
To help lower their climate-related financial risks, banks should consider adding climate experts to their legal and regulatory affairs departments or connecting their government relations staff with their internal sustainability teams. Across these efforts, banks must focus on both direct and indirect lobbying.
Last year, Citi, Morgan Stanley and Bank of America took strong steps to improve their trade associations’ climate policy advocacy. These efforts must continue in 2022 — with an increased focus on the specific regulatory and legislative measures needed to reach net zero emissions by 2050.
If banks are serious about living up to their climate ambitions, interim decarbonization targets such as those we saw last year should serve as the foundation for more comprehensive emissions-reduction plans that can guide net zero banking in the years to come.