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The urgency to
slow the effects of climate crisis is higher than ever. According to the latest data, the
world needs to reach net-zero
by 2050 in order to avoid the disastrous impact of climate change. All
stakeholders play a critical role, from governments, consumers and businesses
of all sectors, including financial institutions. In fact, banks contribute a
huge part to achieving the net-zero target. This is because, the market
requires manor investment to mobilise climate action. Concurrently, this needs
to be supplemented with the global commitment to shift away from financing carbon-intensive
activities and projects.
Nowadays, we are
seeing more and more banks are committing towards net-zero targets. However, as
the definition for net-zero or net-zero finance has yet to be standardised, there
are still many of these banks do not understand what ‘net-zero’ commitment
really entail. This brings limitations towards creating the right and relevant
changes throughout their business model to ensure climate action is being assigned
effectively.
Net-zero. So, what does it mean?
The Paris
Agreement recognizes the importance for the world to step up in the fight
against climate change, including towards achieving net-zero emissions by 2050
and reduce emissions 50 percent by the year 2030.
There are three
long-term targets set by the international Paris Agreement on climate change
i.e. (i) focus on climate mitigation, (ii) focus on climate adaptation and
(iii) focus “to make all financial flows consistent with pathway towards
low-emissions, climate-resilient development”.
For financial
institutions, banks in particular, the third goal is where banks act a vital
role to materialize the objective of the Paris Climate Agreement. It’s
paramount to make climate financing a success as banks have a unique and
absolute role through investments, lending and advisory services. In line with
the Greenhouse Gas Protocol and
the Partnership
for Carbon Accounting Financials, nowadays, companies would not only need
to recognize the environmental impact of their own operations and supply
chains, but they need to also be wary of the impact arising from their products
and services. For banks, this is tied to their financing activities for
instance, though banks nature of operations may not be directly involved in
fossil fuels extraction but financing the fossil fuels extraction projects
affiliates the emissions associated with the project.
So, back to the
discussion on banks’ net-zero commitment, whether it is in alignment with the
Paris Agreement or not, they are committing to take a big action to reduce and
eliminate the carbon-intensive financing over a period of time. “Net zero” is achieved when the amount of
emissions added is no more than the amount taken away or the achieve the
balance between the amount of greenhouse gas produced and the amount removed
from the atmosphere.
Net-zero Commitment – How Far Have Banks Come?
Even before the
Paris Agreement in 2015, some of the major banks have initiated the journey
towards Sustainable Finance. The embrace was sparked not only due to the
environmental trends but also due to its commercial opportunity.
Since the Paris Agreement was established in 2015, we are now seeing more and
more banks are following the likes of the JPMorgan Chase, Citibank, Bank of
America, Wells Fargo, Goldman Sachs and Morgan Stanley that *pledges towards
net-zero.
However, despite
the global focus on mitigating climate change impacts, we still have not seen
any fundamental transformation towards Paris Agreement from some of the large
banks. This is because we are still seeing banks financing and even expanding
their fossil-fuel portfolio.
On the bright
side, we are witnessing an upward trend of banks promoting values-based banking
that highlights that sustainable financing or the shift towards net-zero can
also be profitable and at the same time gaining recognitions from various key
stakeholders including investors, shareholders and NGOs. These banks also
advocates their net-zero journey with the customers and clients and are already
becoming the bank of choice for customers and clients that are more keen
towards Environmental, Social and Governance (ESG).
What Do Banks Need to Do to Shift Towards Net-zero?
Based on
industry best practices and experience gathering from bankers across the globe,
two common factors have been identified that can help accelerate the transition
toward net-zero financing; client engagement and product innovation.
First of all,
from the very beginning, banks need to comprehend that committing towards Paris
Agreement will enforce changes to the business model, including on how
effective and fast it can respond to the climate risks as well as how all of
this can be monitored.
Only then banks
can take the necessary steps to innovate their product offerings and at the
same time proactively engage their clients on the bank can tailor the climate
financing journey over short, medium and long-term, to achieve net-zero.
Client Engagement
Banks should
commit to put in place policies that are ambitious, yet realistic to align
their client engagements with the Paris Agreement strategies that centralised
towards supporting them towards climate transition. Obviously, as stated
earlier, there are still many banks that have the strategy or the affordability
to exclude most of its clients that include those in the climate-intensive
sectors. Mostly, banks would state a forward limited restriction on some of
these sectors such as financing coal.
Banks need to
clearly state the expectations that their clients’ climate transition is
necessary over a specific period of time, monitor their progress and assess
whether it is all in pace with the banks’ net-zero commitment. Banks must also
inform clients of the consequences if the clients are unable to meet the banks
expectations that might also include an exit strategy.
There are some
practical steps banks may adopt in client engagement process to achieve
net-zero:
·
Banks should gather and monitor
clients’ emissions data from their operations. The availability of data allows
banks to develop low-carbon transition plans for their client engagement
strategies.
·
Banks should set
emission-reduction targets for the client to align to the banks’ net-zero
commitment, guided by the completeness of emissions data as well as credible
methodologies such as Science Based
Targets.
· Banks should present peer
benchmarking for their clients to the industry best practices. This will
indicate whether the clients are on the right track of aligning to the banks’
net-zero commitments or require improvements in terms of progress and
reporting.
· Banks should craft structured
client-engagement policies to get clients on board towards the transition to
low-carbon activities. The policies should also include a realistic timeframe
for the transition as well as the standards that will lead to dismissal.
· Banks should equip relationship
managers with knowledge on climate change and the banks net-zero commitments.
On top of that, setting the right KPIs on net-zero for the relationship
managers could also be implemented to ensure the effective implementation.
Product Innovation
Apart from client
engagements, banks also have a key role to play in providing the product
offerings that can enable their clients towards low-carbon activities, such as
green bonds or Sustainability-linked loans. The objective of green bonds is
like any other conventional bond issuance, but green bonds raise capital for
specific green activities or projects. Green bonds usually involve interest
rates that are tied on clients’ activities Sustainability KPIs such as emission
targets, pollution index, or even waste management. This is pretty much similar
to the concept of Sustainability-linked loans with conventional loans.
These product
could further accelerate the adoption of Sustainability from clients as through
these products, companies may benefit lower interest rates and at the same time
be more sustainable.
Green products
of banks need to be based on international standards that can provide
credibility and assurance on the real impact of the clients low-carbon
transitions. This is extremely crucial to avoid greenwashing from
higher-polluting clients as part of the banks green financing. Hence, the
monitoring of the client’s activities and projects and getting a third-party
verification on the low-carbon standard alignment may be applicable.
Conclusion
Through
financing, banks have indirect impact across every sector. The exposure
highlights the significance role of banks towards the world economic
sustainability. To achieve net-zero, banks cannot move alone. They need to
collaborate and work together with businesses towards the common climate
objective through series of engagements and delivering climate product
solutions.
Regulators and
governments must also be in the picture to set the tone of getting all
stakeholders on board towards climate-resilient world and economy.
A lot still
needs to be done. Banks, in particular, have to up their climate game to
achieve this global agenda.
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author and do not represent any particular entity or organisation
