Banks are increasingly setting goals to reduce the climate impact of their financing activities, and are improving in areas including the disclosure of financed emissions and governance of climate risk, although significant gaps remain, with less than 5% of banks disclosing a net zero target covering all financing activities, according to a new analysis released by the Transition Pathway Initiative’s (TPI) Global Climate Transition Centre.
Founded in 2017, the Transition Pathway Initiative is a global initiative led by asset owners and supported by asset managers that assesses companies’ preparedness for the transition to a low-carbon economy and supports efforts to address climate change. The TPI Centre was established in 2022 at the Grantham Research Institute on Climate Change and the Environment to provide research and data on the progress of the financial and corporate world in transitioning to a low-carbon economy.
Financing activities typically accounts for the vast majority of financial institutions’ climate impact, with financed emissions often hundreds of times greater than operational emissions. For the study, the TPI Centre assessed 26 of the world’s largest global banks according to its recently released Net Zero Banking Assessment Framework, which considers a wide range of indicators from banks’ net zero commitments and targets to their disclosure, climate risk governance and climate solutions financing.
The report found that banks have made significant progress towards the integration of climate change into their business strategies, with a significant majority of banks having a net zero financed emissions target in place, and most introducing emissions reduction goals for carbon-intensive sectors. While banks’ climate-focused actions have improved, however, the report also indicated significant room for progress for banks to align their strategies and financing activities with global climate goals.
While 20 of the 26 banks (77%) have disclosed a commitment to net zero financed emissions by 2050, for example, only half of those banks have disclosed which on- and off-balance sheet activities – which include lending, capital markets activity, investment banking, asset management, and advisory activities – are included in those commitments, and only one of the banks has actually disclosed a commitment covering all on- and off-balance sheet activities.
Similarly, while the report found a significant increase in the number of banks setting medium-terms decarbonization targets for high-emitting sectors, with 85% of banks having at least some sector targets in place, up from 33% in a prior 2022 study, only around a third of oil & gas sector targets, and less than half of electric utility sector targets were found to be aligned with the goal of limiting global temperature increase to 1.5°C. Additionally, none of the banks had set targets for high-emitting sectors including food, diversified mining, paper and chemicals.
The banks’ sectoral target setting also does not appear to have been widely incorporated yet into strategy, with only 6 of the banks found to have set financing conditions, such as a requirement for clients to have transition plans in place, to their financed emissions reduction targets.
The report found significant progress in banks’ climate-related disclosure practices, with 69% of banks now disclosing absolute financed emissions for at least one sector, compared with only 33% in 2022, although only 3 banks disclosed absolute financed emissions for all high-emitting sectors, and none of the banks’ disclosures covering all on- and off-balance sheet activities. Additionally, while 17 of the banks have included climate risks as a key risk category in their disclosure, only 8 of the banks have disclosed the scenario analysis results for physical climate risks, and 6 for transition risks.
The report also examined the banks’ sustainable financing activities, indicating that nearly 70% of the banks have set targets to increase financing directed towards climate solutions, although details regarding these targets are often unclear, with only 5 banks disclosing a definition of “climate solutions” based on an external standard, and none of the banks disclosing the total share of finance directed towards climate solutions in the last year.
In the report, the TPI Centre said:
“Our 2023 assessment reveals an overall improvement in banks’ climate action compared with last year. In particular, more banks have been setting emission reduction targets and extending the sectoral coverage of those targets. Following this target-setting, some banks are then defining financing policies to direct capital towards less carbon-intensive companies and industries.
“While this progress is encouraging, important work remains to be done for climate-related matters to be systematically embedded in decision-making across all banking activities.”
Click here to access the report.