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Banking on climate neutrality: The global banking industry’s role in transitioning to a low-carbon economy

A report from the International Banking Federation and Deloitte

At COP 26, 190-plus nations agreed to boost the rate of their greenhouse-gas emission cuts. At the same time, financial institutions committed to align US$130 trillion of private capital with the goals of the 2015 Paris Agreement by 2050. The Paris agreement calls for limiting global warming to 1.5 degrees Celsius over preindustrial levels.

 

One year later, where does the banking industry stand?

To find out, the International Banking Federation and Deloitte surveyed bank executives and directors from around the world. We also interviewed representatives of banks, banking associations, and an international organization. The results are reflected in this report.

Environmental, social, and climate-related issues are materially impacting all sectors of the economy. Real economy sectors are busy finding ways to decarbonize their business according to net-zero commitments and related transition plans. While governments, governmental agencies and carbon-emitting industries need to drive effective solutions to climate change, banks—as financial intermediaries and central players of any economy—play an important role in supporting the transition of their clients in different real economy sectors.

Indeed, in their transition strategies, banks must consider not only the transition of their own operations but, more importantly, the emissions of their financed activities as well. Financed emissions represent around 75% of the carbon footprint for banks and are extremely difficult to measure. Nevertheless, they are an opportunity for banks to play a pivotal role in reaching net-zero throughout the economy.

To fulfil their role as financial intermediaries who can support the transition to climate neutrality, banks are increasingly evaluating business opportunities, risks, and ways to support and accompany clients on the journey to climate neutrality. Along the way, they are reviewing their own operating and business models to ensure that climate-related matters are adequately addressed in their own operations, as well as in their financing activities and engagement with clients. Banks must pay close attention to how capital is redirected and to the risk of potentially stranded assets that have or will be suffering from unanticipated or premature write-downs, devaluation or conversion to liabilities. Considerations on stranded assets will play a significant role in the transition to climate neutrality of lending and investment portfolios.

The success of the transition depends on a collaborative, cross-sectoral, and cross-institutional approach to solutions that could benefit everyone.

Key findings

Our research has led to seven key findings about the banking industry’s climate neutrality efforts.

  1. There is major agreement among national jurisdictions on the need for a just transition to climate neutrality. 2050 is recognized by the Intergovernmental Panel on Climate Change and other scientific bodies as the date by which net-zero should be reached in order to limit the temperature rise below 1.5 degree and to align with the Paris Agreement. However, the timelines for reaching intermediary and final net-zero targets vary depending on the country or region. Most banks are relying on different international and national initiatives to guide their work toward climate neutrality. It may be challenging for banks to achieve net-zero targets earlier than what the economies in which they operate are prepared to achieve.
  2. Mostly driven by their own mission, but also client demand, most banks globally are forging ahead with plans to support climate neutrality goals as they believe banks play an important role in the transition to a low-carbon economy. Banks must do so while managing the climate-related and environmental risks, the risk of devaluation of their assets into stranded assets, and the expectations of regulators. For this reason, while most respondents across geographies believe that they should play a central role in the transition to climate neutrality, some specify that banks should not be considered drivers of the transition, but facilitators. That includes focusing on the areas they can influence most to achieve positive impact.
  3. Important as they are, banks are but one player in a national and regional ecosystem.Carbon-heavy sectors must do their part by innovating to reduce their carbon footprint. Meanwhile, to address uncertainties (primarily regulatory) and region-specific issues, governments and other industries must respond with clearer guidance, harmonized methods, and coordination.
  4. In some jurisdictions, exclusion policies have been the main tool for mitigating banks’ climate impact. These are no longer sufficient to achieve climate neutrality objectives. In the interest of transforming rather than divesting, other mitigation actions include client engagement programs and sustainable finance through product and service innovation.  
  5. While GHG emissions measurement is considered key to set targets and align on climate neutrality, we find that Scope 3 emissions measurement is still a challenge for most banks and corporates due to significant data limitations and the lack of harmonized methodologies (despite the emergence of initiatives such as the Partnership for Carbon Accounting Financials, or PCAF).
  6. The current energy crisis will have an undeniable impact on banks’ ability to plan and implement their climate neutrality work, because of the inevitable impacts on the entire ecosystem (governments and clients alike). In the short term, energy choices may temporarily revert to higher-emitting energy sources. But this does not change the overall trajectory of sustainability—in general, respondents say they remain committed to their previous commitments and priorities. In the medium to long term, the energy crisis can be a strategic opportunity to accelerate more sustainable energy production and reduce dependency on emission-intensive energy sources. Because of this, the road to climate neutrality may not be linear and banks may have to adapt the timing of their specific targets and plans for specific clients.
  7. A just transition to climate neutrality is necessary to maintain social cohesion. In turn, the right level of social engagement is key to ensuring the transition is supported by all stakeholders. Developing countries will require financial and technological support from developed countries to achieve a just transition.

In this report we take a closer look at each of these key findings. We hope you find interesting and useful as you consider how your company is looking to address these issues.

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