These are the times for green alliances
On April 21st, 43 banks from 23 countries with $28,5 trillion in assets formed the Net-Zero Banking Alliance (NZBA). Members are committed to reach net-zero carbon emissions from lending & investing activities by 2050 in line with the Paris Agreement 1.5°C temperature target.
Similar “Net Zero” initiatives have recently blossomed within the Banking & Insurance industry notably:
> The Net Zero Asset Managers Initiative (NZAMI) coined in December 2020 and endorsed by 87 signatories managing $37 trillion in assets.
Why is this time different with the NZBA? Educated guess is that motivating factors behind this new alliance have never been stronger: promoting a common understanding of how to set climate targets & providing clear signals to clients and communities:
> Many players involved: key players from the EU (BNPP, BBVA, Credit Suisse, DB, LBP, Santander, SG), UK (Barclays, Lloyds), USA (BoA, Citi) and APAC (HSBC, Standard Chartered) joined the league.
> Players with ESG challenge: the majority of them are leading the pack in table leagues for financing and underwriting industries like energy, oil & gas and construction industries that are large CO2 emitters. Between 2016 & 2020 fossil fuels corporates have obtained loans of $238 billion from Citi, $199 bn from BoA, $146 bn from Barclays, $121 bn from BNPP and $111 bn from Morgan Stanley1. A s a consequence, their commitment and action to change the deal would be impactful.
> Players craving for a new deal: some like Citi CEO Jane Fraser are mobilised to change the game: “Net zero means rethinking our business and helping our clients rethink theirs. For banks, what some do not realise is that net zero includes not just our own operations but also our core business impacts - in other words, our financing”.
> Precise temporal and sectoral targets: within 18 months of signing on, member banks must set interim (2030 or sooner) targets in 5-year increments for their most carbon intensive sectors. Further, within 36 months, members must set targets validated by current climate science for high-emitting sectors like agriculture and fossil fuels, commercial and residential real estate, power generation, cement, iron and steel, aluminum, pulp and paper, and transportation. NZBA banks must also commit to taking a robust approach to offsets and adhering to guidelines for annual disclosures.
Some market observers have noticed this new alliance does not make the “climate finance alphabet soup” taste better. Why is that?
> Key players missing: some major banks have made the decision not to take part in the alliance. Outliers are incorporated in France (Credit Agricole), Belgium (Belfius, KBC), Italy (Intesa, Unicredit), Netherlands (ING), USA (JPMC, Wells Fargo, Goldman Sachs), Canada (RBC), Australia (Macquarie), China (ICBC, CCB, Agricultural Bank) and Japan (MUFG, Mizuho). Some of them are leading bankers in the energy sub-sectors. Between 2016 & 2020 fossil fuels corporates have obtained loans $317 bn from JPMC, $223 bn from Wells-Fargo and $160 bn from RBC. GS lending strategy of GS is geared towards the energy sector which account for 12% of the loans and 18% of its commitments.
> Many options for an emission pathway: one important question is what kind of net-zero pathway will the league members follow? Where do the banks intend to be in 1, 5, or 10 years towards the net-zero goal? How will they get there and how their emission trajectories will look like? For instance, league players might activate different options: capturing carbon with technologies, offsetting emissions with negative emission technologies (NET), leveraging on renewable energy, financing reforestation programs. All these options are not equally consequential as natural resources are getting scarcer2
> Climate strategy really? The Alliance does not impose mandatory pathways for coal & fossil fuel phase out plans, biodiversity loss and deforestation and ‘just transition’ from a high to low carbon society. Therefore, some market observers reckon that the Alliance will not impose its members a credible climate strategy which is consistent with the financing of fossil fuel industries by the world’s 60 biggest banks between 2016 & 2020 for a total $3.8 trillion.
Bottom-line, if the NZBA promotes common understanding on how to set climate targets, it will not impose binding changes in banks business models and resources allocations. Maybe it is time for regulators & investors to step in to help NZBA becoming the green finance “super league”.
In the next episode, we will touch base on the pioneer Net Zero alliance formed by insurers and asset owners. Stay put!
Written by
Alexandre B., co-Head Avertim France