A group of leading global investors has developed investor expectations for the banking sector through the Institutional Investors Group on Climate Change (IIGCC), calling on banking firms to set enhanced net zero targets for 2050 or sooner with interim targets to be included, scale up green finance and withdraw from projects that fail to meet Paris Agreement goals.
The IPCC estimates that up to $3.8 trillion a year in investment is needed annually to achieve the low-carbon transition for supply-side energy system investments alone. The banking sector has a critical role to play in aligning the real economy with the goal of net zero emissions by 2050 or sooner and in limiting warming to 1.5 degrees.
However, in the years since the Paris Agreement, the world’s biggest 60 banks have provided $3.8tn of financing for fossil fuel companies, with 2020 levels higher than 2016. The group of investors convened by IIGCC are now setting out their expectations for how banks should demonstrate alignment with the Paris Agreement in ‘Aligning the Banking Sector with the Goals of the Paris Agreement’[link].
The investor expectations lay out clear areas for action for banks focused on a public commitment to become net zero by 2050 with explicit interim targets, withdrawal of finance from recipients that show no evidence of transitioning, and the scaling up of green finance. This includes:
- Commitment to becoming net zero by 2050, with a primary focus on ensuring indirect emissions are brought down to net zero by 2050 (scope 3) because the bulk of banks’ emissions are associated with financial services, including commercial, project and retail lending; investment banking; securities trading; etc.
- Board accountability for, and variable remuneration aligned with, the delivery of net zero, with financial statements that reflect the low carbon transition.
- Disclosure in accordance with TCFD recommendations, reporting on greenhouse gas emissions associated with financing activities, and the incorporation of material climate risks in published accounts.
- Explicit criteria to be set for withdrawal of financing to misaligned activities that are benchmarked against sector/industry net zero pathways.
This coalition of investors includes global names such as EOS at Federated Hermes (on behalf of its stewardship clients), the Church Commissioners for England, Sarasin & Partners, and Legal & General Investment Management. IIGCC is the European membership body for investor collaboration on climate change and has more than 300 members with over €37 trillion in assets under management.
The investors are urging banks to cease activities that cause emissions through deforestation and land-use change as well as from fossil fuel financing. Banks must not rely on unproven negative emissions technologies, and avoided emissions arising from green finance should not be used as offsets.
Stephanie Pfeifer, CEO, Institutional Investors Group on Climate Change: “Banks have a vital role to play in the realisation of a net zero and resilient future. There is an urgent need for banks to take and accelerate action to support the goals of the Paris Agreement. With fossil fuel financing increasing since 2016, the time to act is now. Investors are calling on banks to make enhanced net zero commitments, with clear interim targets, focused on reducing their indirect emissions to zero. Organisational net zero commitments will not have the impact needed – just as asset managers and asset owners are making commitments focused on their portfolios rather than their direct emissions.
Net zero commitments must drive real change. The launch of this investor expectations report outlines meaningful action focused on achieving real world impact for the banking sector. This is a significant opportunity for banks to play a leading role in driving the net zero transition. With five years already elapsed since the Paris Agreement, talking the talk must be replaced with walking the walk.”
Natasha Landell-Mills, Head of Stewardship at Sarasin & Partners: “Banks provide the lifeblood to economic activity. Through lending, investment banking and advisory activities, banks play a central role in where capital is allocated. The problem we face today is that too many banks are failing to consider climate harm when they make financing decisions, and too much money is being ploughed into carbon-intensive activities that we so desperately need to move away from.
“In the face of the accelerating climate crisis, investors have come together to send a clear message to banks globally: we need you to make public and credible commitments to align all your financing activities with achieving the Paris Agreement goals; provide meaningful short and medium term targets for phasing out financing of carbon-intensive activities across all sectors; and report on progress in achieving these targets. These investor expectations, launched today, send an unequivocal message: capital needs to start shifting now, not tomorrow, if we are to protect our collective future.”
Bess Joffe, Head of Responsible Investment at the Church Commissioners for England: “This initiative is an ideal way for investors to partner with banks as we all seek to de-carbonise our activities, in alignment with Paris. The investor expectations provide clear guidance to banks as to the steps investors want to see them take to improve their contribution to a net-zero economy and the engagement-focused approach will allow for the best ideas to be tabled. It is imperative that we all work together, collaboratively, to achieve the changes necessary to protect the planet for future generations.”
Bruce Duguid, Head of Stewardship, EOS at Federated Hermes: “Dramatic shifts in bank finance are required to achieve the Paris goals and avoid the looming systemic risk of a ‘carbon crunch’ hitting their balance sheets. As banks increasingly commit to net-zero by 2050, this must be matched by targets and actions to achieve absolute greenhouse gas emissions reductions of 45% over the next decade in their portfolios. This will require increasing finance to low carbon and transitioning companies and withdrawing it from those that cannot or will not aligned to 1.5-degrees.
“In co-authoring this paper, EOS at Federated Hermes has set out investors’ expectations on actions, governance and disclosures central to banks’ strategies to ensure the necessary actions on the pathway to achieving global net zero carbon emissions by 2050.”
Full list of investors supporting the investor expectations: Amundi Asset Management, AP2, Aviva Investors, Brunel Pension Partnership Ltd, Caisse de prévoyance de l’Etat de Genève, Candriam, Church Commissioners for England, DWS Investment UK Limited , EdenTree Investment Management, EOS at Federated Hermes (on behalf of its stewardship clients), Fidelity International, GAM Investments, Handelsbanken Fonder, Jupiter Asset Management Limited, KBI Global Investors, Legal and General Investment Management, Local Pensions Partnership Investments, Lombard Odier Asset Management, M&G Investments, Merseyside Pension Fund, Nest Corporation, Nordea Asset Management, Northern Trust Asset Management, OFI Asset Management, Öhman, P+ Pensionskassen for Akademikere, PIMCO, Rathbones Investment Management, Robeco Asset Management, Royal London Asset Management, RPMI Railpen, Sarasin & Partners LLP, SEB Investment Management, Storebrand Asset Management AS and The Cornwall Pension Fund.
Full list of banks targeted in initial campaign: Agricultural Bank of China, Bank of America, Bank of China, Bank of Montreal, Barclays, BNP Paribas, China Construction Bank, CIBC, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Groupe Crédit Agricole, HSBC, Industrial and Commercial Bank of China (ICBC), ING Bank, JP Morgan Chase, Mitsubishi UFJ FG (MUFG), Mizuho FG, Morgan Stanley, Royal Bank of Canada (RBC), Scotiabank, SMBC Group, Société Générale, Toronto Dominion (TD), UBS, Wells Fargo