Ceres has released a Net Zero Standard for North American Banks, setting out investor expectations for U.S. and Canadian banks on transitioning to a net zero emissions economy. Based on the Net Zero Standard for Banks published June 5th, 2023 by the Institutional Investor Group on Climate Change (IIGCC) and developed in consultation with the Transition Pathway Initiative Global Climate Transition Center, the Standard has been adapted for the North American market and is a guide for investors to use in engaging with banks and for banks to use in understanding investor expectations.
The Net Zero Standard for North American Banks focuses on a bank’s financed and facilitated greenhouse gas emissions, since emissions associated with bank lending are up to 700 times higher than the typical bank’s direct emissions from its own operation. Since corporate economic activity in the U.S. and Canada is largely dependent on bank financing, banks contribute to the emissions of nearly every business sector. That means banks are key to advancing or hampering the global goal of limiting average temperature rise to 1.5 degrees Celsius and to the economic opportunities that are arising from the transition. The Standard also complements the Net Zero Investment Framework used by the investment community to assess and manage climate risk and net zero alignment in their portfolios.
“With the economic transition to a net zero emissions economy clearly underway, institutional investors want to understand individual banks’ progress on climate action in order to assess each bank’s risk management and prospects for long-term value creation,” said Rob Berridge, Senior Director of Shareholder Engagement at Ceres. “The Net Zero Standard for North American Banks can help investors gain that insight.”
It includes 10 areas in which investors expect banks to perform:
- Bank commitments
- Target setting for short, medium and long-term emissions reductions
- Exposure and emissions disclosure
- Historical emissions performance
- Decarbonization strategy
- Climate solutions
- Policy engagement and lobbying
- Climate governance
- Just transition
- Annual reporting and accounting disclosures
Each bank’s pathway to meeting the expectations of the Standard will depend upon its own business model, the legal and regulatory environments in which it operates, its stakeholder base and other unique circumstances. But not meeting investors’ expectations could pose significant financial and reputational risks to banks. The Standard presumes that governments will follow through on their own commitments to support a just transition to net zero at a pace consistent with achieving the goals of the Paris Agreement.
Alongside the Net Zero Standard, the Transition Pathway Initiative Global Climate Transition Center has launched a Net Zero Banking Assessment Framework, which is a set of measurable indicators, sub-indicators, and scoring guidance for assessing the alignment of banks against the goals of the Paris Agreement. The Net Zero Banking Assessment Framework will be used to assess 26 banks, including six large U.S. banks — Bank of America, Citi, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo — and five major Canadian banks — Bank of Montreal, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Scotiabank, and Toronto Dominion Bank – looking at 72 indicators covering the 10 areas of the Standard. Most investors want banks to set targets that incentivize real economy decarbonization. It plans to report those assessments in September of 2023.