Banks’ Net Zero Stances not Backed up by Policies

ShareAction calls on European banks to publish “credible” climate and biodiversity strategies ahead of COP26.

No major European bank has yet matched its net zero commitments with a comprehensive strategy and robust policies across all critical environmental issues, according to a new assessment of their climate and biodiversity practices by ShareAction.

Although 20 of Europe’s 25 largest banks have pledged to reach net zero by 2050, just three – Lloyds, NatWest and Nordea – have committed to halving their financed emissions by 2030 to ensure they are on track to achieve this ambition, according to the responsible investment-focused UK charity.

Eight banks have set interim targets for the most carbon intensive sectors, but only three – Barclays, Crédit Agricole and NatWest – use an absolute emissions metric or complement their targets with additional financed emissions disclosures to track progress toward actual emissions reductions.

Only Barclays’ net-zero strategy covers capital market underwriting in its targets, despite this representing 65% of fossil fuel financing by banks, said the report, titled ‘Countdown to COP26: An analysis of the climate and biodiversity practices of Europe’s top banks’.

Many of the banks covered in the report are members of the Net-Zero Banking Alliance (NZBA), which is expected to unveil a series of new commitments at COP26 as part of industry-wide efforts coordinated by the the Glasgow Financial Alliance for Net Zero (GFANZ).

GFANZ, launched in April by UN Special Envoy on Climate Action and Finance Mark Carney in partnership with the UNFCCC Climate Action Champions, the Race to Zero campaign and the COP26 Presidency, has 160 members, collectively responsible for US$70 trillion in assets. NZBA’s 50 members (US$37 trillion AUM) are required to set 2030 and 2050 reductions targets within 18 months of joining.

Last week, the European Commission released a report saying European banks needed to do improve their integration of ESG risks or risk further regulatory intervention.

Slow to exit fossil fuel business

Overall, the ShareAction report found that banks remained slow to exit fossil fuel business, echoing the pace of commitments by governments in negotiations ahead of the Glasgow summit.

Less than half of the banks have committed to a phase-out of financing to thermal coal-related activities and most of policies contain loopholes, according to the research. Only seven banks restrict corporate finance for companies developing their coal mining capacities. France’s Crédit Mutuel is the only one of the leading banks to have implemented relative and absolute thresholds for the coal sector in line with the Global Coal Exit List recommendations.

ShareAction commended Crédit Agricole for excluding dedicated financing or refinancing for thermal coal mines and coal-fired power plants, including expansions, as well as coal infrastructure projects.

Among major European banks, only Intesa SanPaolo has committed to phasing out its exposure to all unconventional oil and gas sources, including oil sands and fracking. Most banks also place some degree of restriction on financing these activities, said ShareAction, but they typically retain substantial exposure to these activities through corporate finance for diversified companies such as oil majors.

Although UniCredit excludes asset-level finance for many unconventional oil and gas activities and restricts corporate finance for companies with a revenue share of 25% or more from unconventional sources, most diversified energy companies do not meet this threshold. As a result, UniCredit has been the largest financier of Arctic oil and gas activities (US$1.5 billion) among European banks since the Paris Agreement was signed, the report noted.

No major European bank has yet committed to fully stop financing new fossil fuel expansion, despite the International Energy Agency’s recent 2050 net zero roadmap asserting that fossil fuels should ‘stay in the ground’ to limit climate change to 1.5 Celsius. However, Danske Bank and NatWest have introduced project finance restrictions linked to the expansion of the oil and gas industry.

Linking pay to environmental targets remains the exception among European banks, said ShareAction, with sustainability metrics in remuneration policies rarely used to incentivise executives to reduce their financed emissions and financing of Paris-misaligned activities.

Leading bank practices “fail basic litmus tests”

In the research, ShareAction analysed banks’ practices across eight climate and biodiversity-related areas, including net-zero targets and alignment; high-carbon disclosures; sector policies (relating to coal, oil and gas, shipping, and biomass); biodiversity; and executive remuneration.

“There is no excuse for banks which have not yet adopted the leading practices of their peers, though it should also be noted that, in many cases, even the leading practices in the sector continue to fail basic litmus tests on climate and biodiversity, said Xavier Lerin, report co-author and Senior Banking Analyst at ShareAction.

“There is a huge amount that all banks can do right now to address their environmental impacts and we call on them to publish credible climate and biodiversity strategies ahead of COP26.”

The report does not include a ranking, but highlights current leading practices in each area that investors should expect from banks in their own portfolios. It provides checklists of leading practices and next steps for bank policies, as well as suggested engagement questions.

ShareAction said investors should consider voting against directors and file and vote for shareholder resolutions on climate change and biodiversity at banks’ 2022 AGMs. If dissatisfied with banks’ responses.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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