COP27

Net Zero Scrutiny Intensifies at COP27 

Sharm El Sheikh sees progress on accountability and transparency of net zero pledges, but many admit need for regulatory intervention.  

New mechanisms for keeping private sector climate promises have taken big steps forward at COP27 this week, while major banks provided limited visibility on their path to net zero.  

The UN High-Level Expert Group on the Net Zero Emissions Commitments of Non-State Entities issued its recommendations for eliminating ‘greenwashing’ from net zero pledges, which emphasised the need for “significant near- and medium- emission reductions” in 2050 decarbonisation plans.  

The group made ten recommendations aimed at establishing clear standards and criteria for the net zero pledges of companies, financial institutions, cities and regions. The recommendations are designed to improve the ambition, accountability and integrity of private sector entities’ pledges by making them more comprehensive and comparable.  

Separately, the Climate Data Steering Committee (CDSC) issued a consultation on plans for a Net Zero Data Public Utility (NZDPU), intended as an open-source and universally accessible platform for all climate-related data from companies, financial institutions and governments. The CDSC also issued an RFP for the construction of the platform and said it would be live in pilot mode by COP28 in Dubai.  

Today, designated Finance Day at COP27, the UN-Convened Net Zero Banking Alliance (NZBA) published its first progress report, detailing the 2030 decarbonisation targets for more than half its 122 members. Member banks’ targets were largely focused on the highest emitting client segments, notably power generation and fossil fuels, according to the report, which also calls for a “predictable and enabling policy environment to accelerate the net zero transition”. The alliance is part of the Glasgow Financial Alliance for Net Zero (GFANZ), which recently distanced itself from the guidance of the Race to Zero campaign, the coordinating body for non-state net zero initiatives.  

“A make-or-break moment” 

The High-Level Expert Group on the Net Zero Emissions Commitments was announced by UN Secretary General Antonio Guterres at COP26 to scrutinise net zero promises by private sector actors. The 17-member group is chaired by Catherine McKenna, a former Canadian Minister of Environment and Climate Change.  

“We cannot afford any slow movers, fake movers, or any form of greenwashing,” said McKenna, speaking at COP27 yesterday. “We need to act more ambitiously and we’re all on the hook. This is a make-or-break moment for the net zero pledges of non-state actors,” she said, adding that “bogus claims” were driving up the cost of the net zero transition.  

In its report, the group said non-state actors’ net zero commitments should include immediate absolute emission reductions along the supply chain and short-, medium- and long-term science-based targets. Their transition plans should also show how capital expenditure plans are aligned with emissions cuts, while all reporting on decarbonising operations should be verified by third parties.  

The report also highlighted new ‘red lines’, identifying practices that should not be considered compatible with net zero commitments. These include developing or investing in new fossil fuel supply, offsetting via low-integrity carbon credits, setting emissions intensity targets rather than reducing absolute emissions, and lobbying against government climate policies, directly or indirectly.  

Speaking at the same event, Guterres welcomed the report as a “how-to guide to ensure credible, accountable net zero pledges”, and emphasised the importance of interim targets covering all scopes of emissions.  

“Using bogus ‘net zero’ pledges to cover up massive fossil fuel expansion is reprehensible. It is rank deception. This toxic cover-up could push our world over the climate cliff. The sham must end,” said Guterres. 

Limits of voluntary action 

But the group tacitly admitted the limits of voluntary frameworks and called for regulators to insist on third-party assurance of the net zero pledges of large corporate emitters, as well as mandatory annual reporting on progress. Earlier this week, the Transition Plan Taskforce published its recommendations for mandatory transition plans for UK-regulated large corporates and financial institutions.  

The High-Level Expert Group report welcomed the increase in national regulation around net zero as a means of turning voluntary commitments into “ground rules for the economy overall”. But it said fragmentation between regimes would need to be tackled via a task force on net zero regulation, made up of international regulators and experts.   

The recommendation was backed by the UN-convened Net Zero Asset Owner Alliance, whose chair, Allianz board member Günther Thallinger, is a member of the group. “The creation by countries of a taskforce on net zero regulation, to convene regulators across borders and across regulatory domains, would go a long way to hastening the transition to net zero emissions and improve credibility and trust in the essential decarbonisation of the real economy,” said the alliance in a statement. 

To help improve the standardisation, accuracy and availability of data underpinning private sector net zero pledges, the Expert Group’s report endorsed the development of an open-source central data depository for climate-related disclosures, such as the recently unveiled NZDPU.  

Data gaps and inconsistencies 

At a separate COP27 event, CDSC Chair and GFANZ Vice Chair Mary Schapiro said its white paper on the NZPDU made three key recommendations for addressing data gaps and inconsistencies. First, the utility will include data from corporates and financial institutions on Scope 1-3 emissions; second, it will include transparent and comparable emission reduction targets, including specific actions on how to reach net zero; and third, it will feature an accessible user interface and a transparent data classification scheme.  

“We know that data is important for companies and financial institutions to do their transition planning, but it is also for regulators and supervisors and civil society to hold everyone accountable to the commitments they have made,” she said. 

Plans for the utility were initially announced in September, on the margins of the 77th United Nations General Assembly, in response to French President Emmanuel Macron’s One Planet Data Initiative. It is supported by international organisations and global standard setters, including the UN, Organisation for Economic Co-operation and Development, Financial Stability Board, International Organisation of Securities Commissions, International Sustainability Standards Board, Network for Greening the Financial System and International Energy Agency. 

Also speaking at the meeting, Executive Secretary Simon Stiell said the utility would be developed in partnership with the UN Framework Convention on Climate Change (UNFCCC), which would serve as the “accountability chief” for net zero plans across the public and private sectors.  

“For far too long, companies and financial institutions have made public commitments to reducing emissions and achieving net zero, without any credible ways to measure it. There are many out there living on pledges,” he said. 

The UNFCCC already consolidates and monitors the nationally determined contributions of parties to the Paris Agreement via its Global Climate Action Portal. Speaking at an earlier session, UN Secretary General Guterres said net zero voluntary initiatives should submit standardised progress reports via public platforms that feed into the UNFCCC’s portal.  He also asked Stiell to present a plan next year for the UNFCCC’s role in strengthening mechanisms for verification and accountability.  

Banks lay out targets  

In its first progress report, the NZBA said 90% of the 43 banks that joined in April 2021 have now published 2030 decarbonisation targets, plus a further 19 members doing so in advance of requirements, meaning more than half of all alliance members have now set targets.  

NZBA target-setting rules require members to prioritise sectors based on GHG emissions levels and intensities, as well as extent of financial exposure, while aligning with no/low-overshoot 1.5°C science-led transition pathways. This means that this initial batch of targets by member banks are weighted heavily toward the power generation, coal, and oil and gas sectors, with relatively few banks setting targets for other sectors.  

While over 90% of responding members reported having a sectoral policy on coal and/or oil and gas financing, and having set an emissions reduction target in one, or both of those sectors, they typically only set targets for three of the nine climate-intensive sectors listed in the NZBA’s guidelines.  

The NZBA said “action must be accelerated” to ensure intermediate targets are set within 36 months of joining the alliance to cover all, or a substantial majority of, bank attributable emissions across all sectors. It added that additional sectoral decarbonisation targets would be developed over the next 18 months.  “Intermediate targets must be achieved by 2030 at the latest, and must cover a significant majority of the total financed emissions,” it said.  

The report said members were currently using a mix of absolute emissions and emissions intensity metrics. While not favouring one over the other, the NZBA said banks should provide a narrative that “tells the full picture of trends in emissions”, including how carbon-intensive assets that cannot be transitioned are being phased down and out of portfolios. It added that the IEA’s Net Zero for 2050 scenario was the most commonly used temperature scenario but noted that for about 35% of targets “members failed to disclose which scenarios they were using”.  

The NZBA report also emphasised the need for leadership from multiple stakeholders to achieve whole economy transition to net zero, particularly emphasising the role of governments, central banks and supervisors to set consistent policy and frameworks for the private sector. The alliance’s requests from governments included enacting energy and infrastructure transition policies; implementing carbon pricing to make mitigation activity economically viable; and developing sectoral decarbonisation plans in partnership with industry representatives. 

Diverse paths to net zero 

The efforts of finance sector firms to support the transition to a low-carbon economy recently came under greater scrutiny after GFANZ appeared to loosen its expectations of member alliances and individual institutions. In its latest annual progress report, GFANZ said sub-alliances would “take note of the advice and guidance of the UN Climate Change High Level Champions and the Race to Zero”, rather than follow it to the letter. 

Earlier this week, UK-based responsible investment NGO ShareAction published an analysis of NZBA members’ targets and strategies which identified gaps and inconsistencies in their approach that threatened to undermine their efforts to decarbonise in line with the goals of the Paris Agreement.  

Based on information available before COP27, the report found that 84% of the NZBA members studied had not yet included interim overarching targets needed to reach 2030 decarbonisation goals, while others had omitted targets for certain carbon-intensive sectors, such as agriculture, aviation, shipping and chemicals, or focused on lending rather than capital markets when setting targets. This means that 25 of the 31 banks analysed that had set targets for the oil and gas sector did not include the provision of equity or debt financing, even though this often represented the bulk of their activity.  

To model lending portfolios, half of NZBA banks used the drawn amount of loans, but ShareAction argued that this can underplay transition risks and level of support provided to carbon-intensive sectors, asserting that undrawn exposures also be included.  

ShareAction also said use of carbon intensity targets, rather than absolute emissions reductions, as well as the divergent approaches to setting targets for their fossil fuel exposures meant that banks were not making the progress needed to align with net zero 2050 pathways.  

NZBA permits banks to set and measure sectoral emissions reduction targets using carbon emissions intensity metrics, but ShareAction argued that using these alone can mask absolute emissions growth and can incentivise firms to produce oil and gas more efficiently rather than plan to reduce output in absolute terms. Similarly, certain approaches to setting targets for the energy sector which do not distinguish between renewable and fossil fuel energy means banks can meet targets by increasing exposure to the former rather than winding down financing to the latter. 

ShareAction assessed the decarbonisation targets set by 43 NZBA members in the first 18 months of the initiative against key ‘leading practice’ criteria, with the firms selected on the basis of market size and extent of fossil fuel financing activity. 

The group said many banks in the sample, including those using absolute emissions targets, were aligned with the rate of emissions reductions implied by the IEA’s Net Zero by 2050 scenario. Nevertheless, ShareAction said many banks were relying on “less ambitious” scenarios and called on NZBA to strengthen its guidance, including an explicit request to interim targets for 2030, and to implement compliance monitoring.  

It also warned of the limits of voluntary initiatives to reduce emissions reductions. “Governments should step up with robust regulation to ensure companies are taking meaningful rapid action to get us to a 1.5°C world,” said Xavier Lerin, Senior Research Manager at ShareAction. 

A separate new report found that financial institutions – including banks, asset managers, insurers and other asset owners – are more advanced in disclosing net zero targets than reporting on other aspects of their contributions to sustainable development.  

The World Benchmarking Alliance’s (WBA) Financial System Benchmark, which assesses the communications and strategies of 400 large financial institutions, reported that around 40% have disclosed long-term net zero targets, but only 2% of these are accompanied by interim targets. Less than 10% of financial institutions go beyond minimum legal requirements in disclosing their processes for identifying human rights risks and impacts, while less than 5% admit to having a process to identify the impact of their financing activities on nature.  

WBA characterised the financial sector’s current approach to tackling climate change and protecting human rights as “fragmented, siloed and insufficiently aligned to drive scale”. 

“Different parts of the finance sector have different roles to play in triggering the powerful domino-effect that is needed to mainstream sustainable finance. Providing transparency shows us what is currently being achieved, what can be scaled and which areas need urgent collaboration,” said Andrea Webster, Financial Systems Lead at WBA.  

 

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