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NZBA Sets More Ambitious Climate Targets

Alliance extends net zero targets to capital markets activities, as frameworks provide more tailored approach for banks’ transition strategies.

Members of the Net Zero Banking Alliance (NZBA) have voted to update and reinforce their Guidelines for Climate Target Setting, extending the scope of targets to include banks’ capital markets activities.

“This bank-led update to the guidelines, and its important addition of facilitated emissions from capital market activities, ensures that current and future NZBA member banks will continue to set targets in line with the most ambitious temperature goals of the Paris Agreement and the latest science,” said Eric Usher, Head of the UN Environment Programme Finance Initiative (UNEP FI). 

More than 50% of NZBA’s members had to vote and two thirds of votes cast had to be in favour for the updates to pass. As both thresholds were “comfortably cleared”. The new capital markets targets will come into effect from 1 November 2025, while the rest of guidelines’ updated second version is effective from 22 April.

The second of the four guidelines requires banks to establish an emissions baseline and annually measure and report the emissions profile of loans and investments. This has now been extended to capital markets activities.

Founded in April 2021 by UNEP FI, the NZBA has 143 members overseeing US$74 trillion in capital. The alliance was also a founding member of the Glasgow Financial Alliance for Net Zero (GFANZ).

As of 30 September 2023, 96 member banks had successfully set net zero targets, with its next progress report expected this summer.

Continued fossil fuel finance 

The net zero transition of the banking industry is regarded as critical to the reduction of greenhouse gas emissions across the wider economy, due to the sector’s role in channelling both public and private investment towards the net zero transition.

But banks have been slow to reduce lending and financing to existing clients in the fossil fuel sector and other high-emitting industries.

Last September banks were found to have provided US$3.2 trillion towards fossil fuel expansion since the 2015 Paris Agreement. This included more than US$80 billion by HSBC and US$41.1 billion from Barclays. Banks provided 20 times more financing to fossil fuels activities in the Global South than climate finance offered by Global North governments over this period.

A tracker launched last October by 13 NGOs assessing the world’s largest 60 banks’ sustainable power supply commitments found 99% still finance fossil fuel expansion. Only France’s La Banque Postale had “robust restrictions” on support for firms with coal and oil and gas expansion plans.

“The financial sector has long been recognised as decisive on the road to net-zero,” Hélène Lanier, Managing Director at 2DII, told ESG Investor. “Investors have taken steps to advance on this and portfolio alignment progressed, but a lot still needs to be done.”

Actions needed from banks to achieve emissions reduction targets can create friction with other objectives, such as revenue growth in critical business areas, and require changes to key processes and policies.

A further challenge for banks seeking to finance the net zero transition is that they may increase financing in the short term to heavy emitters that require capital to decarbonise.

Complementary frameworks

To assist banks in aligning their business models and financing activities to the goals of the Paris Agreement, guidance has been offered by a number of sources. These include GFANZ, which  finalised its transition finance framework for financial institutions in November 2022, and has also produced guidance for clients on the information needed to secure continued financing and lending support.

Non-profit think tank 2° Investing Initiative’s (2DII) recently published whitepaper mapped the overlaps between the NZBA’s target setting guidelines and its Climate Impact Management System (CIMS) and ways of “cross-fertilizing best practices”.

“CIMS is a methodology which supports the design of impact potential climate strategies,” said Lanier. “This means that CIMS can serve the implementation of NZBA or other frameworks. It does not compete with the existing standards and frameworks.”

CIMS was designed to be “entity-specific”, focusing on climate strategies that are specific for an institution, business line, or product. Conversely, the NZBA looks to drive impact through collective financial institution actions.

“This framework is singular insofar as it concentrates on climate actions which are the most relevant for the financial institution,” she added. “It is not a one-size-fits-all framework, but rather builds upon the constraints of the financial institution and its governance to identify what climate actions are the most accurate.”

2DII flagged CIMS, alongside the NZBA, could potentially serving as a blueprint for future regulation. Lanier said growing interest from regulators and policymakers on transition finance “places credible transition plans in a central position.”

The transition of the finance sector is also an increasing focus of the Science Based Targets Initiative (SBTi). The initiative is developing a Finance Net Zero Standard which aims to provide clarity on key concepts, such as what it means to reach net zero for a financial institution.

Last June, SBTi issued a consultation on the standard’s conceptual framework and initial criteria and was due to launch in Q4 2023 or ‘early’ 2024.

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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