Transition plans should demonstrate alignment with 2030 decarbonisation targets, says UN Climate Envoy.
Financial institutions need to segment their portfolios into transition, net zero-aligned and stranded assets and develop clear emissions reduction plans in line with recognised 2030 and 2050 targets, said Mark Carney, Founder and Co-chair of the Glasgow Financial Alliance for Net Zero (GFANZ).
Carney said it was “absolutely necessary” for GFANZ members to know their financed emission levels, including Scope 3 “where material”. In addition, institutions should have interim decarbonisation targets that are “consistent” with the 2030 target, set by the Intergovernmental Panel on Climate Change, of reducing CO2 emissions by around 45% from 2010 levels.
Within the next two to three years, said Carney, GFANZ members should know the proportion of their assets that support the net zero transition by providing climate-positive solutions, are already aligned or aligning with net zero, or are likely to be stranded and wound down.
This would give institutions a clear plan for turning commitments into action, including an engagement strategy. “You’ll need to be working with the portfolio companies, and maybe making some tough decisions down the road in terms of who you stick with.”
GFANZ was launched in April 2021 and has more than 500 members across its member alliances.
“All of that can be boiled down into hard numbers,” said Carney, also UN Special Envoy on Climate Action and Finance. “What are the emissions? What are the targets? Where are you on the pathway to those targets? What proportion of your assets are consistent with those targets?”
Carney was responding to questions from Eric Usher, Head of the UN Environment Programme Finance Initiative (UNEP FI), about his expectations from members of alliances under the GFANZ umbrella which have not set decarbonisation targets for 2025.
Heading for the exit?
Members of the UN-convened Net Zero Asset Owner Alliance are currently working toward portfolio decarbonisation targets for 2025, while other GFANZ groupings, including the Net Zero Banking Alliance, have only set interim targets for 2030.
A number of large US banks are reported to be on the verge of leaving GFANZ. This is largely due to concerns over litigation risks, following new membership rules from the UN-backed Race to Zero campaign, which authorises and monitors non-state net zero initiatives.
After the Race to Zero campaign tightened up member criteria around fossil fuel finance and Scope 3 emissions, Carney co-signed a statement on behalf of GFANZ which insisted there was “no rationale” for financing new coal projects, also condemning the “folly of our lean, fossil fuel-based global energy system”. But the position is at odds with the practices of several GFANZ members, some of which were recently identified as funding coal expansion.
Ben Caldicott, Director of the UK Centre for Greening Finance & Investment, warned today that it was “increasingly likely” GFANZ’s finance sub-sector alliances would break with Race to Zero’s criteria, or find themselves ejected from the campaign.
“This does not necessarily mean [they] will be less effective. But that entirely depends on the dynamics within each alliance and what accountability mechanisms exist,” he noted.
Carney emphasised the voluntary nature of GFANZ, based on the development of “common frameworks across various alliances” and its efforts to develop guidelines for members, rather than requirements.
He said that the progress of financial institutions, as well as other private and state actors, on net zero transition would in future be more easily monitored, via the recently announced Net-Zero Data Public Utility (NZDPU). Backed by international organisations, standard setters and information providers, the aim of the utility is to make “accurate, trusted, and verifiable” climate transition-related data openly available in a single place.
“The development of this utility will be essential for accountability, and for creating – through that accountability and transparency – positive feedback to financial institutions, to companies and to governments about what else needs to be done,” said Carney.
GFANZ is also consulting on proposed new and enhanced guidance for measuring the alignment of financial institutions’ investment, lending, and underwriting activities with net-zero commitments. The finalised guidance is expected to be published before COP27.
Carney did not rule out the possibility of currently voluntary frameworks for driving the net zero transition in the corporate and financial institutional sectors becoming mandatory requirements through changes in legislation or supervisory expectations. The climate risk reporting recommendations of the Task Force on Climate-related Financial Disclosures, initially formulated as a voluntary framework, are the basis of mandatory requirements in a growing number of jurisdictions.
“The lesson I take from TCFD is that voluntary can go so far, but ultimately to have universal coverage, to have consistency and credibility, you really do need to move to mandatory requirements. Be a little careful not to move too soon because you want to get some of the kinks out from actual application. But you don’t want to leave it too long, either.”