New Race to Zero criteria and strong words from the Secretary-General raise questions for the sector’s commitment to transition.
The United Nations has intensified scrutiny of financial institutions, with its Race to Zero (RTZ) campaign issuing tougher criteria and Secretary General Antonio Guterres saying fossil fuel companies and those that finance them “have humanity by the throat.”
Given the mixed track record of the finance sector in aligning with the goals of the Paris Agreement, its response to the increased pressure is seen as key test of major institutions’ ability to transition long-established business models.
RTZ – the UN-backed drive to rally companies, financial institutions and other non-state actors to take action to halve global emissions by 2030 – says the tighter requirements will clearly expose those who are truly moving ahead versus those “trying to find loopholes”.
Countries signed up to the Paris Agreement of 2015 set out to limit global warming to well below 2°C and pursue efforts to limit it to 1.5°C. But more urgent action is required from the world’s largest corporate emitters of greenhouse gases – and their financiers – to align with this goal.
The new RTZ criteria present a challenge for financial institutions, particularly when it comes to fossil-fuel finance and Scope 3 emissions – those from financed assets or others outside of the direct control of the reporting company – and especially for those that were already falling behind.
The picture is mixed across the industry and within sectors. On the investment side, many managers have signed up to the Net Zero Asset Managers (NZAM) initiative, are using the Institutional Investors Group on Climate Change’s Net Zero Investment Framework to set and monitor targets, and have joined the investor-led initiative Climate Action 100+.
Members of NZAM have so far committed to managing about 39% of their collective assets – or US$16 trillion – in alignment with achieving net-zero greenhouse-gas emissions by 2050 or sooner.
“There is a yawning gap between the policies of the giant asset managers like BlackRock and Vanguard – in particular with regard to passive funds – and what the RTZ now demands,” said Paddy McCully, Senior Analyst at research group Reclaim Finance.
“And despite these asset managers being part of NZAM and supposedly committed to the 1.5°C target, they do not yet appear at all inclined to close this ambition gap through measures such as stopping investments in fossil-fuel expansion,” he said.
Managers have been under close scrutiny during the current AGM season as their past voting records have not always aligned with their net zero commitments. At the same time, the credibility of their climate strategies has been brought into question both by greenwashing scandals and recent analyses of the Paris-alignment of fund offerings.
Phasing down and out
The new criteria make explicit for the first time that RTZ member organisations and alliances must phase down and out all unabated fossil fuels – those where there is no carbon capture and storage technology available. Lobbying and advocacy activities are also now included under the new rules.
In practice, RTZ said, this means corporations and investors must restrict the development, financing and facilitation of new fossil-fuel assets, which includes committing to not invest in any new coal projects.
Organisations that wish to remain endorsed must demonstrate within 12 months that they are restricting fossil fuel development, prohibiting new coal projects and disclosing transition plans covering Scope 3 emissions.
Despite the International Energy Association saying for some time now that there should be no more fossil-fuel exploration, financial institutions have been slow to employ policies banning new investments.
“We seem trapped in a world where fossil fuel producers and financiers have humanity by the throat,” said UN Secretary-General António Guterres, speaking this week at the Major Economies Forum, a virtual conference organised by the White House.
“For decades, the fossil fuel industry has invested heavily in pseudoscience and public relations – with a false narrative to minimise their responsibility for climate change and undermine ambitious climate policies,” he said.
The toughened RTZ rules could help generate the momentum needed for banks to align their strategies more directly with their net zero ambitions, said campaign group ShareAction, which welcomes the commitment to end finance to new oil and gas projects.
“Up until this point, the Net-Zero Banking Alliance (NZBA) has lacked clear guidance for its members on fossil fuels and failed to identify sectoral policies as a key pillar in credible transition plans,” said Jeanne Martin, the group’s Senior Campaign Manager.
European banks have financed upstream oil and gas expansion by more than US$400 billion since 2016, ShareAction research has found. Most of those banks are members of the UN-convened net-zero banking group.
The NZBA recently recommitted to its net-zero ambitions and called on governments and central banks to take action to commit to the Paris target of 1.5°C.
“The Alliance looks to central banks and supervisors to align on consistent frameworks and methodologies, provide specific climate-focused stability mandates, and establish a level global playing field that addresses the imbalances between developed and developing countries,” it said.
GFANZ steps up its guidance
To coincide with the tightened RTZ rules, the Glasgow Financial Alliance for Net Zero (GFANZ), the umbrella body for finance sector efforts to adopt net zero-aligned business models, issued a proposed framework to help institutions to develop credible transition plans.
GFANZ emphasized for the first time the need to shift capital away from polluting assets – in what it called an “accelerated managed phaseout” – having previously focused on moving investments towards green projects.
Welcoming GFANZ’s move, Julie Segal, Senior Program Manager at Canadian advocacy organisation Environmental Defence, said the wording surrounding the phaseout was “still vague” but finally aligning with energy economists.
GFANZ members – including asset managers, asset owners, insurers and banks — have regularly updated on their commitments over the past few months, sometimes running into criticism that these efforts fall short, are too broad, and are relatively slow to be implemented, with some investors called out for inconsistent records on voting and disclosure.
At the same time, frameworks are being developed to provide detailed guidance to investors. Last week, the Institutional Investors Group on Climate Change (IIGCC) published new guidance for asset owners and managers to align their infrastructure assets with a net zero by 2050 pathway.
“One of the most striking features of discussions around net zero has been the speed at which investment managers have signalled their support for the concept of net zero,” said Rory Sullivan, CEO of UK-based advisory firm Chronos Sustainability.
“The big issue is that investors and companies cannot achieve net zero on their own. Other actors have critical roles to play,” he said, pointing to policy makers, customers and suppliers. “The other big issue is that we cannot afford to wait.”
Making sense of the challenge
As to asset owners, the Net-Zero Asset Owner Alliance (NZAOA) – a group of 73 institutional investors with a combined US$10.6 trillion of assets under management — said the updated GFANZ transition guidance “will go a long way in supporting financial institutions to make sense of the net-zero challenge”.
“For NZAOA members, specifically, the document offers best practices for further operationalising the commitment they have made and for implementing the near-term decarbonisation targets they have set as part of their NZAOA membership,” said the group.
There have been moves by some governments to support companies and institutions in outlining detailed transition strategies. The UK has made it compulsory from 2023 for large companies and some financial sector firms to publish a transition plan and appointed a taskforce to develop standards for those plans.
For Reclaim Finance’s McCully, one question is what will happen if the RTZ’s tougher criteria aren’t met in time by the financial institutions they are supposed to be guiding.
“Either the BlackRocks and Vanguards are going to have to seriously rethink and upgrade their climate commitments, or they’re going to need to admit they’re not actually serious about their concern about climate change and quit NZAM and GFANZ – or get told to leave,” he said.
“It’s hard to see how the Race to Zero could justify ignoring bad actors due to some special ‘too big to kick out’ dispensation, including because this would hardly be fair to the other Race to Zero members who take their commitments seriously.”