“Insufficient” Action from Banks to Meet Climate Targets
Lenders are urged to end fossil fuel expansion and convert targets into “meaningful commitments” as US banks fall behind international peers.
Action by banks to reach net zero emissions and meet climate goals is “insufficient”, according to two reports which also highlight significant gaps in the policies guiding the sector’s transition.
US-based environmental non-profit Sierra Club’s report examined the interim emissions targets, exclusion policies, and disclosures of the six major US banks: JP Morgan, Bank of America, Citibank, Wells Fargo, Goldman Sachs, and Morgan Stanley. Meanwhile, a report from the Transition Pathway Initiative (TPI) Centre assessed the climate-related performance and ambitions of 38 banks – 26 major international banks, ten US super-regional banks, and US two custodian banks.
Analysis from the World Resources Institute (WRI) in August revealed that major banks – including Bank of America, Citibank, JP Morgan, and Wells Fargo – are off-track to meet their climate-related targets, asserting that their pledges are often less ambitious than they seem at face value.
The TPI Centre’s report found that on average European and Japanese banks had set more sectoral decarbonisation targets than North American banks.
Sierra Club described all six major US banks as “significant laggards” compared to global best practices and international counterparts. It also stated their long-term goals to reach net zero emissions represented the “bare minimum” for climate action and risk mitigation, while their near-term emissions targets and sectoral financing policies fell short of the action required to meet global climate goals.
“While the largest US banks have committed to reaching net zero emissions by 2050, they are evidently not yet on track to make it happen,” said Ben Cushing, Fossil-Free Finance Campaign Director at the Sierra Club. “Stronger action is urgently needed, including improvements to US banks’ climate targets, policies, and disclosures — and ultimately an end to their financing of fossil fuel expansion. Wall Street banks need to walk the walk, and their regulators, clients, and shareholders need to do more to hold them accountable.”
The TPI Centre – part of the London School of Economics’ (LSE) Grantham Research Institute on Climate Change and the Environment – branded the performance of US super-regional banks on the low-carbon transition as “particularly weak”, with just one of the ten having committed to reaching net zero financed emissions by 2050 and having made limited progress on decarbonisation strategies.
Super-regional banks are similar to large national or global banks in terms of assets, revenue, and scale of activities, but do not operate on a global level, instead having a significant presence in a geographical region across multiple states.
It also deemed the performance of the two US custodian banks – BNY Mellon and State Street Corporation – to be “very weak”.
“Not moving fast enough”
According to the TPI Centre’s report, banks lack alignment with the Paris Agreement, with just 19% of their sectoral pathways being aligned with temperature goals of 1.5°C or below 2°C in the medium term (2028-35), as well as lacking short- and long-term targets to map a clear pathway to net zero by 2050.
The report found that no banks have committed to phasing out all financing for coal activities in line with limiting warming to 1.5°C, while 22 of the 26 international banks (85%) lack commitments to immediately cease all on- and off- balance-sheet activities that finance new coal capacity.
It also highlighted that no banks had pledged to end all activities that finance deforestation by 2025, or explicitly committed to decarbonise in line with just transition principles. Only 8% have said they will cease project financing for new oil and gas fields.
“While some progress has been made since our initial assessments in 2022, banks are not moving fast enough to meet global climate goals,” said Simon Dietz, Research Director at the TPI Centre and Professor of Environmental Policy in the Department of Geography at LSE. “Without stronger action, the banking sector exposes itself — and by extension, the global economy — to greater regulatory, market, and physical risks associated with climate change.”
TPI Centre recommended that banks expand the scope of their commitments, targets and policies, strengthen the alignment of existing sectoral targets, develop robust accounting methodologies for capital market activities, and convert sustainable finance targets into more “meaningful commitments”.
Fossil fuel focus
Meanwhile, the most “essential” recommendation made by Sierra Club for banks to reach net zero was pledging to end support for the expansion of fossil fuel production.
The International Energy Agency previously declared that there should be no additional investment in new fossil fuel supply, meaning new fossil fuel development is incompatible with meeting global climate goals.
However, four of the six US banks – Bank of America, Citibank, JP Morgan, and Wells Fargo – have been the largest financiers of fossil fuels globally since the Paris Agreement in 2015.
All six of the banks named in the Sierra Club report are members of the Net Zero Banking Alliance (NZBA), which last week published its 2024 Progress Report, giving investors greater information from which to assess their climate orientation.
The NZBA’s membership comprises 144 banks. In joining, the banks voluntarily commit to independently set emissions reduction targets for their financing activities in carbon-intensive sectors of the economy within 18 months of becoming members. They also commit to developing transition plans within 12 months of setting targets to detail how they will achieve them.
As of May 2024, 97% of the 122 banks due to have set their first sectoral targets have done so, while two-thirds of the 91 banks required have published transition plans with 25% more expected by year-end.
In March, NZBA members voted to update and reinforce their Guidelines for Climate Target Setting, which extended the scope of targets to include banks’ capital markets activities.
A consultation on the Science Based Targets initiative’s Financial Institutions Net Zero standard closed at the end of last month. The standard is expected to place banks under increased pressure to heighten their climate-related transparency and ambition.
The post “Insufficient” Action from Banks to Meet Climate Targets appeared first on ESG Investor.