The banking, and wider private sector, is becoming the central focus within the journey towards developing a sustainable economy. Accordingly, the financial industry acts as a vital lever for change within the path towards net-zero due to financial institutions lying at the centre of the economy; they have vast amounts of capital to move, they have employees to engage, and they work closely with highly influential stakeholders.
However, banks simply cannot decarbonise on their own. An intersectional approach underpinned by assessment, commitment, and engagement, is paramount to achieving net-zero carbon emissions.
Net-zero refers to cutting greenhouse gas emissions to as close to zero as possible, with any remaining emissions re-absorbed from the atmosphere by oceans and forests, for instance. Net-zero is reached when a business has eliminated all the carbon emissions it could and then compensated the remaining emissions with beyond value chain mitigation.
The net-zero process starts with calculating emissions across Scope 1, 2, and 3, setting science-based targets, developing decarbonisation pathways until 2030, and gradually moving towards long-term carbon capture, storage, and sequestration for those emissions which cannot be reduced.
The historical role of banks within the net-zero journey
Banks have historically under-utilised their resources in achieving net-zero and decarbonisation. Whilst many central banks have previously engaged in unsustainable investment practices, a global shift towards net-zero carbon has subsequently posed crucial questions surrounding the environmental responsibilities of the financial sector.
Accordingly, the UN launched the Net-Zero Banking Alliance (NZBA) in 2021 for banks that were willing to commit to net-zero carbon emissions across their lending portfolios by 2050. The new group includes 53 of the biggest banks from 27 countries with €35 trillion in assets.
This is crucial as the banks that signed up have put their credibility on the line. Therefore, they must demonstrate progress on this big commitment made by making more investments in the sustainable transition by divesting to avoid being scrutinised.
The importance of banks in global decarbonisation
The financial sector is at the core of our economy and defines the direction in which the wind blows for the corporate sector, but for all businesses. With their loans, the underwriting of corporate stock, bond offerings, and investment portfolios they change the mindset of the many. They work under the close governance of the regulators, shareholders and communities.
However, banks simply cannot decarbonise the economy on their own. Even in Europe, which is far ahead of the US, there is a €4 trillion mismatch between the available pool of money and the corporations that currently qualify as Paris-aligned, according to a recent report by CDP-Europe and Oliver Wyman.
How banks can sustainably support global decarbonisation
For banks to support the transition of the economy to a sustainable model they must invest and divest. UNEP FI estimates that for full decarbonisation, the world needs investments in the order of 4.7 to 6.6 trillion euros per year. In the meantime, tens of trillions of dollars are spent yearly on the exploration, extraction, refinement, and transportation of fossil fuels. On top of this, we have the building, sale, installation and use of things that burn fossil fuels to generate electricity, and transport people and goods. All of these activities have to be funded somehow and this is the key to the global decarbonisation agenda.
So, what steps should financial institutions take?
Assessment: Banks need to start measuring their full Scope 1, 2, and 3, meaning incorporating in their assessment of climate-related risks all financed activities. At the moment this is mainly done with the use of averages which leads to inaccurate calculations, which can be off by around 20-30%.
Commitment: The Net-Zero Banking Alliance (NZBA) is a step in the right direction as the committed banks have made it clear sustainability is a priority for the future and if they don't deliver they can expect backlash. Openly committing to mitigating climate risks thereby requires engagement in a process of divestment and the implementation of sustainable finance practices. Accordingly, this thereby allows those trusting their money with a certain financial institution to be assured their money will be there as the crisis unfolds.
Engagement: You can't decarbonise without reducing your Scope 3 and given how diverse the definition of this is for the financial sector (see visual below), you need to get these stakeholders engaged fast as they require time to implement.
A few other key steps which also assist in the journey towards creating a sustainable economy include:
A global emissions database - ideally open-source and free so products can be built on top - facilitates the creation of reliable benchmarks and net zero target-setting for a cluster of industries.
A clear carbon tax - businesses, and respectively banks, need a universal way to estimate the volume and cost of carbon.
A global agreement on the accounting practices related to carbon - we need a universal language when we are assessing the progress on decarbonisation. At the moment there isn't full clarity on which businesses emit how much.
In summary, the vast extent to which banks act as a lever for change within the global decarbonisation agenda reflects their central position within the economy. In order to meet global-net zero targets, banks must utilise their vast amounts of capital, engage their employees, and work closely with their highly influential stakeholders. Utilising these levers for change within an intersectional approach underpinned by assessment, commitment, and engagement will thus be vital in achieving net-zero carbon emissions globally.
To learn about how Plan A can help banks, see Plan A’s latest collaboration with Deutsche Bank.