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Banking on Climate Action: Progress and Gaps in Financing Sustainability

ESGBanking on Climate Action: Progress and Gaps in Financing Sustainability

Banks are increasingly committing to reduce the climate impact of their financing activities and enhancing their disclosure of financed emissions and climate risk governance. However, a recent analysis by the Transition Pathway Initiative’s (TPI) Global Climate Transition Centre reveals significant gaps in these efforts. Less than 5% of banks have disclosed a net-zero target covering all financing activities.

The Transition Pathway Initiative, founded in 2017, assesses companies’ readiness for a low-carbon economy and supports climate change mitigation. The TPI Centre, established in 2022 at the Grantham Research Institute on Climate Change and the Environment, provides research and data on the financial and corporate sectors’ progress in transitioning to a low-carbon economy.

Financing activities, which often result in emissions far exceeding operational emissions, constitute the main climate impact of financial institutions. The study evaluated 26 of the world’s largest global banks using the Net Zero Banking Assessment Framework, which considers various indicators, including net-zero commitments, disclosure, climate risk governance, and financing for climate solutions.

The report acknowledges that banks have made strides in incorporating climate change into their business strategies, with most having net-zero financed emissions targets and emissions reduction goals for carbon-intensive sectors. However, it highlights the need for banks to better align their strategies with global climate objectives.

While 20 of the 26 banks (77%) have committed to achieving net-zero financed emissions by 2050, only half of them have specified which activities (on- and off-balance sheet) are covered by these commitments. Just one bank has disclosed a commitment covering all such activities.

Although the report shows increased sector-specific decarbonization targets, many of these targets for high-emission sectors, such as oil and gas and electric utilities, do not align with the goal of limiting global temperature increases to 1.5°C. Notably, no banks have set targets for sectors like food, diversified mining, paper, and chemicals.

The integration of sectoral targets into banks’ strategies remains limited, with only six banks setting financing conditions, such as client transition plans, for their emissions reduction targets.

Bank disclosure practices have improved, with 69% now disclosing absolute financed emissions for at least one sector, up from 33% in 2022. However, only three banks disclose absolute emissions for all high-emission sectors, and none cover all on- and off-balance sheet activities. Although 17 banks have included climate risks in their disclosures, only eight have disclosed scenario analysis results for physical and transition climate risks.

The report also examined sustainable financing activities, with nearly 70% of banks setting targets to increase financing for climate solutions. However, the definitions of “climate solutions” are often unclear, with only five banks providing external standard-based definitions, and none disclose the total share of finance directed towards climate solutions in the last year.

In summary, while there has been progress in banks’ climate efforts, systematic integration of climate considerations across all banking activities remains a crucial challenge.

By FCCT Editorial Team

Disclaimer: The views expressed in this article are independent views solely of the author(s) expressed in their private capacity.

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