ECB report: bank climate commitments are not effective

April 24, 2024|Written by Moriah Costa|European Central Bank

Voluntary climate commitments such as the Net-Zero Banking Alliance (NZBA) may not be effective in reducing financed emissions, a report from the European Central Bank (ECB) has found.

“Our results cast doubt on the efficacy of voluntary climate commitments for reducing financed emissions, whether through divestment or engagement,” the authors wrote.

The researchers found that since 2018, banks in the NZBA had reduced their lending to targeted sectors by 20%, which was the same percentage reduction as banks that had not made a commitment.

In addition, banks had not reduced divestment from other high-emission sectors, such as mining firms, while those in the NZBA were also more likely to enter into new relationships with high-emission sectors. Financial institutions also did not change interest rates for carbon-intensive firms.

“This evidence supports recent efforts by governments to improve the credibility of net zero commitments,” the report says. “More broadly, it suggests that voluntary private-sector initiatives may have relatively little impact on decarbonization.”

Meanwhile, firms that borrowed from NZBA-aligned banks were not more likely to set a decarbonisation target.

The ECB’s research focused on banks that have joined the NZBA because it is seen as the most rigorous climate commitment alliance. The NZBA is a UN-convened alliance founded in 2021 at Cop16 in Glasgow. Today there are 138 member banks from 44 countries, representing about 40% of global banking assets.

Still, the alliance is not without controversy. The group has been accused of giving into bank lobby groups and watering down commitments, while one of Germany’s green banks, GLS Bank, left the group last year amid concerns that signatories still support oil and gas projects.

The ECB researchers noted that there are many reasons a bank might join a climate commitment group like NZBA, such as part of a risk management strategy, to improve their reputation or lower the cost of capital. In many cases, banks that joined the NZBA saw an increase in their ESG ratings score, which “suggests large banks with ESG ratings derive reputational and financial benefits from making climate commitments”.

An NZBA spokesperson said that the authors of the ECB paper acknowledge that the alliance is one of the strictest voluntary climate initiatives and is still at an early stage. The spokesperson also noted that the data covered only goes from 2018, three years before NZBA was founded, to 2023, even though signatories were only due to set their first targets by October 2022.

“Given transition plans and progress reports from founding members have only emerged in the last few months, we believe it is premature to draw conclusions on whether the commitments NZBA members banks choose to make have resulted in reductions in their financed emissions,” the spokesperson said.

This page was last updated April 24, 2024

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