The Problem Lies in the Net

Making Finance Contribute to a Net-Zero Economy

July 6, 2022Published by Finance Watch

As declarations and statements from financial institutions, fossil fuel companies, and governments tell us that more greenhouse gas (GHG) emissions are compatible with achieving net zero, this Finance Watch (FW) report examines the concept and suggests that there is something “dangerously wrong” with the way it is being applied.

“The world economy is so addicted to GHG, and in particular to carbon, that it wants to continue functioning by emitting as much as it can whilst offsetting its emissions,” says author Thierry Philipponnat. Asking if net zero has become “the new buzzword for business as usual” or “the biggest greenwashing concept ever invented”, he argues that the objective of the “race to net zero” should be to decarbonise the real economy, not financial portfolios – and to do so in time to avoid dangerous and irreversible temperature increases.

The report begins by examining the apparent contradiction between the Cop26 commitment to net zero by the Glasgow Financial Alliance for Net Zero (GFANZ) and the refusal of the major fossil fuel-producing countries to commit to reduce, let alone stop, their production of oil, gas and coal. While governments were implicitly refusing to limit their absolute levels of GHG emissions, GFANZ financial institutions were speaking about carbon intensity, it says. This ambiguity of net-zero objectives between absolute emissions and intensity allows green growth without decarbonisation of the existing economy, leading to a “debatable” impact on climate change mitigation.

The report then focuses on solutions, offering a series of recommendations for non-financial corporate issuers, financiers and financial supervisors. Companies must become carbon neutral, and require strong policy support and effective measurement focusing on absolute GHG emissions, not GHG intensity, it suggests. It goes on to call for the exclusion of carbon offsets, avoided emissions and hypothetical carbon dioxide removal technologies from assessments.

GFANZ members and other financial institutions should support such measures, the report argues, and should utilise their power of stewardship to influence non-financial companies through shareholder engagement or by imposing conditions on borrowers. It also proposes a three-pronged approach in which no financial services should be marketed as “ESG”, “climate-oriented” or “net zero” unless they relate to activities that are compliant with the EU Taxonomy, are accompanied by a robust transition plan, or feature suitable climate covenants.

With additional powers, financial supervisors can support this effort by requiring the above approach and by expanding disclosure requirements, the report says. There is also a role for supervisors to control the quality, type and duration of carbon offsetting techniques, to avoid the double counting of carbon credits, and to manage the authorisation of certifiers.

The definition of the “net” in net-zero “will be crucial for determining if the concept will help to decarbonise the economy or risk being discredited as a greenwashing tool,” the report concludes. “With only a few years remaining to stabilise atmospheric CO2 at safe levels, now is not the time to risk fooling ourselves with definitions that rely on intensity measures, carbon offsets, or unrealistic hopes of future carbon capture, however attractive these are to report a seemingly positive message in the short term.”

This page was last updated April 28, 2023

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