Net Zero Standard for Banks

The Net Zero Banking Standard from the Institutional Investors Group on Climate Change (IIGCC) sets out expectations for banks on the transition to net zero. The standard launched in partnership with an assessment framework which was published by the Transition Pathways Initiative (TPI). Together the documents aim to create a “gold standard” for assessing the alignment of banks with efforts to limit global temperature increase to 1.5°C.

Released in June 2023, the standard follows a two-year consultation process involving investor engagement as well as a pilot exercise with 27 global banks. It was overseen by the IIGCC’s banks’ working group, whose work is supported by an investor group and their stewardship representatives with  a combined US$11tn in assets/advice.

Banks’ commitment is “essential” to achieve climate goals and help economies adapt to climate change, say the authors. They add that, as shareholders in banks, investors have a duty to hold banks accountable for implementing climate-resilient strategies which they describe as “sensible risk management” tools.

The framework outlines 10 expectation standards: bank commitments, targets, exposure and emissions disclosure, historical emissions, decarbonisation strategy, climate solutions, lobbying, climate governance, just transition, and reporting and accounting disclosures.

Each standard focuses on facilitated and financed emissions, rather than only emissions caused by banks’ direct operations, and is paired with a set of indicators in the assessment framework.The authors also urge banks to take action across the full range of banking activities, including lending, securitisation, underwriting and advisory services.

The standard’s objective is to increase “long term sustainable wealth creation” while remaining anchored to a 1.5°C trajectory and its authors describe it as “stretching” but “achievable”.

The investor group expects banks to make comprehensive and strategic commitments across the entire banking group that are matched with short, medium and long-term targets. Targets should expand finance for transition-enabling activities, use physical denominators and target areas with the most impact on the real economy, such as high-emitting sectors. Historical emissions data should also be used to track overall performance and credibility of plans.

Additionally, investors expect transparency around both emissions and exposures, which should be reflected in banks’ financial statements. Disclosures should be independently audited and use widely recognised methodologies. They should also disclose offsets separately and not count them towards emissions targets. Annual reporting should be conducted in line with the Task Force on Climate-related Financial Disclosures’ recommendations.

Banks should also establish a clear group-wide position in favour of climate action and assign board level oversight of lobbying activities and transition policies. To ensure they meet their emissions targets, banks should adapt their incentive structures, allocate resources for capacity building and integrate climate metrics throughout the organisation.

Finally, banks should provide financing, services and expertise to scale up socially impactful climate solutions. To achieve a just transition, banks should consider the social impacts of climate policies and incorporate international guidelines such as the International Labour Organization’s principles on just transition and the UN declaration on Indigenous peoples’ rights.