Banks and the Net Zero Transition

The Transition Pathway Initiative’s (TPI) climate transition centre has released the results of its first assessment of large banks using its finalised net zero standard. The findings show that more banks are setting a greater number of targets compared to the 2022 pilot study. However, disclosures are still “partial and selective” and no banks currently include all on and off balance sheet activities.

The net zero standard sets out investor expectations for banks on the transition to net zero. The report presents the centre’s analysis of 26 of the world’s biggest banks across Europe, North America and Asia against this standard.

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

The report documents the growth of net zero commitments, with 20 of the 26 banks having committed to net zero financed emissions by 2050. Yet only one of the banks made a commitment that covers both on and off-balance sheet activities.

According to the authors, decarbonisation targets are a “primary lever” for achieving net zero, yet those used by banks are only “weakly aligned with climate goals”. Although the use of medium-term targets has increased in a few high-emitting sectors, such as oil and gas, only 35% of those targets are aligned with a 1.5C global warming trajectory.

Additionally, a minority of banks were found to have specific policies designed to meet their targets. For instance, only 27% have tied financing policies to sectoral targets.

Capital continues to be allocated to misaligned activities, say the authors, as fossil fuel exclusion policies are still rare, and existing policies are not comprehensive enough.

Exclusion policies are often limited to project finance and corporate finance activities, leaving all other types of financing, such as underwriting and syndicated loans, unrestricted.

Although sectoral disclosures have improved, with 18 banks now disclosing absolute emissions in at least one sector, a mere three banks disclosed this data for high-emitting sectors. None of the banks disclosed emissions for all on and off-balance sheet activities.

Additionally, while conducting climate scenario analysis is increasingly common across the finance industry, only five of the banks assessed have publicly disclosed the results to their shareholders.

The analysis further reveals that while banks have increased financing of climate solutions, none currently disclose the total share of finance directed towards climate in line with external standards. 

Finally, the report found “clear commitments and actions towards just transition principles are lacking”. Only three banks were found to have taken action to integrate justice concerns into their climate strategies.

The TPI centre makes five key recommendations for banks:

• progress climate action despite a lack of complete data and standardised methodologies,
• formulate comprehensive financing policies for high-emission sectors, covering all on and off balance sheet activities
• formulate comprehensive exclusion policies
• include climate-related risk analysis in annual reports and financial statements,
• and expand disclosure and governance structures.