Banks and investors must actualize their net-zero commitments by 2030 or sooner
If there’s anything I’ve learned from decades of work to build awareness of – and action to tackle – the economic risks posed by climate change, it is this: market signals matter. That’s why the news that all six of the major U.S. banks and some of the largest investors have now committed to aligning with a net-zero future is so important. It sends an unquestionable signal to other major capital market actors that we must scale up action, today, to protect our economy and the environment.
First, let’s take a look at the banks’ commitments. In supporting the Paris Agreement’s net-zero goal, Bank of America, Citi, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo have raised expectations for the role of financial institutions in making our economy more resilient. While these commitments are a welcome first step in the right direction, driving meaningful and lasting impact will come down to whether banks are able to establish science-based short term goals while also developing and implementing a proactive engagement strategy in the near-term at the speed required that puts their borrowers on the path to decarbonization.
After all, the banks’ commitments are significant not because they will achieve carbon neutrality in their own operations – but rather will drive carbon neutrality in the businesses they finance. According to Ceres report, Financing a Net-Zero Economy: Measuring and Addressing Climate Risk for Banks, more than half of bank lending is exposed to transition-related climate risk. If left unchecked, this exposure could result in as much as a hundred billion dollars in losses for U.S. banks and potentially trigger a new financial crisis. The scale of these potential impacts puts the onus on banks to work with their clients to proactively plan for the transition to a net-zero economy.
While the banks have their work cut out for them, the good news is that these commitments are just one example of the momentum across the financial sector for net-zero portfolios in line with the Paris Agreement.
Just this week, Ceres and its global investor partners launched the Paris Aligned Investment Initiative – a collaborative investor-led forum involving 110 global investors managing $33 trillion in assets under management. This global effort supports asset owners and managers in aligning their portfolios and activities to the goals of the Paris Agreement, and committing to set science-based portfolio emissions reduction targets that are consistent with achieving global net-zero emissions by 2050 or sooner, with credible intermediate targets.
As part of the launch, 22 asset owners representing $1.2 trillion in assets signed on to a Net Zero Asset Owners Commitment, committing to 10 specific actions: including to transition their investments to achieve net zero portfolio GHG emissions by 2050, or sooner; to set an interim target for 2030 or sooner for reducing Scope 1, 2 and 3 emissions associated with their portfolios and a target for increasing investment in climate solutions; and to ensure any direct and collective policy advocacy they undertake supports policy and regulation relevant for achieving global net zero emissions by 2050 or sooner, among other steps.
In December, a group of 30 asset managers representing $9 trillion made a similar commitment through the Net Zero Asset Managers initiative.
Making this transition to net zero, however, won’t be possible without detailed plans with interim goals and milestones that the banks and investors are accustomed to developing in support of any other business strategy. Weaning off of fossil fuels as a driver of profits, for example, will require deliberate focus across all units of a banks’ business – especially when some are still lending billions to the fossil fuel industry. C-suite goal-setting is only as effective as how well it is operationalized and prioritized cross-functionally, and then, of course, how progress is measured and reported. Achieving the 2030 targets that the banks will soon be making – let alone the larger net zero ambition – will require longer-term thinking and planning.
Here are three steps the banks and investors must take now to begin the hard work of actualizing their net-zero commitments by 2030 or sooner:
- Adopt time horizons for risk management
- Create financing plans for each sector
- Engage clients and borrowers starting now to enable the needed business transformation
U.S. banks and large asset owners and managers have taken some critical steps. In making these commitments, the banks and investors have sent a loud and clear signal: global emissions need to reach net zero by 2050 or sooner to limit the systemic and financial risks of the climate crisis. Perhaps even more importantly than that, though, is the recognition by some of the biggest players in our economic system that global shift to net zero emissions is one of the biggest investment opportunities of our time.
Now, it will take all of us, every stakeholder, policymakers and regulators alike, rowing in the same direction, to achieve this level of ambition at speed and scale.
