An Essay from Banking on Climate Chaos

posted by Jason Disterhoft

This blog was originally published as an essay in Banking on Climate Chaos: Fossil Fuel Finance Report 2021, published in March 2021 by Rainforest Action Network, BankTrack, Indigenous Environmental Network, Oil Change International, Reclaim Finance, and Sierra Club. See the full report for a chart analyzing banks’ financed emissions commitments.

The banks evaluated in Banking on Climate Chaos 2021 are among the world’s major drivers of climate chaos. Their single biggest contribution to climate change is their financing of fossil fuels, which this report has detailed. Banks’ most urgent task in fighting the climate crisis is therefore ending support for the expansion of fossil fuels and committing to a 1.5°C-aligned phase-out of fossil fuel financing. On that score, while banks have taken some important steps, especially on coal, their policies remain insufficient, as this report has also shown. 

The current wave of bank commitments to “net zero by 2050,” as well as related policies like measuring and disclosing financed emissions, must be seen in this context. These steps are no substitute for, and must not delay adoption of, policies on fossil fuels. No bank making a climate commitment for 2050 should be taken seriously unless it also acts on fossil fuels in 2021 — banks must immediately end support for fossil expansion, and commit to the date by which their fossil financing will reach zero. Any bank that makes a net zero by 2050 commitment and treats that as a license to continue with fossil fuel financing business as usual should, and will, be seen as greenwashing. (While it is beyond the scope of this report, the same applies to bank financing of deforestation, given that deforestation is the second-leading cause of climate change after fossil fuels.)

Furthermore, no additional analysis is necessary for banks to know that curbing their fossil fuel financing will reduce their financed emissions, and in fact it is the most reliable and shovel-ready way for them to do so. While establishing financed emissions standards will be important going forward, the climate simply will not offer us a grace period while these are implemented. 

In assessing financed emissions commitments — of which “net zero by 2050” is currently the most visible element — we should recall where “zero” and “2050” come from. At the Paris climate conference in December 2015, the climate movement, led by island nations and other communities on the front lines of the climate crisis, raised the world’s ambition and established staying below 1.5°C temperature rise as a global goal enshrined in the Paris Agreement itself, winning a commitment for a special Intergovernmental Panel on Climate Change (IPCC) report on meeting that goal. In October 2018, that special report underlined the moral urgency of limiting global warming to a maximum of 1.5°C and established that the most prudent pathway for doing so requires global emissions to be almost halved from 2010 levels by 2030, and brought to effectively zero by 2050.

To limit global warming to 1.5°C, every major emitter must align its emissions trajectory with those benchmarks. That includes global financial institutions, especially given the Paris Agreement’s aim of “making finance flows consistent with a pathway towards low greenhouse gas emissions.” The current wave of “net zero by 2050” commitments represents a tacit acknowledgment by banks that they too are major emitters. This is long overdue. In fact, for years banks have resisted acknowledging their harmful climate impact (their contributions to climate change) at all, preferring to instead focus almost entirely on climate risk (their vulnerability to climate change).

It is also vital to interrogate the “net” in “net zero.” The 2018 IPCC report notes that some degree of negative emissions will be necessary for climate stability. But, as an important recent report on net zero from a coalition of climate justice groups, including Indigenous Environmental Network, reminds us, “Right now, the only approaches to deliver real carbon removal are based in nature: ecosystem restoration and ecological management of working forests, croplands, and grasslands.” The report, “Chasing Carbon Unicorns,” calls for “real zero” as a north star: “reducing emissions to as close to zero as possible and using ecological approaches to remove residual emissions.” In fact, a precautionary approach to trajectory-setting demands exactly this: banks must not rely on negative-emissions technologies which we simply cannot assume will succeed at scale (and bank regulators must ensure that banks do not rely on hypothetical future technologies).

In practice, the need for some degree of negative emissions has been seized on by corporations as an excuse to delay real cuts in emissions, to set emissions reduction targets that fall far short of what the science demands, to rely on assumptions about future carbon capture that are absurd on their face, and to lock in emissions sacrifice zones. Furthermore, many of these corporations — including many of the banks in the scope of this report — are actively fueling deforestation, destroying the single most crucial natural carbon sink. (The human rights section of Banking on Climate Chaos 2021 explores this critical issue of the “net” in “net zero” in more detail.)

If long-term financed emissions commitments are to be more than a fig leaf for delayed action on climate change, they must urgently be supplemented to actually bring banks in line with a 1.5°C-aligned trajectory. “Principles for Paris-Aligned Financial Institutions,” released in September 2020 by more than 60 climate and rights groups from around the world, offers a number of criteria for assessing financed emissions policies. The following presents an initial analysis of the current state of play, based on those Paris Principles, with the clear takeaway being that banks’ present policies fall dangerously short.

    • Commitment to zero out financed emissions. Banks must commit to zeroing out their financed emissions by 2050 at the latest.As detailed above, this is one of the areas where banks have been most active, with 17 banks of the 60 in the scope of this report at the time of publication making “net zero by 2050” commitments. And indeed, banks are major emitters, and they must zero out their emissions by 2050 at the latest. The shortcomings are in delaying cuts in emissions, and in dangerous reliance on the “net” in “net zero.”

 

    • Intermediate commitment to cut financed emissions. Banks’ financed emissions must decline sharply year-on-year from 2021 onward, and they must make interim commitments of at least halving their financed emissions by 2030 at the latest.
      It is not only the endpoint of the emissions curve that matters — so does the area under the curve. We are long past the time for any further grace periods; serious cuts in emissions are necessary starting immediately, with 2030 a crucial midterm checkpoint. Furthermore, banks’ intermediate commitments — like the commitments of all major emitters — must be made in absolute terms, to ensure they are doing their part to cut global greenhouse gas emissions. While intensity commitments may be a stepping-stone to absolute emissions commitments, they are not a substitute.

      NatWest and Lloyds have committed to cutting climate impact in half by 2030.

 

    • Disavowal of discredited “net” schemes: credits or offsets that violate human rights, particularly the rights of Indigenous Peoples; excuse continued fossil emissions; or rely on unfeasible schemes or hypothetical technologies.

      As noted above and explored further in the next section, the “net” in “net zero” is being treated by some fossil fuel companies as a license to set emissions targets that fall short of what the science demands, based on copious offsetting or absurd assumptions about future carbon-capture schemes. The scaling up of carbon markets amplifies the threat. Almost no bank has so far disavowed such schemes, though we have seen a pair of limited steps in the right direction. In a resolution not yet ratified by shareholders at press time, HSBC proposes to use scenarios “which are not overly reliant on negative emissions technologies.” Barclays, the #1 banker of fossil fuels in Europe by a 32% margin, has declared that it aims to not rely on negative-emissions technologies that do not already exist.

 

    • Commitment to drop clients that don’t align with a 1.5°C trajectory.Banks must require all fossil fuel clients to publish plans to align their emissions trajectories to align with 1.5°C, including immediately ending expansion of fossil fuels and committing to time-bound fossil fuel exit strategies. And banks must commit to drop clients that do not do so.A number of banks, including Crédit Agricole, have policies of this sort regarding their coal clients. On oil and gas, so far only NatWest has made any commitment along these lines; while its pledge to drop major oil and gas clients that do not align with the Paris Agreement is promising, the criteria have so far not been made public.

 

  • Measure and disclose financed emissions.

    As noted above, while no further analysis is needed for banks to know that fossil fuel financing is a central source of their financed emissions, and the climate does not offer a grace period on cuts to emissions while standards are established, it will be important to set up and strengthen financed emissions methodologies going forward. As of the time of publication, 14 of the 60 banks in this report are now members of the Partnership for Carbon Accounting Financials (PCAF), the leading finance industry–led methodology for measuring and disclosing absolute financed emissions; Morgan Stanley is a member of the steering committee. Going forward, PCAF’s scope must expand from lending and investing to also include banks’ capital markets activity. Barclays has committed to account for the impact of its underwriting as well as its lending and investing, and also to account for the full value of revolving credit facilities, regardless of how much clients draw them down. But the fact that Barclays remains Europe’s biggest banker of fossil fuels by a 32% margin, illustrates how much immediate work it still has to do.

    By contrast, measurement methodologies that are limited to emissions intensity are insufficient; as noted above, intensity-based intermediate commitments are insufficient, and what a bank measures determines what it will cut.  

As UN Secretary-General António Guterres said in February 2021, “Long-term commitments must be matched by immediate actions to launch the decade of transformation that people and planet so desperately need.” This applies to banks just as it does to any major emitter. The UN Climate Change Conference in Glasgow in November, COP26, is a clear deadline for demonstrating that net zero by 2050 policies are not greenwashing by pairing them with immediate action on fossil fuels.