Banks can achieve net-zero pledge by 2050. Here’s how

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This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: John Colas, Partner; Vice-Chairman, Financial Services, Americas, Oliver Wyman Group (MMC)

  • The UN group, Net-Zero Banking Alliance, have pledged to reach net-zero carbon emissions across their lending portfolios by 2050.
  • Banks can influence corporate behaviour by offering loans and investments that factor in climate-related risks.
  • Only through collective action across the public and private sector can we tackle the climate crisis.

The climate challenge has been so difficult to overcome in part because of what economists call “externalities” or problems outside the economic system that can’t be addressed by one company or nation on its own. Carbon emissions are by far the global economy’s biggest externality, and as a result, no single group has been held accountable for reducing them.

Banks are stepping up to the challenge. The new UN-convened group known as the Net-Zero Banking Alliance brings together 53 banks from 27 countries with $37 trillion in assets. Their historic pledge is to reach net-zero carbon emissions across their lending portfolios by 2050. It’s part of the broader Glasgow Financial Alliance for Net Zero, which also includes asset managers shepherding more than $70 trillion of the world’s assets.

What makes the pledges so significant is that not only have banks demonstrated a high commitment to the issue by placing their credibility on the line – they also have invited the world to check their progress along the way in shifting capital toward companies making the net-zero transition.

Banks are especially well suited to influence corporate behaviour. Not only do they make loans to corporations – they also underwrite corporate stock and bond offerings and manage investment portfolios. They have enormous expertize across their organizations that they can tap to help their clients make the transition and communicate with stakeholders such as regulators, shareholders and communities.

But banks can’t push mankind to net-zero carbon emissions by themselves. Even in Europe, which is far ahead of the US, there is a $4 trillion mismatch between the available pool of money and the corporations that currently qualify as Paris-aligned, according to a recent report by CDP-Europe and Oliver Wyman.

€4 trillion ambition gap.
€4 trillion ambition gap. Image: Oliver Wyman.

How can banks achieve net-zero?

For banks to make good on their pledges and help reduce global carbon emissions meaningfully, the broader incentive systems driving global business activity need to be realigned in numerous ways.

First, companies need a universal way to estimate the volume and cost of the carbon they emit. Right now, it’s a mixture depending in part on jurisdiction. Forty countries and 20 cities and regions have implemented carbon prices, charging companies a tax or fee for each ton of carbon emitted. But the prices vary widely.

A global carbon price, driven by collective policy actions and market dynamics, would provide much needed clarity. But getting one won’t be easy since there is no governing body powerful enough to enforce this across the globe. If some prominent international body – for example the G20 – were able to reach an agreement among member nations, that could help set the tone for the rest of the world.

Likewise, banks need international agreement on the proper accounting practices for carbon so they can all measure their progress the same way. No one is entirely sure how much carbon companies are producing because the data aren’t readily and universally available. Banks will need to develop standards for their own use, but those might differ.

Authorities could help by creating standards so that all companies use the same language when reporting their carbon activities. The International Financial Reporting Standards Foundation, based in London, is aiming to create such standards by mid-2022, and the SEC has invited public comment for climate disclosure rulemaking.

Skeptics will note that central banks weren’t created to enforce climate policy. But they do seek financial stability. Banks face major risks from climate change, such as loans made to companies in coastal areas at risk of rising ocean levels and tidal flooding. If one bank takes a big hit, others will suffer.

What’s the World Economic Forum doing about climate change?

Climate change poses an urgent threat demanding decisive action. Communities around the world are already experiencing increased climate impacts, from droughts to floods to rising seas. The World Economic Forum’s Global Risks Report continues to rank these environmental threats at the top of the list.

To limit global temperature rise to well below 2°C and as close as possible to 1.5°C above pre-industrial levels, it is essential that businesses, policy-makers, and civil society advance comprehensive near- and long-term climate actions in line with the goals of the Paris Agreement on climate change.Global warming can be beaten thanks to this simple plan

The World Economic Forum’s Climate Initiative supports the scaling and acceleration of global climate action through public and private-sector collaboration. The Initiative works across several workstreams to develop and implement inclusive and ambitious solutions.

This includes the Alliance of CEO Climate Leaders, a global network of business leaders from various industries developing cost-effective solutions to transitioning to a low-carbon, climate-resilient economy. CEOs use their position and influence with policy-makers and corporate partners to accelerate the transition and realize the economic benefits of delivering a safer climate.

Contact us to get involved.Mission Possible Platform: Delivering industry pathways t…

France’s central bank governor told the Financial Times in June that “climate-related risks are part of financial risks. And so for financial institutions and supervisors as well, it’s not a nice-to-have. It’s not part of [corporate social responsibility]. It is a must-have and it’s part of risk management.” The Bank of England’s Prudential Regulatory Authority now asks banks to measure their climate exposures, while the European Central Bank is running a climate stress test and French regulators launched a pilot exercise in which banks and insurers measured their financial exposure to climate risk to 2050.

Banks also need the ability to track carbon emissions around the world. While company emissions data are available from multiple sources, these information sets aren’t exhaustive. Imagine a single, perfect database that not only would help banks steer capital appropriately but also would help scientists model carbon levels and atmospheric conditions more robustly and come up with a real-time global carbon budget that could be constantly monitored. We are seeing breakthroughs in this arena through low-orbit satellites monitoring methane and the emergence of tech startups that measure and track emissions.

In addition to a stronger emissions database, the net-zero future won’t come about without a more coherent global approach to climate policy. While banks can dispense advice and provide capital, companies must embrace the net-zero agenda – and they might need incentives such as tax breaks, subsidies, public contracts or research to be nudged in that direction.

For example, an airline might find it uneconomic to reach net-zero emissions – but if governments were to require that half their aviation fuel come from sustainable sources, their progress would rapidly accelerate. Think of it like a three-way partnership: the public sector, together with banks and companies, can help create and finance new solutions.

Banks are taking a commendable step in the climate fight. But if the rest of the world fails to figure out the correct financial incentives, metrics and policies, their ambitions will remain forever out of reach – even as the mercury continues to rise.

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