Many banks in the last 12 months have made significant climate commitments, however, a lack of consistency in how emissions are assigned to banks make comparisons challenging.
While the commitments read well – and will satisfy less discerning customers and investors – in reality, there is a significant divergence in ambition between the four major UK banks. Each may have belatedly joined the race to reduce their exposure to climate risk, but they’re all taking very different routes, and some are not moving nearly fast enough.

This was the year banks finally appeared to get serious about climate change. One by one, the big beasts of finance lined up to unveil their climate commitments. Whether motivated by investor pressure, genuine altruism, or a desire to clean up the industry’s perennial PR problem, the need to take a firm stance has become a business imperative.

It’s a welcome step – though, frankly, long overdue. According to the Rainforest Action Network, the world’s leading banks have pumped well over £2tn into fossil fuels since the landmark signing of the Paris Agreement, and our own industry giants here in the UK are among the worst offenders.

Yet the Big Four of British banking – HSBC, Barclays, Lloyds and NatWest – have each taken significant strides forward over the past twelve months. Keen to showcase their green credentials, all have committed to hitting net zero across both their direct operations and – crucially – their financing activities by 2050.

They are all at pains to declare their plans as being fully “Paris-aligned” – working towards the goal of limiting the increase in global average temperatures to well below 2°C. However, that increasingly trite phrase doesn’t exactly tell the whole story.

Comparisons between the four Banks climate ambitions are confusing: a lack of consistency in how emissions are assigned to each bank within TCFD disclosures. However, by applying some broad criteria – we can cut through the jargon and assess the credibility of each bank’s ambitions.

Ambitious Lloyds lacking in detail

greening finance - lloydsBack in January, the Lloyds Banking Group became the first major European bank to commit to the goal of at least halving its financed carbon emissions by 2030. Aligned with the IPCC’s 1.5°C scenario, it’s a commendably short-term goal from the UK’s largest domestic bank: credible and urgent in equal measure.

The news also came with the promise to “support businesses by financing their investments in the green economy”. Though no firm numbers were offered, we can expect more in the way of green bonds, and perhaps an expansion of the bank’s Clean Growth Finance Initiative that allocates discounted finance to clients committed to a lower carbon future, and has lent in excess of £6bn over the last four years.

But – perhaps inevitably given the lack of detail provided – serious questions remain.

The plan is vague about the bank’s net zero strategy, only confirming that it’s in step with the Paris Agreement and the UK’s own net zero goals. And while Lloyds has previously committed to stop lending to companies that take 30% of their revenue from coal or mining, alongside measures to halt financing new coal power stations and Arctic oil and gas exploration, there was no sign of additional extensions to exclusion thresholds.

Anyone hoping for a promise to completely phase out coal, oil, and gas financing would have been left disappointed. The bank’s Head of Sustainability James Wilde recently confirmed on edie’s SustyTalk series that the intention is to “support the transition for sectors that are more exposed” and to “help those sectors abate” – a plan to collaborate, rather than clamp down with tangible deadlines.

 

NatWest the Best of the big four

greening finance - natwest

The NatWest Group’s pledge (under its former RBS moniker) arrived the following month. The bank committed to reaching net zero within its own operations by the end of the year, and to become climate positive by 2025. Like Lloyds, it too promised to halve the carbon emissions of its financing activity by that all-important 2030 date.

Given the bank’s larger recent exposure (the proportion of funds invested in a particular asset or market) to fossil fuels, the ambition of this pledge, therefore, outstrips even Lloyds’ own commitments. The credibility of the goal is further bolstered when you consider that NatWest cut – an indication that this has been the intended direction of travel for some time.

Most encouragingly, the plan warned of a withdrawal of financial support to companies within the brown economy and offered quantifiable targets for the phasing out of fossil fuel funding. NatWest confirmed that it intends to phase out coal investments entirely by 2030. The bank will put an end to lending to companies with more than 15% of their activities tied to coal by the close of this year. It’s also put the oil and gas sector on notice- imposing a hard deadline of the end of 2021 for companies to make concrete and credible transition plans for alignment with the Paris Agreement.

Where the plans perhaps fall short is in the bank’s commitments to green financing. While an additional £20bn in funding for climate and sustainable finance before the end of 2022 is nothing to sniff at, it’s subsequently been dwarfed by the investment promises made by rivals HSBC and Barclays. We would hope to see more detail too about its chosen decarbonisation pathway, with the bank only currently claiming that they will “do what is necessary to achieve alignment with the Paris Agreement”.

 

Barclays still on the wrong path

greening finance - barclaysBarclays has long been a magnet for climate protesters. And with good reason. It’s Europe’s largest fossil fuel financier, and the seventh-largest in the world, with over £100bn provided to the fossil fuel industry in the years since the Paris Agreement. In March, it announced significant steps to begin making amends.

In a commendably detailed white paper, the bank outlined plans to hit net zero across its financing activities by 2050, alongside the announcement of a planned £100bn of green financing to be delivered over the next decade. Barclays was also the first of the Big Four to give its climate commitments some firm legal footing through a shareholder resolution later in the year.

But there are gaping holes in the bank’s strategy.

There’s been no firm date announced for the bank to reduce its exposure to coal to zero, with a yawning transition period offered to clients phasing out legacy coal-reliance, and – as highlighted by investor pressure group ShareAction – an inadequate revenue-based exclusion threshold that fails to omit a number of the most polluting companies. Its lending policy also continues to tiptoe around the tar sands sector – enabling devastatingly carbon-intensive developments utterly out of step with a Paris-compliant future.

Its biggest flaw however is arguably its chosen decarbonisation pathway. Barclays will base its decarbonisation strategy on the IEA’s Sustainable Development Scenario (SDS), and readily admits that it “expect(s) to need negative emissions technologies to offset any residual gap to net zero”. The SDS has been exposed as being over-reliant on these hypothetical technologies, and is now believed to fall some twenty years short of Paris’ 2050 target. We need to see robust short-term targets instead.

ShareAction has stated that “Barclays’ refusal to withdraw support for the most polluting companies and fuels, and commitment to engage with its clients on timelines that are clearly incompatible with the Paris goals raise doubts about the bank’s ability to meet its net zero ambition”.

And those doubts grow ever greater when you consider Barclays’ investments in 2020. The Rainforest Action Network revealed that the bank has provided £18.42bn in underwriting and lending to the fossil fuel industries in the first three quarters of this year – £150m up on 2019’s figures; numbers that make a mockery of the climate change commitments announced in the spring.

 

HSBC need to turn aims into action

greening finance - hsbcHSBC was the last of the heavy-hitters to unveil its strategy, late to the party in October. Like Barclays, it targeted net zero emissions across its financing activities by 2050, and is looking to hit net zero in its own operations and supply chain by the end of the current decade. The bank bolstered these goals with a headline-grabbing pledge of between £563bn and £750bn in support for clients making the transition to low or no carbon over the coming decade, and plans to donate some £75m towards climate innovation ventures and invest a further £75m in clean technologies.

But while its green financing promises in particular are commendable, the overall plan leaves plenty to be desired. It hasn’t escaped people’s notice that the statement contains plenty of ‘aims’ rather than firm commitments. And without a binding legal commitment, you’d be forgiven for wondering if these were simply empty words. Banking activists Market Forces were particularly scathing: “HSBC’s statement that they’ll be ‘net zero by 2050’ is like someone saying they’ll go on a diet by 2050 – they hope it sounds impressive, but it’s meaningless.”

The bank’s promise to “apply a climate lens to financing decisions… taking into account the unique conditions for our clients across developed and developing economies” certainly appears worded to secure some wiggle room in the heavily coal-reliant Asian market. The plan is noticeably lacking in detail, with not so much as a mention of financing restrictions, exclusion thresholds, or timeframes to phase out clients reliant on fossil fuels.

HSBC stands behind only Barclays as Europe’s second-largest financier of fossil fuels, with just shy of £80bn lent to the industry since 2016. It increased its year-on-year financing by a shameful 34% between 2018 and 2019, and though the number has fallen this year, it has still provided loans and underwriting to the tune of £14.25bn in the nine months up to October.

Rainforest Action Network’s Hana Heineken said it best: “This net-zero commitment is welcome, but if HSBC is serious about dealing with the climate crisis, then it needs to stop funding fossil fuel expansion and forest destruction now. Anything less is greenwash.”

Much more to be done

Make no mistake: the Big Four’s announcements represent genuine progress. These are positive steps for the sector. Even those who have not gone far enough are at least stumbling in the right direction. However, they must all move faster, and with greater transparency.

Though each bank can now boast of being “Paris-aligned”, there is a clear credibility gap between some banks’ commitments and what is actually required.

Considerable green investment must be twinned with a firm commitment to phase out fossil fuels. So far, only NatWest has delivered on this score. Banks must also align their strategies with more rigorous pathways towards net zero – by using the likes of the SBTi methodology over the discredited SDS scenario.

And finally, we need to see far more urgency. Net zero by 2050 is not enough. HSBC and Barclays’ colossal financing of fossil fuel over the first three quarters of this year – even as their sparkling new climate plans sit proudly on their websites to reassure consumers – is proof that change can be kicked into the long grass. Short-term progress is required, and it is the banks with challenging early goals that are ultimately the more credible.

The financial sector has a major role to play in the climate change battle. The phrase ‘Paris-aligned” can cover all manner of sins, but banks can’t get away with simply paying lip service to the goals of the Paris Agreement.

Here at Avieco, we help forward-thinking banks do their bit. Whether it’s calculating your financed emissions, helping you understand your exposure to climate risk, or working with you to set tangible targets, Avieco is ready to ensure your firm’s climate commitments pass the credibility test.

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We get that change is not easy. But we must be brave, challenge old ways, set new habits, embrace new thinking.

sustain-ability.
more than a word.

We get that change is not easy. But we must be brave, challenge old ways, set new habits, embrace new thinking.