Banks finally appear to be getting serious about climate change. Over the course of the last twelve months, the industry’s biggest beasts have lined up one-by-one to unveil their climate commitments. Whether motivated by investor and regulatory pressures, perennial PR concerns, or a growing recognition of the financial risks of the climate emergency, 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.

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

While their 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.

Each bank is 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.

Net zero by 2050 may be the established benchmark for “alignment”, but the evidence from the IPCC is that this long-term goal alone is not enough. Banks must go further. To align with the IPCC’s more robust 1.5°C scenario, significant reduction in CO2 emissions must be achieved this very decade. Greater urgency and stronger methodologies are required to meet this ambitious – but necessary – benchmark.

It is banks with challenging early goals that ultimately boast the more credible climate change commitments. 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 considerable green investment twinned with a firm commitment to phase out fossil fuels.

The Big Four – by varying degrees – are falling short by these measures. By cutting through the jargon and looking for clear evidence of progress in the four highlighted key criteria, we can assess each major UK bank’s commitments, and see which are truly credible, and which are guilty of greenwash.

NatWest, the best of the Big Four

The NatWest Group’s pledge (under its former RBS moniker) last spring currently sets the standard. The bank committed to reaching net zero within its own operations by the end of 2020 through the offsetting of all scope 1, 2 and 3 (business travel) emissions, and to become climate positive (offsetting more carbon than is emitted) by 2025.

Crucially, it has promised to halve the carbon emissions of its financing activity by 2030 in alignment with the IPCC’s 1.5°C scenario – following in the footsteps of the Lloyds Banking Group, who had become the first major European bank to commit to this commendably short-term goal.

Given NatWest’s larger recent exposure (the proportion of funds invested in a particular asset or market) to fossil fuels, the ambition of their pledge outstrips even Lloyds’ own commitments. The credibility of the goal is further bolstered when you consider that NatWest cut its annual fossil fuel investment by 54% between the years 2018 and 2019 through the introduction of new energy financing policies – 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 or see their lending and underwriting grind to a halt.

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 – particularly given the fast turnaround – it’s subsequently been dwarfed by the investment promises made by HSBC as a proportion of total assets. 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”.

 

Ambitious Lloyds lacking in detail

The Lloyds Banking Group stands tall alongside NatWest with its commitment to halving its financed carbon emissions by the IPCC’s all-important 2030 date. The UK’s largest domestic bank can be applauded for its sense of urgency, and for being the first of the Big Four to announce such a step.

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 financing solutions, 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.

 

HSBC need to turn aims into action

HSBC’s strategy arrived with great fanfare last autumn. The bank will hit net zero in its own operations and supply chain by the end of the current decade. But it fails to match NatWest and Lloyd’s short-term 2030 commitments by only targeting net zero emissions across its financing activities by 2050.

The announcement came 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. Even taking into account the bank’s greater relative size to its three main UK rivals, this is a significant investment.

The bank further bolstered these commendable green financing goals by becoming a founder member of the Natural Capital investment Alliance – a Prince of Wales-backed initiative that encourages investment in ecosystem conservation, restoration, sustainable livelihoods, and other “nature-based solutions”.

HSBC has previously committed to establishing targets aligned with the Science Based Targets initiative (SBTi), and deserves credit for choosing to use the Paris Agreement Capital Transition Assessment Tool (PACTA) to develop sector-level pathways towards net zero “in line with the goals of the Paris Agreement.” The bank has also recently teamed with Carbon Intelligence to unveil a ‘Net Zero Guide” for business – highlighting the myriad benefits for SMEs in committing to net zero following SBTi principles.

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 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. Indeed, a group of investors have filed a climate resolution ahead of the upcoming AGM demanding more in the way of strategy and short-term targets.

Any assessment of HSBC’s climate goals will be clouded by the cold truth that the bank 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 fell last year, it still provided loans and underwriting to the tune of £14.25bn all to fossil fuels in the nine months up to October 2020.

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.”

 

Barclays still on the wrong path

banks net zero commitmentsBarclays 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. Last 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 and a further £175m investment in green innovation through its Sustainable Impact Capital Initiative. 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. While the bank deserves credit for its role in piloting the PACTA and for the development of its own BlueTrack methodology for measuring financed emissions, it has chosen to base its decarbonisation strategy on the IEA’s Sustainable Development Scenario (SDS). The bank 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. It’s not good enough. We need to see robust short-term targets – like those offered by NatWest and Lloyds – 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 provided £18.42bn in underwriting and lending to the fossil fuel industries in the first three quarters of last year – £150m up on 2019’s figures; numbers that make a mockery of the climate change commitments announced in the spring.

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 with much greater haste.

HSBC and Barclays’ colossal financing of fossil fuel over the course of last 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.

The financial sector has a major role to play in the climate change battle. The UK’s leading banks may all boast of being “Paris-aligned”, but that phrase is something of a smokescreen  – it can cover all manner of sins. 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.