5 top tips for net zero for financial firms

Happy Earth Day! Huge announcements on net zero flying in from all corners, with banks, insurers, asset owners and investment managers all piling in. Absolutely brilliant to see and also absolutely critical for achieving the climate goals we have to.

But, how to actually do this in practice? Recently, Climate Action 100+ (CA100) have released the first ever net zero benchmark, a project I was particularly proud to work on with EY colleagues, which tracks how the largest corporate greenhouse gas emitters. This has been followed with investor expectations for banks. The Transition Pathway Initiative (TPI) are another organization assessing progress on net zero and recently released their State of Transition 2021 Report.

It is clear to see the direction of travel here - firms will be measured and assessed for progress against their net zero pledges - and financial service firms can look forward to greater scrutiny in this area going forward.

Here are my top 5 actions for financial services firms on net zero - do you agree?

Top 5 actions for financial services (FS) firms on net zero

1.      Understand how your portfolio is tracking against the framework criteria

Leverage the CA100+ and TPI criteria, to understand how your portfolio aligns to net zero. It provides the building blocks for assessing your portfolio companies, and should also be used to assess yourself.

2. Implement a clear net zero stewardship and engagement strategy, focusing on material emitters

Develop a clear net zero policy around the companies you finance or insure, that recognizes progress over perfection, encourages your corporate clients to decarbonise and focuses on the material emissions in your book. The net zero frameworks let you pinpoint areas where companies or lenders are not making enough progress and can be applied broadly across your corporate book.

3. Apply the net zero criteria to your own climate strategy

The frameworks provide a comprehensive view of what a climate strategy should look like. They go beyond financed emissions and climate targets, including items like Just Transition, investment and incentives. If you're not meeting the CA100 criteria yourself, then expect challenge in the future.

4. Incentives drive action and must be a component of your plan

One of the dimensions assessed in the Climate Action 100+ benchmark is whether or not executives are incentivised to deliver net zero or not. Incentives drive action and many leaders have already begun incorporating net zero into remuneration strategies. Your net zero commitments will lack credibility if this isn’t evidenced.

5. Link your engagement strategy to your capital decisions, with clear red lines

If you have committed to net zero then it is incongruent for you to continue to finance the activity of companies that are not willing to transition. This could include, for example, a dynamic exclusions policy linked to the adequacy of net zero commitments, meaning that you do not re-finance the debt of companies that don’t show improvement.