The Climate of Business #64: Banking on decarbonisation - how to eliminate emissions in the banking sector?

Climate Change Reality

Biodiversity loss and climate extremes: study the feedbacks (Nature )

Climate change is causing narwhals to change migration Patterns (Bloomberg )

Tuvalu is recreating itself in the metaverse as climate change threatens to wipe it off the map (Euronews )

Here is what scientists are doing to save Florida's coral reef before it's too late (NPR )

It takes a village to map the urban heat island effect (Bloomberg )

Engineering just saved Venice from a flood, will it be enough for the uncertain future? (Independent )

Melting point: could ‘cloud brightening’ slow the thawing of the Arctic? (The Guardian )

Plants teach their offspring how to adapt to climate change, scientists find (EuroNews )

Business Climate Reality

Amazon vows to replenish all the water it uses for data centres (Bloomberg )

Puerto Rican towns sue Big Oil under RICO alleging collusion on climate denial (Reuters )

The week that could unravel the global oil market (Financial Times )

NASA cancels greenhouse gas monitoring satellite due to cost (AP News )

Netherlands to buy out farmers amid pushback over nitrogen goals (Bloomberg )

World’s first test run of a hydrogen jet engine a success (The Verge )

EU climate plan sacrifices carbon storage and biodiversity for bioenergy (Nature )

Global market for 'nature tech' poised to triple to $6B by 2030 (GreenBiz )

Reality Check

Today we talk about the banking sector and its vast potential to speed up the sustainable transformation.

Industry Profile??

Net Zero Industry Pledge: 2050

Part of Paris Agreements: Yes

Expected Growth?

• A study suggests that the global open banking market size is expected to reach USD 135.17 billion by 2030, growing at a CAGR of 26.9% from 2022 to 2030.
• It is estimated that the revenue potential for banks from debt investment in climate finance will be on average $100 billion annually through 2030.

Important bodies to know

Glasgow Financial Alliance for Net Zero or GFANZ is a coalition of financial institutions committed to net-zero. Founded in April 2021 by the UN Special Envoy on Climate Action and Finance Mark Carney and the COP26 presidency, in partnership with the UNFCCC Race to Zero campaign. Established both to create a forum for the challenges faced by the sector and expand the number of institutions committed to net-zero.

Net-Zero Banking Alliance convened by the UN Environment Programme Finance Initiative, part of the Race to Zero, joins together a global group of banks committed to aligning their lending and investment portfolios with net-zero emissions by 2050.

The Banking Industry & its Sustainability?

The finance sector, and in particular the banking one within finance, is deeply embedded in all other sectors. You cannot build a business without capital, often you cannot buy a car or a house without the financial support of an external body. Therefore the 'products' of a bank are its investments and other financing vehicles and activities. This is where also the majority of the industry emissions sit.? is where most of their emissions come from.?

With this in mind, banks need to make some key decisions for the future today.?

On one hand they need to finance the transition by supporting the green agenda with new financial instruments that enable the scaling of renewable energy, improvement of? infrastructure to make it more resilient, as well as the electrification of transportation. On the other hand, a bank needs to reassess its balance sheet by establishing practices for climate risk assessment, where projects and products fuelling the climate crisis are avoided or reduced in significance. With such commitment, banks can their lending and investments portfolios to align with a net-zero pathway.

Making such a commitment and establishing a net zero strategy for a bank isn't a matter of preference, given shareholders, stakeholders, legislation as well as consumers request transparency on the path towards net zero of a bank.?

Challenges to Net Zero Transition

As in any industry where the biggest levers for decarbonisation are within the hands of third parties, banks have a multitude of complexities to deal with to achieve net zero. Investments vary in terms of sectors, geography, legislation, consumer awareness,? climate risks, as well as industry dynamics and competitive preparedness to act on net zero. This makes the task burdensome and confirms that the more intrinsically motivated a bank is to transition the more likely it is it will succeed.?

What are the key challenges??

1. Accurate measurement of impact ?

Setting a robust and accurate baseline requires the establishment of clear definitions of what the bank will have to measure, which are then dependent on breadth of sector, asset class, and value chain coverages as well as relevant categories of greenhouse gases.?

Even after measurement, attribution of the emissions can be challenging to grasp, due to activities of legal entities, data sources and robustness of data strategy (such strategy often includes multiple data inputs, such as counterparties’ own data, third-party data sources, and where available, emissions estimates using public data sets).

2. Externalities?

Given the crucial role banks play in the strength and development of our economy, their net zero choices might have ripple effects in other domains, where for example an industry doesn't scale fast enough in a particular geography as the banking sector doesn't have the relevant investment vehicles available. This challenge is particularly critical given how instrumental the sustainability agenda of banks can be to the global net zero goal.??

3. Fossil fuels assets?

A report called “Banking on Climate Chaos 2021” revealed that since the Paris Agreement was adopted, banks have further supported with over $3.8 trillion the fossil fuel industry, meaning that fossil fuel financing was higher in 2020 than in 2016.

The Path to Net Zero

Short-term

Talent and Expertise

Due to the complexities around climate risk management and decarbonisation, deep and practical expertise internally on climate topics is a must in order to be able to determine and help achieve the required goals to have an impact.

A bank's team members should be knowledgeable on not just the Paris-aligned requirements and local legislations, but also on the opportunities and risks associated to the transition.

Client and Stakeholder Engagement

• Introduction of client benchmarking
• Each bank should design and implement clear client-engagement policies to ensure clients transition to low-carbon activities, including a defined timeframe for the transition and a declaration of what conditions will lead to dismissal. Prudence is also required when accepting new clients and engaging in new transactions.

Long-term

It would be an understatement to say banks have one of the most important roles in the sustainable transition of our economy. They can facilitate both the growth and scaling of sustainable alternatives and innovations, but also pave the way for their clients, often other businesses, to decarbonise by providing them with tangible guidance on the process.

It is estimated that $9 trillion per year of capital expenditure until 2050 could be necessary in transport, buildings, infrastructure, power, agriculture, industry, and many more industries in order to achieve our net zero goals.

Banks can be critical for this investment to be made available against clear commitments on a timely transition.

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