On the Path to Net-Zero: Translating Ambitions to Actions for Financed Emissions

On Wednesday, 27th October, the United Nations Environment Programme Finance Initiative (UNEP FI) released a report with bold recommendations to the G20 calling for ‘credible net-zero commitments from financial institutions. This report could not have come at a better time, considering that, over the last year, there's been a significant amount of progress in terms of developing dedicated tools for calculating the portfolio emissions of financial institutions.

Financed or portfolio emissions are the largest portion of the greenhouse gas footprint of financial institutions, more than 700x greater than operational emissions, according to a CDP report in April 2021. If entities in the sector intend to make any meaningful contribution to tackling climate change, this is where to win the battle. By mobilizing and directing capital towards all economic sectors, financial institutions facilitate the reduction of emissions emanating or avoided by their capital allocation decisions and other services they provide.

The industry has started responding to the host of push and pull factors driving the global decarbonization agenda as evidenced by high-level ambitions. Based on a Climate Policy Initiative (CPI) research published this month, Financial institutions committed to net-zero now number 301 (controlling about USD 93.3 trillion AuM), and climate commitment announcements in 2021 have risen by 45% compared to 2020.

Good as all this may be, intermediary and concrete time-bound science-based targets, which are needed to assess the progress of these entities are still lagging. The fact that only 10% of the entities with net-zero ambitions have released interim emission reduction targets according to CPI reinforces the timeliness of the recommendations of UNEP FI, notably points 2 and 3 (see the table above).

Problems that used to stand in the way of the industry, such as the lack of harmonized GHG accounting standards and a relevant decarbonization pathway, are now being addressed by the Global GHG Accounting & Reporting Standard for the Financial Industry developed by the Partnership for Carbon Accounting Financials (PCAF), and the Financial Sector Science-Based Targets Guidance of the SBTi.

It is also worth highlighting that these tools also touch upon questions of scopes of emissions and sectoral boundaries that were also raised in the recommendations of UNEP FI. The PCAF GHG standard, for instance, requires accounting for Scope 3 emissions starting from 2021, while the SBTi guidance stipulates an end to thermal coal facilities by 2030 and an annual reporting of investments and lending to fossil projects and companies.

Apart from these two, 2° Investing Initiative has also developed the Paris Agreement Capital Transition Assessment (PACTA) for measuring emissions and scenario analysis (see the short illustration above).

The world needs to accelerate the pace of reducing GHG emissions, at least by the rates seen in 2020 if we must cap global temperature rise to 1.5°C as recommended by the special IPCC report.

Can we continue relying on voluntary actions by financial institutions, or should there be additional legislative/regulatory push following the UNEP FI’s recommendations to the G20? Voluntary actions have stalled real progress, and some do lack credibility. There will be a need to turn on the regulatory heat to move from high-level ambition to traceable actions.