Bankers Warned of ‘Credibility Issue’ Amid Implausible CO2 Goals

(Bloomberg) -- Bankers trying to get their net-zero CO2 targets certified now face hard deadlines to reduce capital flows to fossil fuels.

The Science Based Targets initiative, which is backed by the United Nations, plans to only verify emissions targets that include clear limits on financing oil, gas and coal, said Nate Aden, who heads SBTi’s financial industry project. The stricter process will also apply to asset managers.

The decision follows evidence that the finance industry has continued to channel hundreds of billions of dollars into the world’s biggest polluters, despite touting net-zero goals. Over the past 12 months, banks provided more than $600 billion in capital to oil, coal and gas producers, roughly unchanged from the previous year, according to Bloomberg data. And major asset managers still hold about $550 billion in fossil-fuel developers, according to an analysis by Reclaim Finance.

“We are in a situation now where you’ve got some of these net-zero initiatives that aren’t taking a very rigorous approach here, and it is starting to become a credibility issue,” Aden said in an interview.

One Year On

It’s a year since the Glasgow Financial Alliance for Net Zero was created with the stated goal of getting the global finance industry to commit to net-zero emissions by mid-century. By November, at the COP26 climate summit in Scotland, firms representing a combined $130 trillion in assets had signed up. (Michael R. Bloomberg, founder of Bloomberg News parent Bloomberg LP, is co-chair of GFANZ).

But with no formal structure for policing such claims yet in place, SBTi certifications are fast becoming the best tool stakeholders have to assess how signatories are doing. Roughly 450 financial firms have signed up to GFANZ. For now, only 25 firms have had their near-term emissions plans certified by SBTi, with another 100 in the pipeline, according to Aden.

The biggest provider of fossil-fuel loans over the past 12 months was JPMorgan Chase & Co., followed by Wells Fargo & Co., according to Bloomberg data. The biggest underwriter of bonds for oil, gas and coal producers was Citigroup Inc., followed by JPMorgan. All three banks are GFANZ signatories.

Aden said SBTi is discussing with the finance industry the extent to which it can fall back on carbon offsets to live up to net-zero goals.

“There is still ongoing confusion, I think, and a lot of it comes down to the role of offsets in any sort of target or climate ambition formulation,” he said. “This is something that is consistently varying, for example, with the net zero initiatives where they allow offsets in a way that SBTi does not.”

‘Blunt Instrument’

A fossil-fuel deadline might be seen as something of a “blunt instrument,” Cynthia Cummis, technical director and founding partner of SBTi, said in an interview earlier this year. But it’s also a “simple way to set a target,” instead of “just having an emissions based target, which is more complicated.”

SBTi’s decision to enforce a stricter certification process comes amid increasingly dire warnings from scientists that time is running out to fight climate change. At the current rate of warming, the planet now faces temperatures rises that will be more than twice the critical limit of 1.5 degrees Celsius. It’s a trajectory that the UN has characterized as catastrophic. 

SBTi wants to set a 2030 deadline for financial firms to divest from coal and a 2040 deadline to exit oil and gas firms that don’t commit to net zero. Aden said the group is also likely to demand disclosure of all fossil-fuel investments and an immediate stop to new fossil-fuel investments, in keeping with International Energy Agency recommendations. Final wording is expected early next year, he said.

The deadlines proposed by SBTi would give asset managers and bankers time to first use their influence to try and force oil and gas companies to change, in part to avoid the sale of assets to new owners that aren’t likely to reduce emissions.

Portfolio ‘Shuffling’

“The idea is that there is engagement of the fossil-fuel investees and clients, to get them to be 1.5 aligned,” Aden said. “For those that are resistant or unwilling or unable to do that, then there is a divestment lever that we expect to be pulled.”

Otherwise, Aden said, there’s a risk of “portfolio shuffling,” something that’s already happening with “various oil fields that have been passed around among the large companies.”

“Generally, we feel that just having a company divest some emissions-intensive asset isn’t really the long-term solution,” he said. “It is really about permanent decommissioning or transformation of the particular asset.”

SBTi is also working on a net-zero verification program for the oil industry, a project complicated by calculations around emissions of oil-related products like plastics and of the benefits of moving from coal to gas. 

Russia’s invasion of Ukraine, which has triggered a new wave of energy security risks and exacerbated an existing energy crisis, has also complicated the race to net zero. But SBTi’s general posture is “apolitical,” Aden said. 

“Clearly it’s not going to reduce emission that we are doing more fossil-fuel production,” he said. “The science doesn’t change.”

(Adds details on bank financing, comment on offsets)

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