(Tuesday 8th November) Inadequate decarbonisation targets set by a third of the banks in the Net Zero Banking Alliance (NZBA) risk compromising the alliance’s commitment to net zero by 2050, reveals new data published by responsible investment NGO ShareAction on the eve of Finance Day at COP27.

Its research into 43 of the alliance’s biggest banks that are the largest financers of fossil fuels found that while the majority have set at least one sector-specific target for reducing their greenhouse gas (GHG) emissions, crucial gaps remain.

These include a lack of interim overarching targets to ensure emissions reductions are on track for 2030 and a failure to include emissions-heavy sectors such as chemicals and agriculture or capital markets activities in target setting. There are also problems with inconsistent metrics, for example widespread use of intensity over absolute emissions reduction and varying approaches to fossil fuel targets, that mean they fail to capture their full climate impact.

The NZBA is a member of the Glasgow Financial Alliance for Net-Zero (GFANZ), which recently came under fire for dropping a requirement to comply with UN-backed Race to Zero guidelines. This new research suggests the alliance must do much more to ensure its members have rigorous and credible climate strategies in place.

Xavier Lerin, Senior Research Manager at ShareAction, said: “Every member of the NZBA has pledged to align their portfolios with the goals of the Paris Agreement and keep warming within 1.5°C – yet our research shows that their target-setting is falling short.

“Banks have a vital role to play in financing the transition to net zero that people around the world are counting on for a liveable future – they should act now to ensure their decarbonisation goals are far more ambitious. The NZBA needs to demonstrate stronger leadership to keep members on track, for example through compliance monitoring and an accountability mechanism.

“It’s clearer than ever that we can’t rely on voluntary initiatives alone – governments should step up with robust regulation to ensure companies are taking meaningful rapid action to get us to a 1.5C world.”

Key findings relating to the 43 banks analysed in this research:

Only 16 per cent have set interim overarching targets

The most direct way for financial institutions to demonstrate their commitment to meet net-zero by 2050 is to set overarching interim emissions targets for 2030 – or sooner. Despite this, only seven of the 43 banks (16 per cent) analysed have done so. Lloyds Banking Group, NatWest, Nordea, BPCE, La Banque Postale, Crédit Mutuel and KB Financial Group all show leadership in this area, but inconsistent methodologies behind targets makes them difficult to compare and benchmark.

Most have prioritised the highest emitting sectors when setting targets

Over 80 per cent covered the highest emitting sectors, such as oil and gas or power, in their first round of targets, a positive indicator of progress made by the NZBA. In addition, important advances have been made in target setting for the transport sector, with commitments made by 15 banks for automotives, five banks (Commerzbank, ING, La Banque Postale, Lloyds Banking Group, Santander) in aviation and two banks (Crédit Mutuel, ING) in shipping. However, only one bank published a target for agriculture, and none in the chemicals sector, which have both pose significant climate risks for investors.

Intensity metrics are becoming the norm despite risk of absolute emissions rising

The vast majority of banks’ sectoral targets (80 per cent) were set using an emissions intensity metric. While this approach is permitted by NZBA guidelines, it has risks as it can mask the fact that in absolute terms emissions continue to grow. It can also create problematic incentives for companies. For example, intensity targets incentivise banks to encourage oil and gas companies to produce oil and gas more efficiently rather than commit to an absolute decline in output. Among banks that have set an oil and gas target, over a third, including JPMorgan, NatWest, and Standard Chartered, set intensity targets.

Fossil fuel targets are difficult to compare due to methodological differences

Despite the NZBA’s common target-setting framework, banks’ approach to setting targets is inconsistent. For example, only 14 of the banks with an oil and gas target, including CIBC and MUFG, cover methane, which is a major source of GHG emissions. Banks such as JPMorgan and TD Bank do not distinguish between renewable energy and low-carbon fuels and fossil fuel energy sources in their targets. This means that they can meet their targets by expanding their financing of renewable and low-carbon energy rather than reduce their financing of oil and gas.

Most exclude a major source of oil and gas sector funding from their targets

The NZBA has not set a requirement to include capital markets activities, such as raising equity and debt financing, in the scope of member targets. As a result, 25 of the 31 banks that have oil and gas targets exclude these, despite them typically forming the bulk of financing provided by banks to the oil and gas industry. For example, Credit Suisse and UBS exclude capital markets activities in their oil and gas targets despite 77 per cent of Credit Suisse and 94 per cent of UBS financing for oil and gas being in this form.

ShareAction’s key recommendations to reach net zero:

• The NZBA should explicitly request that member banks set interim targets for 2030. These would provide investors and other external stakeholders with a clearer picture of how they are progressing towards net zero.
• Banks that have only set intensity targets should follow the example of the 13 banks which have set absolute emissions targets for oil & gas, including BMO, Citi, and HSBC.
• The NZBA should strengthen its guidelines around the net zero scenarios used by its members so that a 1.5°C scenario is standard.
• Banks should go beyond reaching the minimum thresholds of net-zero scenarios and incorporate an additional buffer in their targets, to increase the likelihood of meeting the goals of the Paris Agreement.

Although many NZBA members have based their targets on net zero scenarios aligned with 1.5°C, many still currently rely on less ambitious scenarios. ShareAction compared the rate of reduction implied by the International Energy Agency (IEA)’s net-zero scenario against absolute emissions targets set by banks and found that although most were aligned, some barely reached the threshold (BMO, Deutsche Bank, Commonwealth Bank).

This is concerning because there is already a low probability of success in most climate scenarios – the IEA’s carries only a 50 per cent chance of achieving a 1.5°C outcome. Additionally, banks in developed economies will require a steeper level of decarbonisation to achieve net zero globally.