Last Monday, the Environmental Audit Committee (EAC), a parliamentary select committee questioned Mark Carney on the Glasgow Financial Alliance for Net Zero’s (GFANZ) progress towards net zero.
This is the first time the voluntary industry-led alliance has been scrutinised by parliament since it was established last year in the run up to COP26, representing an important step in accountability.
In his opening remarks, Carney outlined that GFANZ alliances have made significant progress on their climate commitments and reporting. In the space of eighteen months, some financial institutions have set 2050 net-zero targets for the first time, as well as targets to keep them on track before then
But progress has not been fast enough. Some financial institutions have flouted the alliance’s guidelines and missed the deadline to set net zero targets. We find two areas of tension in Carney’s oral evidence. First, his framing of the energy transition, and second, his ambiguous comments regarding the role of government policy.
Phasing down fossil fuel finance is vital to achieve the energy transition
During the session several MPs pointed out that GFANZ members continue to finance fossil fuel expansion at rates incompatible with 1.5C, despite their net zero commitments.
Last year the 44 largest members of the Net-Zero Banking Alliance (NZBA) provided $143.6 billion in lending and underwriting for the 75 companies doing the most to expand oil and gas.
Carney did not state unequivocally that new oil and gas is incompatible with 1.5C, as the IEA and IPCC have made clear. Instead, he emphasised that scaling up renewables financing is key to achieving the energy transition.
When Clive Lewis MP questioned why Brookfield asset management, for which Carney is Vice-Chair, is invested in oil tankers which would benefit from planned oil expansion in the North Sea, Carney replied, ‘You’re referring to one ship in the North Sea relative to a renewable platform’.
But renewable financing does not cancel out or justify new oil and gas.
Financial institutions must prioritise phasing down their fossil fuel investments much faster than they are currently, on pathways aligned with 1.5C warming.
Any new fossil fuel financing for new projects is incompatible with this target.
Government policy should be informing industry net zero standards (not the other way round)
According to Carney, industry-led initiatives organised by GFANZ should be used to inform future government policy.
He said, ‘GFANZ helps informs the government. There is an important argument for a mandatory approach in regulation once there is confidence that we have it right’, citing the Taskforce for Climate-related Financial Disclosures (TCFD) and incoming transition plans as success stories.
But when MPs called out GFANZ for failing to ensure its members adhere to credible 1.5C climate pathways, Carney said repeatedly there are ‘policy gaps’ and ‘financial institutions can’t reach 1.5C alone’.
A convenient circular argument.
The climate crisis won’t wait. The UK government must regulate all financial institutions immediately (not just GFANZ alliance members), rather than waiting to adopt measures trialled by voluntary initiatives.
It’s not just a question of time. The GFANZ’s ambition and accountability are weak.
Last Friday, just four days after Carney gave evidence in Parliament, GFANZ dropped its partnership with the UN-backed Race to Zero campaign.
This move came after the UN campaign updated its criteria in June for GFANZ members to make them more ambitious. The seven net zero alliances under the GFANZ umbrella would have been required to meet the updated minimum criteria by June 2023.
But several financial institutions threatened to take legal action against GFANZ as a result, which led to Carney’s recent announcement that "member alliances are encouraged, but not required, to partner with the Race to Zero”.
In other words, an already voluntary commitment has now become even weaker.
It’s clearer than ever that voluntary initiatives alone aren’t enough to drive the urgent action needed to secure a liveable future.
Financial regulation would bring the ambition and accountability GFANZ currently lacks
Smart financial regulation is the solution to this problem.
Policy must go beyond the GFANZ’s proposed soft accountability measures (such as increased disclosure of data and targets), to more stringent government-led climate financing incentives and targets, with consequences for non-compliance.
Academics and NGOs are calling on the Bank of England, which is reviewing its approach to climate risk, to implement one-for-one capital requirements on high-carbon assets. This would mean that financial institutions are gambling with their own money when investing in fossil fuels, not the public’s.
There's an opportunity for policymakers to include such mandatory climate safeguards amongst others in the Financial Services and Markets Bill (currently at Committee Stage in parliament) as well as the Treasury's upcoming Solvency II review governing the insurance industry.
Overall, we welcome Carney’s attendance at the EAC’s scrutiny session, and we hope it is his first appearance of many. The financial sector reaching net zero on a timeline aligned with 1.5C warming is in the public interest.