By Jeanne Martin, Senior Campaign Manager, ShareAction

With great fanfare (and a heavy dose of déjà vu), today saw the launch of the Net-Zero Banking Alliance, endorsed by 43 banks from 23 countries.

You might remember the launch of the UN Principles for Responsible Banking (endorsed by 226 banks). And the Collective Commitment to Climate Action (endorsed by 38 banks).

These were less than 2 years ago, aiming to get banks to align their business models with the Paris climate goals. And in 2016 the Paris Pledge for Action, endorsed by banks such as Barclays, BNP Paribas and HSBC.

The list goes on.

We’re not arguing that industry groups have no role to play. They do.

But if their main role is to market the (very light) green credentials of “repeat greenwashing offenders” and delay action from commercial banks as well as the introduction of climate regulation by central banks – then it becomes an issue.

Banks are increasingly under pressure from investors, customers and civil society organisations alike to phase out fossil fuels.

But the Guidelines remain suspiciously quiet on this – and many other issues, including:

• The need for coal and fossil fuel phase out plans
• Biodiversity loss and deforestation
• The 'Just transition' (a shift from a high to low carbon society that is fair and equitable for workers and communities)

Three essential issues that should form the backbone of any credible climate strategy.

The failure to include them raises serious doubts about the value this initiative adds.

Especially given that many of its signatories are some of the world’s largest fossil fuel financiers – the likes of Bank of America, Barclays, Citi and HSBC.

The Good

So, is there anything good in the guidelines?

Perhaps the biggest highlight of is their position on climate scenarios.

The Guidelines require banks to use “no-overshoot” or “low overshoot” scenarios (e.g. scenarios P1 and P2 of the Intergovernmental Panel on Climate Change– IPCC). The scenarios chosen “shall rely conservatively” on negative emissions technologies (NETs). They'll also have reasonable assumptions on carbon sequestration (that is, carbon removed from the atmosphere) through nature-based solutions and land use change.

This is an important admission of the immense risks of relying on an unproven technology to remove a large chunk of global greenhouse gas emissions in the second half of the century.

The IPCC itself has warned that relying on carbon capture and storage “is a major risk in the ability to limit warming to 1.5° Celsius".

The Guidelines suggest banks should use the IPCC’s P1 and P2 scenarios. The good thing is both of these are cautious in their approach to NETs. And, in our opinion, they make more realistic assumptions about the scale of action we need to avert the climate crisis. Notably the IPCC P3 scenario – permitted by the Net-Zero Asset Owner Alliance – isn’t mentioned.

Will this actually make the likes of Barclays change the scenario they use?

Barclays has already made clear it doesn’t wish to rely on NETs. It’s set an ambition to be net-zero by 2050, which it says "gives [it] confidence that [its] approach for our own portfolio would remain appropriate even without any future net-negative technologies.”

But the bank continues to use the International Energy Agency’s Sustainable Development scenario. This one doesn't align with the bank’s ambition to be net-zero by 2050, and also relies on excessive amounts of NETs.

The Bad

Words matter. The Net-Zero Banking Alliance state that some guidelines are “optional” or “optional but strongly recommended”.

Quite bold for an initiative that is already voluntary in scope.

But it means it’s not always obvious to the uninformed reader where the guidelines fall short.

In the words of Bank on our Future: "All that glitters is not gold. What seems at first glance to be quite ambitious, actually lacks the urgency and ambition that the climate crisis demands”.

Banks are required to set 2030 and 2050 emissions reduction targets for the emissions embedded in their financing. Sounding great? Not quite...

For one, banks have a total of 4 years to set targets and publish plans to meet them.

Yes – setting targets is hard. Methodologies are still being developed, data is sometimes hard to come by, and science evolves all the time.

But 4 years is an incredible timeframe for something that many European banks – including Barclays, ING and ABN Amro – are already doing, for some of their sectoral portfolios at least.

It’s an incredible timeframe for something that should have been done years ago.

It’s an incredible timeframe given that our planet is, literally, burning and we have less than 9 years left to halve global emissions.

The Ugly

A real problem is that the Guidelines don’t mandate banks to set targets on their underwriting activities.

Banks provide financing to companies in a number of ways. These are usually categorised as “balance sheet activities”, that is, as ‘lending’. Or they're “off-balance sheet activities” – which means in the form of ‘underwriting’.

Looking at the money flowing from banks to the fossil fuel industry, it’s clear that major global banks provide just as much fossil fuel financing through underwriting as through lending.

In 2019 and 2020, Europe’s third largest fossil funder HSBC enabled almost as much financing to the energy and utility industries in the form of lending as it did in the form of underwriting.

Barclays recently published a new methodology allowing it to set emissions reduction targets for its utility and energy sector clients. The targets cover both its underwriting and lending activities. HSBC recently committed to doing the same, following pressure from investors.

But under the Net-Zero Banking Alliance Guidelines, setting targets on underwriting activities is only optional.

They state that “off-balance sheet activities", including facilitated capital markets activities, will be considered in the next version of the Guidelines.” But no word on when this next version might be published.

This is a clear step backward for an initiative aimed at accelerating the “Race to Net-Zero”.

A missed opportunity

2020 saw a “relentless” intensification of the climate crisis affecting millions of people around the world, according to the UN’s World Meteorological Organisation.

As the lifeblood of the economy, banks have a major role to play in averting the worst consequences of the climate crisis. So far, the banking sector has failed to do its part.

Today’s launch is a missed opportunity to define climate leadership for the banking sector ahead of COP26 – the UN Climate Change Conference set to be held later this year in Glasgow.

If private sector banks want to be seen as 'part of the solution', they need to get a lot more ambitious. If not – it's time for regulators to take over and provide a proper solution.