NZBA round 1: an assessment of banks' decarbonisation targets

1. Most banks have started setting sectoral targets, but only seven (16 per cent) have set an interim overarching target to cut emissions across financing activities.

2. Most NZBA members have prioritised the highest emitting sectors in their first round of targets. The rest should follow suit and first movers should quickly expand coverage to other priority sectors.

3. Intensity metrics – rather than absolute emission metrics – are becoming the norm. This puts net-zero at risk if no guardrails are in place to keep emissions within a carbon budget compatible with 1.5°C of warming.

4. Over a third of banks with an oil & gas target use an intensity metric, despite it being inadequate for a sector facing terminal decline.

5. Different approaches to segmentation and scope of emissions can weaken fossil fuel targets and make them difficult to compare.

6. The scope of financing activities often doesn’t provide the full picture on financed emissions.

7. Most banks are excluding a major source of oil & gas sector financing from their oil & gas targets.

8. The NZBA guidelines, level of ambition, and availability of scenarios are obstacles to a wider and strict adoption of 1.5°C-aligned benchmarks.

9. Most banks use 1.5°C-aligned benchmarks to set power generation targets, but they are not all equally ambitious.

10. A lack of transparency on the target-setting process undermines the credibility of targets.

Click on the finding you are interested in to find out more.

We do not focus on sector policies – policies that determine what sectoral activities a bank will or will not finance and under what conditions, such as fossil fuel policies – despite the essential role they play in curbing financing to activities that are not aligned with the goals of the Paris agreement (see Discussion 3).

We conclude with a series of recommendations for banks and the NZBA.

Below is a summary table of the data we analysed. The full data set can be found in the Methodology section.

But only seven (16 per cent) have set an interim overarching target to cut emissions across financing activities.

In 2018, the IPCC demonstrated that meeting net-zero by 2050 required a halving of CO2 emissions by 2030. Several GFANZ alliances have already reflected this need in their guidelines. For example, the Net-Zero Asset Owner Alliance asks members to cut financed emissions by 49 to 65 per cent by 2030, and the Net-Zero Asset Managers Initiative requires members to set 2030 targets “consistent with a fair share of the 50 per cent global reduction in CO2”.

Setting an overarching target to cut overall emissions by 2030 is the most direct way for financial institutions to translate the Paris agreement onto their portfolios. Yet, we find that only seven banks in our sample (16 per cent) are taking this approach. Two banks (Lloyds Banking Group and NatWest) have committed to halving their emissions by 2030 and one bank (Nordea) has committed to a target range of 40 to 50 per cent. Overarching targets set by the other four banks are not directly comparable to the IPCC findings as they rely on emissions intensity or temperature rise metrics. In addition, none of these targets cover capital markets activities (Finding 6).

A possible explanation for the low number of banks that have set interim overarching targets is that the NZBA does not explicitly refer to halving emissions by 2030 in its guidelines. However, it does require members to use low-or-no overshoot 1.5C scenarios. These targets are therefore implicitly expected. We urge the NZBA to explicitly call on banks to set these targets so that investors and stakeholders have a better view on the overall direction of travel.

On a more positive note, 37 banks (86 per cent) have set at least one sectoral target. Most of the banks that have not yet set targets joined the NZBA later than their peers and have therefore not missed their deadline, with one possible exception - Nordea didn’t set any sector-level target before its deadline, but it did set an interim overarching target. Because the NZBA guidelines are vague on whether banks need to set both an interim sector-level and overarching targets, it is unclear whether Nordea has missed its deadline.

It is concerning that some banks have missed or extended the deadline to set targets given that the timeline that NZBA members face to set targets is already too generous in our view. We call on the NZBA to monitor non-compliance and enforce accountability.

The rest should follow suit and first movers should quickly expand coverage to other priority sectors.

Over 80 per cent of NZBA members covered oil & gas or power in their first round of targets (Figure 1). Among those who did not, some had addressed these sectors by committing to a phase out of coal power (e.g. Crédit Agricole) and oil & gas (La Banque Postale). While their strength needs to be carefully assessed, phase out commitments can be viewed as targets to reduce exposure to zero. Banks who skipped these sectors entirely should prioritise them now regardless of relative size in their portfolios. The NZBA guidelines allow members to prioritise sectors based on “GHG emissions, GHG intensities and/or financial exposure”, but focusing on exposure ignores the outsized impact of these activities.

Setting targets for the major components of energy demand is important too, and NZBA members have also made progress on that front. Transport – representing 37 per cent of CO2 emissions from end‐use sectors – received the most attention in this category. Fifteen members (40 per cent of banks with at least one sectoral target) now have a target for the automotive sector, while five banks also announced targets for aviation (Commerzbank, ING, La Banque Postale, Lloyds Banking Group, Santander) and three for shipping (Crédit Mutuel, Danske Bank, ING).

However, only one bank (NatWest) published a target for agriculture. A lack of data and reference scenarios for this sector is a hurdle, but Rabobank’s decision to downgrade its dairy farm portfolio following the Dutch government’s announcement of livestock reduction plans highlights how important it is for banks to keep it on their radar. This is also true of the chemicals sector, which is not on the NZBA priority list despite its serious ecological impacts.

This puts net-zero at risk if no guardrails are in place to keep emissions within a carbon budget compatible with 1.5°C of warming.

The NZBA guidelines require members to set targets based on absolute emissions “and/or” emissions intensity. Yet, a vast majority of banks rely only on emissions intensity (Figure 1). These metrics are helpful to benchmark companies or portfolios, but they put the 1.5°C of warming limit at risk of serious overshoot if used in isolation. This is because carbon budgets associated with 1.5°C are extremely constrained, and reductions in emissions intensity can be achieved while absolute emission continue to grow. For activities that don’t face structural decline in net-zero scenarios (unlike fossil fuels - see Finding 4), emissions intensity metrics can be appropriate. However, banks also need to report on absolute emissions across sectors and set interim overarching targets in absolute terms.

Among members relying on emissions intensity metrics, four banks (Morgan Stanley, NatWest, Standard Chartered, and TD Bank) are using a ‘financial intensity’ metric (e.g. tCO2e/$m) for at least one target. The NZBA prefers physical metrics (e.g. tCO2e/MWh for power) but allows financial intensity metrics if a rationale is provided. NatWest has done so for the agriculture sector – it uses a revenue intensity metric because “farming activities do not have a homogeneous unit of output base”. This is in line with TCFD guidance for non-homogeneous sectors. However, there is no obvious rationale for the other banks to use financial intensity metrics for sectors such as power generation. These metrics are more subject to economic volatility and targets could be met through a fluctuation of market prices or capital intensity.

Thirty-one banks have set at least one target for their oil & gas portfolios. Most of them have set absolute or intensity-based financed emissions targets, while others have set targets based on credit exposure (referred to as ‘financing’ or ‘exposure’ interchangeably in this analysis). A handful of banks relied on a combination of metrics to either set multiple targets (e.g. BNP Paribas) or cover different emissions scope (e.g. BMO) see Figure 2.

Of particular concern is the fact that among banks that have set an oil & gas target, over a third– including the likes of JPMorgan, NatWest, and Standard Chartered – have set targets based on physical or financial intensity metrics with no absolute emissions targets to complement them.

While the NZBA allows banks to set intensity-based targets, we believe that these are inadequate for the oil & gas sector. This is because banks’ priority shouldn’t be to encourage oil & gas companies to produce more oil & gas efficiently, but to commit to a managed decline in output. In the words of Nigel Higgins, Chair of the Board of Barclays, “The [Energy sector, which is responsible for extracting fossil fuels from the earth – mainly coal, oil and gas] is different because it cannot reduce its emissions intensity below a certain point (a barrel of oil cannot be de-carbonised), and so a reduction in absolute emissions is the more appropriate measure.”

Banks that have only set intensity-targets for their oil & gas portfolio should urgently follow the lead of the 13 banks using absolute oil & gas financed emissions target (such as BMO, Citi, and HSBC).

Three banks (BPCE, Danske Bank, ING) have only set a financing target for oil& gas. This metric doesn’t comply with the NZBA guidelines, but in our view is not necessarily inadequate to model lending activities, in particular if the bank is able to differentiate fossil fuels from renewable activities of integrated and/or diversifying energy companies (Finding 5). This is because financing is expressed in absolute terms and is a more direct translation of a long-term phase-out commitment into intermediate milestones. They are also less subject to volatility as they don’t need to be linked to emissions through an attribution factor.

The NZBA specifies which carbon-intensive sectors members need to set targets on and indicates that “sectors are defined according to internationally recognised sector classification codes, such as the NACE, SIC, GICS or NAICS codes”. However, the specifics of intra-sector segmentation are left to the discretion of members.

As banks can rely on different methodologies, targets set for the same sector don’t necessarily capture the same activities. For example, JPMorgan and TD bank include renewable energy and low-carbon fuels in their oil & gas targets. In our view this approach weakens the target, as it is less transparent for stakeholders and could artificially reduce financed emissions.

The lack of consistent segmentation is also apparent in other oil & gas targets. Some banks like Danske Bank only cover upstream activities, while others like BNP Paribas include upstream and refining, or even midstream and trading activities of integrated companies in the case of Lloyds Banking Group. This makes comparisons with other targets and scenarios challenging.

Furthermore, while most banks have set targets focusing solely on oil & gas, others have set blended coal and oil & gas targets or set separate targets for their ‘Oil’ and ‘Gas’ portfolios. For banks such as Barclays the setting of blended targets precedes the publication of the NZBA target-setting guidelines. We would however encourage banks that have not yet set targets covering their oil & gas portfolio to separate out ‘oil & gas’ from ‘coal’.

The scope of emissions covered in fossil fuel targets is also of concern. Some banks (Bank of America, BMO) have set separate targets for the scope 1 and 2 emissions and for the scope 3 emissions arising from the oil & gas sector. Others (Scotiabank) have only set a scope 1 & 2 emissions target for oil & gas, despite scope 3 emissions forming the bulk of greenhouse gas emissions produced by the sector.

Finally, we find that only 14 banks (52 per cent of banks with an oil & gas target), including CIBC, HSBC, and MUFG, covers methane in their financed emissions target. This is problematic because methane is a major source of greenhouse gas emissions for the oil & gas sector. And while CO2 is more abundant and longer-lived, methane – the main component of natural gas – is far more effective at trapping heat while it lasts.

As the NZBA guidelines currently focus on lending and investment activities, it doesn’t come as a surprise that only six banks (16 per cent) include capital markets facilitation in their sectoral targets (Figure 3). Barclays, CIBC, Goldman Sachs JPMorgan, TD Bank, and Wells Fargo demonstrate leadership on this front, although Barclays only takes partial responsibility (33% pro rata share) of emissions resulting from capital markets facilitation.

Banks omitting capital markets activities in their first round of sectoral targets usually argue that a common methodology is yet to be defined. However, banks tend to be less cautious about including capital markets in their green finance targets. Moreover, PCAF published a standard for lending activities but many banks already deviate from it (for good reason, such as better accounting for the total impact of their lending - see Discussion 1). Adjustments will be almost inevitable as climate science and methodologies evolve. Critical in our view is to communicate transparently what on drives progress (changes in the real economy or changes in methodology and portfolio composition).

Fifty per cent of banks use the drawn amount of loans to model lending portfolios (Figure 3) , in line with guidance from PCAF. In our view, this indicator does not paint an accurate picture of a bank’s relationship with its corporate clients and has therefore the potential to underplay transition risks and level of support to carbon-intensive activities.

Among other things, drawn exposure doesn’t reflect the amount a bank has committed to provide or even the amount that it is actually providing (e.g. if a company draws on the loan and repays before the reporting cut-off date). This modelling choice can have material implications. Barclays acknowledges that the “majority of [its] lending is in the form of Revolving Credit Facilities (RCF) which are typically undrawn, particularly in the Investment Bank”. TD Bank notes that PCAF’s recommendation to model drawn amounts “can also introduce temporal volatility (particularly in periods of stress)”. These two banks have thus decided to set targets using committed amounts. They also disclose financed emissions for both drawn and undrawn lending exposure (Figure 4), which gives more clarity on what is covered in the portfolio and on the implications of this modelling choice.

Using drawn exposure as indicator can also lead to artificial volatility in the portfolio, as financed emissions could increase or decrease with very little correlation to a company’s emissions. Setting targets based on total commitments isn’t perfect either – it can lead to overallocation of emissions and double counting – but it has the merit of being transparent and, as Citi puts it, “better capture how changes in [the bank’s] lending practices over time alter [the bank‘s] exposure to climate risk and can contribute to the net zero transition.”

Therefore, we recommend that banks set targets using committed amounts and report financed emissions using both drawn amounts (in line with PCAF) and committed amounts for transparency.

The NZBA does not yet require members to include capital markets facilitation and underwriting activities in the scope of their targets. As a result, 80 per cent of banks with oil & gas targets exclude these activities from their targets. This is problematic because these activities often form the bulk of the financing provided by banks to the oil & gas industry.

Indeed, we found that between 2016 and 2021, 57 per cent of the financing provided by Europe’s largest 25 banks to the top 50 upstream oil & gas expanders was in the form of capital markets underwriting. For some of these banks the share of financing provided via capital markets is significantly higher. For example, Credit Suisse and UBS exclude capital markets activities in their oil & gas targets despite 77 and 94 per cent of their financing to these top oil & gas expanders, respectively, comes in this form. The same likely holds true for many European banks.

When the NZBA was launched, we said that its position on scenarios was perhaps the biggest highlight. We also asked if these guidelines could make the likes of Barclays switch to 1.5°C-aligned climate scenarios to set targets. Eighteen months later, and thanks to the publication of the landmark Net-Zero Emissions scenario by the International Energy Agency (IEA NZE), Barclays and many other NZBA members are using reference scenarios aligned with 1.5°C. But while the range of net-zero scenarios that banks can use to set targets is growing, many still rely on less ambitious scenarios (Figure 5).

There can be good reasons for this – scenario developers might not have published data for all sectors and across all regions. For example, many banks use the IEA NZE (2021 edition) for the power sector, but it only provides a benchmark for emissions intensity at the global level. This can be issue for banks with portfolios geared towards developed economies where 1.5°C decarbonisation pathways are much steeper (see Finding 9). In the automotive sector, where most targets have been set using emissions intensity metrics but where the NZE doesn’t provide all the data to estimate this, almost half of the banks relied on below-2°C scenarios to a certain degree. Banks setting targets for the shipping sector face a similar issue.

These challenges come on top of inherent uncertainties about tipping points and other climate phenomena, inaccuracies in portfolio modelling, and low probability of success in most climate scenarios. For all these reasons, banks should take a precautionary approach to target setting (Discussion 2) . However, the NZBA guidelines are vague and some banks are taking the opposite approach. The NZBA allows for less ambitious scenarios if “the individual scenarios are expected to be aligned with the temperature goals of the Paris agreement”. This flexibility has led to the emergence of targets where 1.5°C is only the best case (Figure 5). Barclays updated its oil & gas target using the IEA NZE, but its 2030 targets for the power, cement and steel sectors are based on a range where the upper band is the NZE while the lower end is the bank’s “current view of sector and client pathways and commitments”. MUFG set targets for power and oil & gas using a range where the lower end is IEA’s Announced Pledges Scenario, which is at best a 2°C scenario.

We have highlighted in separate analyses that banks should take a precautionary approach to aligning with climate scenarios. This entails going beyond what the climate scenario suggests and allowing for an additional buffer in targets given inherent uncertainties about tipping points and other climate phenomena; the inaccuracies in portfolio modelling; and the low probability of success in most climate scenarios. For example, the IEA NZE carries only a 50% chance of achieving a 1.5°C outcome.

Targets set for the oil & gas sector don’t always cover the same segments of the value chain (Finding 5) and information on the scope of emissions is not always available (Finding 10). This lack of consistency makes it challenging to make meaningful comparisons. To minimise any bias, we compare the rate of reduction implied by the IEA NZE against two different subsets of ‘absolute’ oil & gas targets: targets set using absolute emissions and targets using financing (Figures 6 and 7). For the latter, we use production instead of GHG emissions as proxy as it’s a more obvious benchmark and these targets only cover upstream oil & gas. In both cases, the comparison is made using the ‘rate-of-change’ method (portfolio emissions should decrease at least at the same rate as the scenario), which is appropriate for absolute metrics although it comes with limitations depending on how the benchmark is constructed. We don’t compare targets set using an emissions intensity metric as they are inadequate (Findings 3 and 4).    

We find that most targets are more or less aligned with the IEA NZE. However, the level of ambition varies greatly. While some targets are barely aligned with the scenario, others go well beyond the required rate of reduction. In addition, we find that banks using absolute emissions metrics could be underestimating the rate of reduction required when taking methane emissions into account (see Figure 6).  

While there is less divergence in methodology for power generation targets compared to oil & gas, making comparisons across banks and against benchmarks is not straightforward. Some banks include CO2 emissions only, while others use CO2 equivalent metrics. Most NZBA members cover only scope 1 emissions, but 30 per cent of the targets we reviewed also include scope 2 emissions (or even scope 3 in the case of UBS). However, we believe there is still room for an approximative comparison because a) CO2 makes the vast majority of GHG emissions in the power sector and b) scope 2 emissions are usually marginal for this sector. The comparison is made using the convergence method (portfolio intensity should converge towards the benchmark), which is appropriate for intensity metrics.

Our analysis shows that physical emission intensity targets are usually aligned or below the IEA NZE in 2030 (Figure 8). However, the IEA NZE (2021 edition) only provides a benchmark at global level while many of the portfolios covered in this analysis are geared towards developed economies, where 1.5°C decarbonisation pathways are much steeper. A comparison with the OECD subset of the IEA Sustainable Development Scenario (SDS) – a well-below 2°C scenario – shows that half of the banks’ targets are less ambitious than this pathway. Banks should update their targets using regional subsets of 1.5°C scenarios that match the geographical footprint of their portfolios as soon as they become available, and/or go beyond what the scenario requires when data is not available.

ShareAction has long argued that banks’ emission reduction targets need to be complemented by robust sector policies to truly align financial flows with the Paris climate goals. Robust sector policies can minimise offsetting between high-carbon and low-carbon activities; prevent the financing of Paris-misaligned activities, such as coal expansion and new oil & gas; and drive ambitious corporate change by setting climate-related conditions for financing. Ahead of COP26, Mark Carney, a co-chair of GFANZ, and the COP25 & COP26 High-Level Champions launched a public call for financial firms to commit “to phase out coal finance and addressing the implications of the IEA’s net zero analysis for the energy system and all sectors of the economy”, amongst other things. The co-chairs and vice-chair of GFANZ reiterated publicly in August 2022 that “there is no rationale for financing new coal projects”. However, these public calls must now be followed through with actions and be fully reflected in the NZBA guidelines. At present, the NZBA guidelines currently omit speaking about sector policies in detail. It only requires banks to complement their targets by the “disclosures of planned actions and milestones to meet these targets, including investment and lending guidelines (…) and sector policies such as for fossil fuel and other high-emitting sectors”, but fails to back this up with clear requirements.

In June 2022, the Race to Zero, a UN-backed campaign that sets minimum levels of climate ambition for corporates and of which the NZBA is a member, strengthened its minimum membership criteria. These new criteria, which were slightly softened in September 2022 following an outcry by US banks, include a requirement to “phase out [banks’] development, financing, and facilitation of new unabated fossil fuel assets, including coal, in line with appropriate global, science-based scenarios”. The Race to Zero has asked its current members to comply with the new criteria by June 2023. While GFANZ has recently left the Race to Zero, the NZBA continues to be a member. Regardless of its Race to Zero member status, the NZBA should update its guidelines and require members to publish robust sector policies to support their targets.

On average, banks disclose around 90 per cent of the information needed to assess the credibility of their sector targets. This includes baseline, climate scenarios, and scope of emissions among other key components and assumptions. Target setting and portfolio alignment are relatively recent tools, which means that guidance is rapidly evolving, and consensus is yet to emerge. For this reason, it is critical for banks to be as transparent as possible.

The NZBA is prescriptive on this topic. Its guidelines require members to “disclose the scope and boundary of the asset classes and sectors included”, “establish an emissions baseline”, and “be transparent about […] selected scenarios”. Yet not all members disclose the reference scenarios or emissions scope for their targets, and baseline is disclosed for only about 75 per cent of sector targets (Figure 9).

We recommend that banks:

• Set 2030 overarching targets on top of sectoral targets to reflect their fair share of absolute emissions reduction across all activities.
• Set targets using absolute emissions metrics for fossil fuels.
• Ensure their targets cover all relevant greenhouse gases. For fossil fuels, banks should cover CO2 and methane at a minimum.
• Include all relevant financing activities in their targets, including capital markets facilitation. The weighting of capital markets facilitation should be 100 per cent.
• Set targets using total commitments for lending activities and report drawn and undrawn exposures in financed emissions disclosures
• Go beyond what reference scenarios require. This is even more critical where 1.5°C-aligned scenarios are not available.
• Disclose all key components and assumptions supporting sectoral targets. This includes baseline and base year, target (rate of reduction and/or end value), metric, scope of emissions, greenhouse gases, financing covered, lending indicator, and climate scenario.

We recommend that the NZBA and its supporting bodies take the following actions:

• Clarify that NZBA members must demonstrate how they are contributing towards their fair share of halving emissions by 2030, a core tenet of other GFANZ alliances and of the new Race to Zero criteria. Encourage members to set a 2030 high-level target to provide transparency on their overall direction of travel and strengthen the sectoral targets they have been asked to set.
• Actively monitor compliance with its target-setting guidelines and apply its accountability mechanism in a transparent fashion whenever it identifies a case of non-compliance.
• Require that banks set absolute targets for their oil & gas portfolios.
• Require banks to cover capital markets facilitation and underwriting activities and all material greenhouse gas emissions in their sectoral and high-level targets.
• Tighten its guidelines on climate scenarios so that only 1.5C scenarios are allowed to be used by banks.
• More explicitly recognise the role played by sector policies and encourage members to adopt the new Race to Zero criteria.

We would expect many of these actions to be taken ahead of the NZBA formally reviewing and updating its guidelines in 2024.

To speak with our team about the report please email bankingteam@shareaction.org

1. Crédit Mutuel Alliance Fédérale is making concrete commitments to put itself on the trajectory of the Paris Climate Agreement aimed at limiting temperature increases by 1.5 to 2°C by 2100.
2. This target is somewhat lower than the IEA’s global combined CO2 and CH4 pathway to 2030 but represents a material emissions reduction goal that is based on the scientific insights discussed above, existing and proposed government policy aligned with net zero, and credible industry initiatives that will lead to net-zero emissions from operations by 2050. Scenarios:
   IEA NZEGCAM NZEIPCC net-zero-aligned scenarios AIM/CGE 2.0 SSP1-19, AIM/CGE 2.0SSP2-19, MESSAGE-GLOBIOM 1.0 SSP2-19
3. GCAM’s Net Zero 2050 (GCAM NZE)
   IPCC net-zero-aligned scenario AIM/CGE 2.0 SSP2-19 IPCC net-zero-aligned scenario MESSAGE-GLOBIOM 1.0 SSP2-19 IPCC net-zero-aligned scenario AIM/CGE 2.0 SSP1-19 IEA’s 2021 Net Zero Emissions (IEA NZE)
4. Only the upper-bound of the range is based on the IEA NZE. The lower-bound is based on RBC’s assessment of the policy landscape in key jurisdictions and an analysis of our
   portfolio at the time of this Report .
5. The upper range of MUFG's targets is below the IEA's 2C scenario (APS) and the lower range is consistent with the IEA 1.5C scenario (NZE)
6. The upper range of Barclay's targets for Power, Cement and Steel use the IEA NZE but the lower end is based on Barclays' current view of the sector.