COP26 continued an acceleration in the number of climate commitments made by private financial institutions. Overall, institutions managing over $130 trillion in assets are now committed to net zero by 2050, according to the Glasgow Financial Alliance for Net Zero (GFANZ). This increase in the number of commitments has been met with equal parts excitement, trepidation, and skepticism.
Through the recently published Private Financial Institutions’ Commitments to Paris Alignment project CPI tracked the public climate commitments made by over 350 private financial entities who have committed to net zero or are otherwise systematically important, including asset managers and owners, commercial banks, and insurers.
This tracking exercise provided context to the role private financial institutions are playing in the transition to a net zero economy. Our report can be boiled down to three major findings:
Big numbers are great…: GFANZ announced that at least 450 firms managing or controlling over $130 trillion in assets are committed to net zero by 2050. These numbers are increased from 350 firms with $93 trillion just a few weeks prior to COP26. Membership has expanded to new industries, including financial service providers and investment consultants. We are reaching a point where most of the biggest private financial institutions have now publicly committed to net zero – including the largest 20 asset managers globally and at least 39 of the top 60 global commercial banks.
…but details and size matter: As required by joining GFANZ, we are starting to see more interim (2025 or 2030) emission reduction targets. For example, 29 out of 56 members of the UN-convened Net-Zero Asset Owner Alliance (NZAOA) have released interim targets. GFANZ requires companies to set these targets within a year of joining. These short-term targets are needed both for establishing internally how long-term goals will be met and for external observers to ensure that companies are making progress and that net zero targets do not become another form of greenwashing. The latest progress towards setting short-term mitigation targets is welcome, but similar details have not been released for the other commitment types we tracked in our report: investment goals, exclusion and divestment, and new business practices.
And action needs to start now: An entity which carries on with business-as-usual emissions until 2049 and plans to achieve a reduction of all its emissions in 2050 is not making a credible commitment. Similarly, institutions must commit all of their assets to net zero goals, unlike the 35% of asset managers’ assets under management that are currently in line with net zero goals. And financing any additional fossil fuel infrastructure at this point is inconsistent with the goals of the Paris Agreement and is an indication to portfolio companies that the financial institutions are not serious about their climate commitments.
Over the next few months and years, we expect new institutions to make headline-grabbing commitments, and for those that had already issued high-level commitments to follow up with implementation plans. Below we offer key questions to ask of new announcements in order to ensure they are additive, impactful, and consistent with the goals of the Paris Agreement.
An announcement should not be mistaken for actual action. Press releases have the potential to give an indication to portfolio companies, clients, and policymakers that the institution is serious about climate, but future research will be needed to ensure that announcements are followed through.
A quick guide on what to look for when assessing net zero commitments from private financial institutions:
- Ambition: Are targets aligned with achieving net zero by 2050 and keeping warming below 1.5ºC?
- Do the commitments cover not only the financial institution’s Scope 1, 2, and 3 emissions but also Scope 1, 2, and 3 of their underlying exposures, such as clients or borrowers?
- Is the entity pledging to immediately end all finance for new thermal coal projects and phase out existing coal power plants by at least 2030 in OECD countries and 2040 in developing economies?
- Is the entity pledging to phase out existing oil and gas financing and subsidies where a credible transition plan does not exist?
- Timeframes: Is the institution taking immediate or short-term action?
- Are institutions making short term emission reduction commitments? Indeed, while targets to reduce emissions by 2030 are becoming more common among financial institutions and corporations, meeting 1.5ºC climate goals with limited or no overshoot requires a target for 29% reduction in portfolio emissions by 2025 on an absolute level against a 2019 base year.
- Measurement and process: How will progress be tracked and communicated?
- Do emission reductions come from impacts on the real economy with a reasonable and recent baseline year?
- Are investment targets defined by sectors and what mechanisms will be used to identify and monitor sector-specific goals?
- When announcing fossil fuel exclusions, what is the threshold for divestment? Is the entity pledging to phase out all financing, without loopholes, or just new financing?
- For entities not pursuing direct fossil fuel exclusions, is ‘engagement’ part of an escalation strategy? Indeed, withdrawing capital too rapidly can lead to leakage concerns but exiting from heavy polluters who refuse engagement should remain a component of an engagement escalation strategy.
- Is the financial institution pledging to disclose in line with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations? And once established, in line with the Taskforce on Nature-Related Financial Disclosures (TNFD)?
- If already reporting along TCFD recommendations, is the entity reporting along all recommendations? According to the latest TCFD Status Report, only 13% of companies are reporting the resilience of their business strategy to climate-related risks.
While mainstreaming elements are difficult to assess externally, we include this section for employees, investors, and other stakeholders capable of assessing internal implementation.
- Is the financial institution fully integrating net zero targets and SDG commitments into mandates, governance, executive compensation, risk management frameworks, and performance management, in a “whole institution” approach?
- Are entities leading engagements with counterparties to publicly commit to 1.5ºC-aligned business strategies and targets and publish a detailed policy for those that fail to adopt and implement credible transition plans.
- Are entities proactively engaging on and advocating for sustainable finance policy and regulatory measures to ensure Paris-aligned financial flows?
Unfortunately, all too often companies make exciting announcements only to later squash climate policies. While financial actors’ commitments are ambitious, they will be nearly impossible to achieve without governments around the world passing similarly ambitious laws – including regulations, carbon pricing, climate risk disclosure, and investments to crowd-in private finance. Ambitious public action will make private action possible.
Private financial institutions manage and own substantial amounts of capital and can be transformative actors in both deploying climate finance and helping manage the transition away from fossil fuels. While meaningful announcements should be celebrated, more work is needed to identify and measure the impact of each commitment and to understand whether the sum of announcements translates into the change needed in the real economy.