Bankers Making Improbable Green Claims May Soon Be Exposed

(Bloomberg) -- Bankers may soon have a harder time arguing that climate pledges and fossil-fuel financing can go hand in hand.

The Science Based Targets initiative (SBTi) is weighing whether to set a hard deadline for financial firms to halt new fossil-fuel investments, if they want their net-zero emissions targets verified by the United Nations-backed group.

Though a “blunt instrument,” a deadline represents “a simple way to set a target around fossil fuels,” Cynthia Cummis, technical director and founding partner of SBTi, said in an interview. She says that's better “than just having an emissions based target, which is more complicated.”

Banks, insurers and investors representing about $130 trillion of assets -- 40% of the global financial system -- have said they'll reduce net emissions to zero by the middle of the century. But many in that group are clinging on to their fossil-fuel business. In fact, a lot of net-zero pledges ignore the underwriting of bonds for the oil sector, according to an analysis by S&P Global.

JPMorgan Chase & Co., which committed to net-zero financed emissions last year and arranges more green debt than any other firm, also ranked as the world's biggest underwriter of bonds to the fossil-fuel industry in 2021, data compiled by Bloomberg show. The largest provider of bank loans to fossil-fuel companies was Wells Fargo & Co., which also says it targets net-zero emissions by 2050.

The International Energy Agency has made clear there's no room for continued investment in new oil, gas and coal projects if the temperature increase is to be kept within the critical threshold of 1.5 degrees Celsius.

If the net-zero goals that have been announced to date aren't credible, then the planet risks catastrophic levels of overheating. There are already signs that confidence is running out. Climate action failure was listed as the biggest concern among participants in the World Economic Forum's 17th annual Global Risks Report.

Cummis said the fact financial firms are making net-zero pledges is a positive, especially after they dragged “their feet for decades on this issue.”

“But now, we need more clarity on what net zero really means for the financial sector and how they are going to track progress against these targets,” she said. While “net zero has become the global goal,” there's “a lot of vagueness” around how banks plan to get there. SBTi will decide on a deadline as it reviews responses to its consultation paper on long-term net zero plans.

The group is also weighing whether to prohibit the use of carbon offsets as a tool for removing residual emissions because of the “lack of robustness” of that market and the greater impact banks would have by sticking with direct carbon removal, Cummis said.

SBTi and the EU's green taxonomy...
The Science Based Targets initiative is also looking into setting targets for green investments. The group had originally considered basing its work on the European Union's so-called taxonomy for sustainable investments. But after the bloc moved ahead with a proposal to temporarily include some gas and nuclear plants, SBTi backed away. “Now there is a question about whether that is going to be the right reference for us,” Cummis said.

A stamp of approval from SBTi, whose partners include the United Nations Global Compact, is increasingly sought after. The number of entities applying for SBTi verification doubled last year to more than 1,000. SBTi estimates that figure will rise to about 2,000 in 2022. For now, though, hardly any of those certifications have gone to financial firms for their short-term emissions reduction goals.

The Net-Zero Banking Alliance, whose members include JPMorgan, Goldman Sachs Group Inc., Citigroup Inc. and HSBC Holdings Plc, requires that banks build their “net-zero pathways and targets in accordance with credible and ambitious science-based scenarios that adhere to a 1.5 degree Celsius warming limit,” according to a written response to Bloomberg. Though the alliance doesn't mandate the use of any specific verifier, it said it welcomes “partners like SBTi.”

The Net-Zero Asset Owner Alliance, which adopts a similar position, has been collaborating with SBTi since 2019. It's currently working on a position paper that no new oil or coal “assets or capacity should be financed, permitted, developed or constructed.”

Ultimately, it's likely to come down to government regulation. Until then, even if large numbers of investors start shunning fossil-fuel assets, others “are likely to pick them up,” a spokesperson for the alliance said in an emailed response to questions.

SBTi receives its funding from a number of organizations, including Bloomberg Philanthropies. Michael Bloomberg, the founder of Bloomberg News parent Bloomberg LP, is also the co-chair of the Glasgow Financial Alliance for Net Zero.