The world’s best bank transition strategy 2021: Citi
When Euromoney decided to include this category in the awards for excellence this year, we imagined that by late summer banks would have expanded on the net-zero commitments made over the previous nine months, outlining sectoral strategies and setting science-based targets.
That was unrealistic. Understanding the steps needed to achieve alignment with the Paris Agreement is a huge and complex task, and one with which the industry has only just begun to grapple. It will take years rather than months before global banks are in a position to produce credible pathways to net zero for their financed emissions. Certainly, none has done so yet.
There have been some early movers. Five European banks – BBVA, BNP Paribas, ING, Societe Generale and Standard Chartered – signed the Katowice Commitment in 2018, pledging to work towards Paris alignment.
In the US, Bank of America has been a frontrunner in energy transition, while in September 2020 Morgan Stanley became the first major lender to make a net-zero commitment.
What we were looking for, however, was the bank that made the most progress on its transition strategy in the 12 months to the end of March.
Other key criteria were that the winner should be a bank with a serious transition challenge, that it should be showing leadership rather than waiting for industry consensus and that it should demonstrate a readiness to take the tough decisions that will be necessary to achieve net zero.
In the face of strong competition, the bank that most closely fulfils these conditions and wins this year’s award for world’s best bank transition strategy is Citi.
There is no question of the scale of the challenge facing the US bank. Assessing the climate exposure of Citi’s $2.3 trillion balance sheet and more than 100 million customers across 160 jurisdictions will be tough – let alone achieving net zero.
Nevertheless, Citi has indicated clearly that it is keen to get started. Until last year the group was very active in green finance but behind some peers in mainstreaming sustainability across its business. A slew of changes last summer signalled a decisive shift in direction.
In July, Citi launched a new 2025 sustainable progress strategy committing to measure and reduce the climate risk of its portfolio; reduce its scope 1 and 2 greenhouse gas emissions by 45% by 2025; and join the Partnership for Carbon Accounting Financials.
The bank also updated its thermal coal mining policy to include a phase-out of exposure to the business by 2030, a commitment that was supplemented in February with a policy for the gradual curtailment of financing for the coal-fired power sector.
We have to help companies think about strategic transformation such that they can navigate their own transitions
To facilitate the transition process, Citi also undertook an extensive internal restructuring. A new sustainability and corporate transitions group was created, headed by Keith Tuffley and Bridget Fawcett, to help clients across the sector develop holistic sustainability strategies.
The bank’s chemicals, energy and power divisions were brought together in a new natural resources and clean energy transition grouping, while a new sustainable debt capital markets group was also created in July 2020.
“There has been a seismic shift over the past two years at Citi,” says Val Smith, chief sustainability officer. “Every business unit is now looking at how, from a business perspective, we can introduce sustainability into our products and support our transition journey.”
The culmination of all these changes came in Jane Fraser’s announcement in March, on her first day as chief executive, of a commitment to achieve net zero for emissions associated with financing by 2050 and associated with operations by 2030.
In April, Citi joined global peers in forming the Net Zero Banking Alliance, which requires members to present sectoral targets for emissions reduction by 2030 over the next 18 months to three years.
Fawcett says collaboration is essential to achieve net zero. “There are many co-dependencies in order to successfully effect the various transitions under way,” she says. “For the energy system transition, a single company can’t solve the problem on its own.”
Outside of banking
She also stresses the importance of working with industry groups outside the banking sector, particularly in hard-to-abate industries that will have to make changes to their business model.
“The financial services sector can help by providing advice and solutions and deploying capital in support of transition,” she says. “We have to help companies think about strategic transformation such that they can navigate their own transitions.”
Citi is already working with RMI – formerly the Rocky Mountain Institute – on a climate-aligned finance agreement to support decarbonization in the steel sector, along with Goldman Sachs and four European banks.
Another area in which Citi has taken the lead is disclosure. It was the only major US bank to sign up to the United Nations Principles for Responsible Banking – and is still only one of two – and to commit to assess and publish its impact on the Sustainable Development Goals.
It was also the first bank in the US to report according to the standards set by the Taskforce for Climate-Related Financial Disclosures (TCFD), in 2019, and last year began reporting according to the Sustainability Accounting Standards Board as well as the Global Reporting Initiative.
Citi is keen for clients to follow its example. “We are very clear with our clients that investors and other stakeholders need to understand their climate risks, as well as their climate opportunities,” says Tuffley.
“We encourage all our clients to report according to TCFD and put in place science-based targets, as well as clear strategies to achieve those targets.”
Most importantly, Citi has indicated that it will take a tough line with non-compliant clients, something US banks in particular are often wary of committing to. Tuffley is clear that Citi is prepared to take action. “Ultimately, if clients are not willing to engage with us on transition, then we will have to assess our relationship with them,” he says.