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ESG

COP27: Inconsistent progress on fossil fuels shows need for flexibility

Reports published at COP27 suggest slow but steady progress by banks on interim sector targets for net zero. But political reality, particularly in the US, requires a delicate approach.

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US special presidential envoy for climate John Kerry at COP27. Photo: Reuters

As the Sharm el-Sheikh Climate Implementation Summit drew to an end this week, focus turned to thematic days – most notably finance on Wednesday.

Some key commitments were made at the meeting by governments, eager to show progress on pledges they made in Glasgow last year, but also to contribute to the $100 billion climate finance goal.

Host nation Egypt’s ministry of international cooperation announced a $15 billion climate programme for national energy, food and water projects. At public-sector level, discussions focused on ensuring a just transition, with the launch of the Sharm-El-Sheikh guidebook for just financing.

The US special presidential envoy for climate John Kerry, The Rockefeller Foundation and the Bezos Earth Fund announced a partnership to work toward the creation of an energy transition accelerator to drive private capital to the clean energy transition in developing countries.

More capital commitments were announced across the conference Blue Zone’s 156 pavilions, including $13 billion over the next eight years from the Islamic Development Bank (IsDB), part of the Arab Coordination Group's $24 billion financing package for climate action.

Reporting on progress

For private-sector banks, where available capital for climate finance rises to at least $130 trillion, according to the UN Environment Programme Finance Initiative, Finance Day was an opportunity to show the concrete steps that have been taken towards the many net-zero pledges made at COP26.

The Net-Zero Banking Alliance (NBZA) published its first progress report, which states that 51% of its 62 members had set intermediate net-zero targets as of October 24, 2022.

“Over 90% of responding members report having a sectoral policy on coal and/or oil and gas financing, and have set an emissions reduction target in one, or both of those sectors,” it says.

Yet according to the Financial System Benchmark, launched earlier in the week by the World Benchmark Alliance (WBA), progress made so far has been lacklustre.

The FSB graded 400 leading financial institutions on their progress toward accelerating the net-zero transition. Of that number, 155 are banks.

The over-riding revelation is that the industry as a whole is far behind where they think they are. There is a lot more room for improvement
Andrea Webster, WBA
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The benchmark covers a broad range of measurements from governance, climate, nature and biodiversity, human rights and social issues. It pulls from nearly 100 recognised frameworks and principles, including from the UN's Guiding Principles and UNEP FI frameworks; the OECD; disclosure charity CDP; the Global Reporting Initiative (GRI); the Taskforce on Nature-related Financial Disclosures (TNFD); the International Labour Organization; and the Institute for Human Rights and Business (IHRB).

The report states that only 37% of leading financial institutions assessed have disclosed long-term net-zero targets. Disappointingly, of these commitments only 2% have been translated into interim targets applied across the institution’s financing activities, of which only 1% are backed by scientific evidence.

“The real value of the findings comes from the nuance that can be seen across the different sectors within the benchmark,” says Andrea Webster, WBA’s finance system transformation lead. "However, the over-riding revelation is that the industry as a whole is far behind where they think they are. There is a lot more room for improvement, regardless of some of the bigger issues being discussed at COP."

Large European and US banks performed better on the benchmark than other financial institutions. Chinese and Indian banks were among the worst ranked entities.

Few NBZA members have set interim targets for emissions reduction across all essential sectors, which they are required to do within 36 months of joining.

The report shows that a majority of the members have set targets for oil and gas and power generation, but other hard-to-abate sectors, such as agriculture and aluminium, are being missed.

GFANZ under fire

This chequered progress across the banking industry testifies to a lack of clarity on what steps are valid in the race to net zero.

NZBA is part of the Glasgow Financial Alliance for Net Zero, which is facing criticism for its inconsistent enforcement of the UN's Race to Zero rules that members were required to align with according to the GFANZ 2021 report.

It is clearer than ever that voluntary initiatives alone aren’t enough to drive the urgent action needed to secure a liveable future
Jeanne Martin, ShareAction
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The latest report does not enforce alignment with these rules after concerns were raised by some of NBZA’s US banking members about the legal and reputational risks of letting third parties impose restrictions on investment strategies, specifically on the phasing down of fossil-fuel investments.

“It is clearer than ever that voluntary initiatives alone aren’t enough to drive the urgent action needed to secure a liveable future,” says Jeanne Martin, head of the banking programme at ShareAction. "Governments should step up with tougher regulation of financial institutions that continue to fund fossil-fuel expansion."

But some argue that a more flexible approach is what is needed.

“The problem wasn’t with the intentions of the UN Race to Zero rules,” one senior banker tells Euromoney. "It was the methodology, which failed to consider the bipartisan political realities that US banks are facing, given the red state push-back against ESG."

GFANZ couldn’t ignore the demands of the US banks, which together make up a large part of the global financial network.

“It was a strategic small step backwards to try and find a more syndicated approach that could cater to everyone,” the banker adds.

The question is whether or not watered-down guidelines will deter banks from sticking to their fossil-fuel phase-down plans. From a business perspective, banks are finding it more strategic to get into new sub sectors in the renewable energy mix now than to capitalize on a short-term delay in the global supervisory debate.

“The mechanisms of transition are already in motion,” another COP27 attendee observes. “It’s already cheaper to invest in renewables in, for example, Angola than it would be to drill for oil.”