A new report published by the Columbia Center on Sustainable Investment (“Finance for Zero: Redefining Financial-Sector Action to Achieve Global Climate Goals”) finds that financial institutions’ climate strategies are far off track from what’s needed for climate action, and even from their own commitments.
The financial sector’s climate commitments “often overstate or misrepresent the extent to which they support meaningful action toward achieving climate goals,” often relying on misaligned targets or metrics that further undermine their effectiveness.
Clearer commitments, real-economy metrics, more effective strategies, strong oversight, and better data are vital to the legitimacy of financial sector climate pledges. Robust government action is also critical to account for the inherent shortcomings of bottom-up approaches to aligning finance with net zero goals.
The recommendations of this report go several steps further than the existing practice within net zero alliances. With little accountability for climate commitments, there is little incentive for honest communication or for the hard work of changing business plans and models.
Financial institutions play a critical role in decarbonizing the economy and scaling access to clean, affordable energy. At the recent UN climate talks in Bonn, the vast disparities in finance became clear once again, with the flow of cash to be a central focus of COP28. This new report sets the stage for the substantial changes required to rectify the disparities.
A key message of the report is that as providers, underwriters, and fiduciaries of trillions of dollars of capital flows annually, financial institutions must shift away from a narrow view of portfolio emissions and towards real-economy influence.
This includes winding down fossil fuel infrastructure and fossil fuel demand, and increasing finance for the transition. The ratio of clean-energy lending and equity underwriting relative to fossil fuels has to quadruple by 2030. This shift in finance is both enabled by and limited by the policy framework, so the report urges financial institutions to end anti-climate-action lobbying.
The key recommendations for financial institutions and their alliances in the report are:
- Be clear and unambiguous about their climate commitments, and use robust and relevant targets, metrics, and methodologies that are aligned with their goals.
- Cease anti-climate-action lobbying, including through industry associations.
- Focus on the real economy, not on portfolio emissions. This means shifting finance towards clean energy to support a six-fold increase, and using financial institutions’ power and influence to decarbonize their financed entities.
- Strengthen accountability and oversight significantly, to pressure and incentivize the sector and its alliances to continuously improve.
This report is released in the context of an accelerating coalescence and strengthening of general net zero standards and guidelines, alongside a clear ramping up of regulations and court cases focusing on false climate claims, such as those detailed in this recent report from ClientEarth. If these institutions do not take corrective action, they face increased regulatory exposure and transition risk.
“There are deep and inherent limitations to bottom-up approaches to achieving decarbonization goals,” the report’s authors state. The report “focuses on the things the financial sector can and should do even in the absence of a robust long-term policy framework” while calling for a critical discussion among policy makers and financial institutions about the necessary policy framework and appropriate set of practices and tools to achieve climate goals.
Energy in Demand - Sustainable Energy - Rod Janssen 