Wells Fargo has earned the distinction of being the first major US bank to abandon its commitment to achieve net-zero financed emissions by 2050. It won’t be the last. We already saw US banks swarm the exits of the Net-Zero Banking Alliance (NZBA), and as we see the publication of 2024 sustainability reports this summer, more banks and companies will likely walk back ambitious net-zero commitments.
After each one, climate advocates, the press and others will condemn their cowardice in the face of political headwinds. But the problem started before this moment of political upheaval. Banks’ net-zero commitments were a mirage from the outset.
The simple reason is that banks’ climate commitments rely heavily on assumptions about decarbonisation throughout the economy. They are fairly upfront about the fact that they were planning to reach net zero largely because they anticipated the entire economy would eventually reach net zero.
JPMorgan has the clearest statement on this point: “As a bank, we rely on global advancements in decarbonisation technologies and strategies across various sectors to create opportunities to support our clients’ transition efforts.
“Without significant progress by both our clients and the wider economy, our ability to support the transition, and in turn progress toward our targets, is constrained. Specifically, our progress toward our targets is reliant on the diversification of energy supply and increased adoption of cleaner sources of energy by demand-side sectors.”
The unspoken part is that banks were never prepared to turn down the opportunity to finance high-emitting sectors that remained profitable, much less against the threat of political reprisal.
Lack of disclosure
What does the retreat from net-zero commitments tell us about banks’ actual transition activities? Very little. Unfortunately, detailed public disclosure about the steps banks have taken and plan to take to meet their targets is hard to come by. Glossy sustainability reports are short on these details.
The doomed SEC climate disclosure rule would have gone a long way towards giving investors material details to inform their investment decision making. Without the rule, investors must sift through various sources of information to piece together what steps banks are actually taking to manage climate risk or capitalise on climate-related opportunities.
That banks are walking back their aspirational targets right now is not surprising. It may even be clarifying. Like mirages, net-zero commitments looked so promising but turned out to be an illusion.
Not only will we have trouble trusting future net-zero commitments, but we may even question whether they continue to make sense if they are little more than hedged predictions about when the economy will support full decarbonisation. Research from Europe suggests that banks with net-zero commitments do not make any meaningful changes in their lending or engagement with their borrowers to reduce emissions, compared to banks without net-zero commitments.
A better project would be for banks to assess how they can profitably support and further decarbonisation – through driving operational efficiencies, investing in innovation and supporting necessary public policies, such as putting a price on carbon or modernising ageing electrical grids.
There is money to be made right now in financing the energy transition, which will require trillions of dollars. This is the approach that providers of private equity and credit are taking, as they raise billions of dollars for energy transition funds. Whatever they decide to do next, banks must be more transparent with their investors and the public about what they plan to do.
They can start by voluntarily providing information to their investors and the public using the International Sustainability Standards Board (ISSB) sustainability and climate disclosure standards.
The ISSB’s standards would, for example, provide investors with financially material information about companies’ targets, their plans for achieving them and, more generally, the impact of climate risks and opportunities on their business strategy and decision making.
Voluntary compliance would significantly improve the substance of corporate climate disclosures in the US. It would have the added benefit of meeting the requirements for California’s climate disclosure laws, as well as the requirements of a dozen or more foreign jurisdictions in the process of requiring ISSB disclosures.
However, even with greater transparency by individual banks, information about transition finance activities may not be consistent or comparable. The ecosystem of organisations that was devoted to climate commitments, such as the NZBA, should fill this void by helping to articulate and systematise metrics of energy transition finance and investment.
Those metrics should prioritise financial information about what has been spent and how that spending fits into a plan for what should be spent in the future.
One possible metric is an energy supply financing ratio, which compares financing for low-carbon energy versus high-carbon energy. JPMorgan recently began disclosing this ratio, as a result of its engagement with New York City Public Pension Funds. While JPMorgan warns that it does not manage to this ratio, investors may gravitate towards this type of metric going forward.
Transition plans
Banks also must be more upfront about the climate risks they face. The risks are probably greatest right now for those institutions furthest behind in thinking about climate – namely smaller, more geographically or industry-concentrated banks. While climate effects may not be material yet for a massive globally diversified financial institution, the effects will accumulate and intensify.
The focus has been on getting banks to set targets or net-zero commitments, but we should be more interested in their transition plans. When climate risks or opportunities are material to the business, a transition plan should tell its investors how a company envisions adapting its business strategy to remain a going concern in the context of a lower carbon economy and worsening physical risks.
If banks felt the need to produce a sound transition plan and provide a quantitative accounting of their transition finance activities, they would undertake much more credible work to grapple with climate risks and opportunities than we have seen to date.
Hopefully, we are entering a new and more serious phase of the fight against climate change. Unserious net-zero commitments may be the casualty. But if, in their place, banks develop pressure-tested strategies to provide much-needed capital to the energy transition, we will be far better off by the time we get to 2030. We may even get back on track for 2050.
Mika Morse recently served as lead policy adviser on climate-risk finance issues for former chair Gary Gensler at the Securities and Exchange Commission (SEC). Before joining the SEC, she served as senior counsel and deputy legislative director for US Senator Brian Schatz (D-HI).
