Pathway to transition  

  • Nick Villiers
  • 22 December 2021
  • Blog | Green Finance | Blog

At COP26 we saw the Glasgow Financial Alliance for Net Zero (GFANZ) announce it had reached over 450 members, including 93 banks, committed to aligning their portfolios with net zero by 2050. Whilst this is a hugely positive development in terms of scale, much needs to be done to move from commitment to action, including robust near-term targets so that we can halve emissions by 2030. 

Work is underway to deliver a common definition of net zero, with the Science Based Targets Initiative leading the way. The next step is to decide how to measure the current carbon intensity of a bank’s lending portfolio and work out how they should work with clients on transitioning to net-zero business models. We need to see more action on understanding credible transition pathways across different industries and regions, as well as understanding what makes effective engagement. This work is starting across the world of academia and industry, but must be developed further and at speed. Whilst the initial focus has to be on the hard to abate sectors such as steel and cement, aviation, and ground transport, we need to expand this quickly into the wider economy.  

The ongoing development of disclosure requirements is clearly positive in providing some of the information needed to assess companies’ climate performance. Much work still needs to be done, however, on the scale and accuracy of Scope 3 emissions data to give a true picture of a firm’s carbon footprint.   

What has been exciting to see in our work with banks, including through our education programmes and Banking Environment Initiative, is the growing number of financial organisations who see the transition to a low carbon economy as a huge opportunity.  

It’s not just about mitigating risk or trying to do what the regulator requires, but actually understanding the transition as a systemic shift or an industrial revolution. It’s about finding innovative ways of working with clients to understand their transition journey and to design new financing products to support their clients’ transition.  

This requires a new way of working to co-design solutions because clients don’t have all the answers either. However, it also requires all bankers to have the understanding and tools available to engage with their clients in a meaningful way. We have addressed this through our education work with financial institutions, but have also developed ‘Let’s Discuss Climate: The essential guide to bank-client engagement’ to meet this need at scale. 

Another area in which we’ve been focusing is working with the SME Climate Hub assisting banks and multinational companies in understanding their role in helping SMEs decarbonise. Banks typically have huge volumes of SME lending on their books, yet it’s a widely under-served part of sustainable finance. It can be harder, of course, to have the capacity in a small business to focus on decarbonisation, but it’s important that banks and multinational organisations improve their understanding of how to help their clients or supply chains decarbonise.  

There remain huge challenges beyond decarbonisation, including the need to focus on adaptation to climate change. Even with all the pledges made at COP26, we will be living in a significantly warmer world, with all the physical effects that will bring. In addition, we need to ensure the transition is a just one, working for people, whilst also protecting and restoring nature.