If there’s anything I’ve learned from decades of working to raise awareness of the economic risks posed by climate change – and take action to address them, it’s this: Market signals matter. . That’s why the news that America’s Big Six banks and some of the biggest investors are now committed to aligning with a net zero future is so important. It sends an indisputable signal to the other major players in the capital market that we must step up our actions today to protect our economy and the environment.
Let us first look at the commitments of the banks. By supporting the Paris Agreement’s net zero goal, Bank of America, Citi, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo have raised expectations about the role of financial institutions in making our economy more resilient. While these commitments are a welcome first step in the right direction, achieving meaningful and lasting impact will depend on the ability of banks to set short-term, science-based goals while developing and implementing a short-term, proactive engagement strategy at the required speed that puts their borrowers on the path to decarbonization.
After all, bank commitments matter not because they will achieve carbon neutrality in their own operations, but rather because they will lead to carbon neutrality in the companies they finance. According to Ceres’ report, Financing a net zero economy: measuring and addressing climate risk for banks, more than half of bank loans are exposed to climate risk associated with the transition. Left unchecked, this exposure could result in up to $ 100 billion in losses for U.S. banks and potentially trigger another financial crisis. The magnitude of these potential impacts requires banks to work with their customers to proactively plan for the transition to a net zero economy.
While banks have their work cut out for them, the good news is that these commitments are just one example of the momentum across the financial sector for net-zero portfolios under the Paris Agreement.
Just this week Ceres and its global investor partners launched the Paris-aligned investment initiative – a collaborative investor-led forum involving 110 global investors managing $ 33 trillion in assets under management. This global effort helps asset owners and managers align their portfolios and operations with Paris Agreement goals and commit to setting science-based portfolio emissions reduction targets that are consistent. with achieving global net zero emissions by 2050 or earlier, with intermediate targets.
As part of the launch, 22 asset owners representing $ 1.2 trillion in assets signed a contract Net zero liability of asset owners, by committing to 10 specific actions: including the transition of their investments to achieve zero net GHG emissions from the portfolio by 2050, or before; set an intermediate target for 2030 or earlier for the reduction of Scope 1, 2 and 3 emissions associated with their portfolios and a target of increasing investments in climate solutions; and to ensure that any direct and collective political advocacy they undertake supports relevant policies and regulations to achieve global net zero emissions by 2050 or earlier, among other milestones.
In December, a group of 30 asset managers representing $ 9 trillion made a similar commitment through the Net zero asset managers initiative.
However, this transition to net zero will not be possible without detailed plans with intermediate goals and milestones that banks and investors are used to developing in support of any other business strategy. Weaning off fossil fuels as a profit driver, for example, will require a deliberate concentration in all units of a bank’s business – especially when some still lend billions to the fossil fuel industry. C-suite goal setting is only effective to the extent that it is operationalized and prioritized across the board, and then of course how progress is measured and reported. Achieving the 2030 targets that banks will soon set themselves – not to mention the broader ambition of net zero – will require longer-term thinking and planning.
Here are three steps banks and investors need to take now to begin the hard work of discounting their net zero liabilities by 2030 or before:
- Adopt time horizons for risk management
- Create financing plans for each sector
- To hire customers and borrowers now to enable the necessary business transformation
US banks and large owners and asset managers have taken critical action. By making these commitments, banks and investors have sent a strong and clear signal: Global emissions must reach net zero by 2050 or earlier to limit the systemic and financial risks of the climate crisis. Perhaps even more important than that, however, is the recognition by some of the biggest players in our economic system that the global shift to net zero emissions is one of the greatest investment opportunities of our time.
Now, it will take all of us, all stakeholders, policymakers and regulators, to row in the same direction, to achieve this level of ambition at speed and scale.