The Institutional Investors Group on Climate Change (IIGCC) in collaboration with the Transition Pathway Initiative (TPI) has published an investor-led framework of pilot indicators to assess banks on the transition to net zero.

The latest work follows the establishment of a banks working group by IIGCC to help investors assess how prepared banks are for the low-carbon transition and the subsequent investor expectations for banks published in April 2021.

The need for an assessment framework for banks is underpinned by investors wanting to manage their own net zero alignment and stewardship of portfolio companies (which frequently includes banks), as well as recognition of the critical role banks have in helping deliver global decarbonisation through their activities.

Initial findings: a sector in transition but with a long way to go

Used to assess 27 banks, the current framework of pilot indicators is organised into six key areas :

  • net zero commitments;
  • short- and medium-term targets;
  • decarbonisation strategies;
  • climate governance;
  • climate policy engagement;
  • audit and accounts

Those 6 areas show that while the banking sector has started its transition towards net zero, it still has a long way to go to
align with a 1.5°C pathway. All analysis is based on disclosures published up to 25th February 2022 only.
Across the six key areas covered by the pilot indicators, the 27 banks performed best on climate governance (‘Evaluating how a bank incorporates climate strategy into its governance structure and remuneration policies’), aligning with just under half (44%) of the sub-indicators in this area.

Conversely, the 27 performed worst on climate policy engagement (no bank publishes a position statement that pledges to conduct all direct lobbying activities in line with the goals of the Paris Agreement) and on audit and accounts (none comprehensively incorporates material climate-related matters into its financial accounts).

Decarbonisation strategy – the area containing the most indicators and sub-indicators – assesses the actions taken by banks to deliver on their financed emissions reduction targets.

While some banks are making steps to develop and implement a decarbonisation strategy, with most progress made in setting milestones to scale up green finance, collectively they have yet to establish financing conditions that enforce accelerated decarbonisation efforts.

“For investors considering their own net zero alignment and stewardship of portfolio companies, it is critical that they have sufficient information on companies’ transition planning, including banks. The final framework – which we look forward to publishing later this year – will provide investors with a comprehensive picture of banks’ net zero transition plans and can be used to support engagements with the banks in their portfolios.”

Stephanie Pfeifer, CEO, IIGCC

“Banks have increasingly committed to net zero targets for their financed emissions – our pilot assessments find that 18 out of 27 banks set 2050 net zero commitments. However, banks have yet to show how they plan to meet these net zero targets. For example, banks’ targets often omit large portions of their portfolios (such as underwriting and advisory) and exclude certain high-emitting sectors. Banks’ policies often still allow for continued finance to carbonintensive activities such as coal mining and deforestation, and evidence of engaging with high emission companies on transition plans is sparse.”

TPI Research Team led by professor Simon Dietz, Grantham Research Institute on climate change and the environment, London School of Economics

investor-led framework

Source: IIGCC; TPI