A (late) recognition of the importance of fossil fuels
It was about time. In the first days of COP26, the financial sector’s net-zero initiatives grouped together under the GFANZ umbrella (1) finally acknowledged the elephant in the room: fossil fuels. After being widely criticized for their weak criteria, GFANZ and two of its key member alliances published new documents admitting the need to act on fossil fuels.
- On day 1 of COP, GFANZ and the UN’s Race to Zero Campaign clarified via a fact sheet that it was trying to “accelerate the phase-out of fossil fuels”. It also stressed that it may remove members that “fail to live up to their published commitments” and in fact, had already done so (although it is unclear who has been removed and for what reason). GFANZ also published a progress report which says that “disclosing specific policies on the use of carbon credits, fossil fuels, coal and deforestation” is a best practice for net-zero plans.
- Second, the Net Zero Asset Managers initiative (NZAM) published on November 1st a vague (2) fossil fuel position calling members to adopt a “robust and science-based policy for the organisation in relation to fossil fuel phase out” and asked members to disclose information on their policies “on coal and other fossil fuel investments” when disclosing their 2030 targets.
- Finally, the Net-Zero Asset Owner Alliance (AOA), in a public response to the Reclaim Finance report on GFANZ, said it would accelerate the adoption by its members of coal policies — although it remained silent on the key issue of fossil fuel expansion.
Let’s not get carried away: at this point, these are very timid steps. Admitting the need to act on fossil fuels must pave the way for bolder requirements. Net-zero alliances now urgently need to publish robust and mandatory guidelines on how to end support for fossil fuel expansion.
Strategies and policies are not aligned with climate science
Unfortunately, the financial sector’s net-zero initiatives are not giving their membership the blueprints they need to tackle coal, oil and gas. Currently, none of the initiatives require ending investments in fossil fuel expansion, the red line drawn by the International Energy Agency to stay under 1.5°C. Most members do not have corporate strategies and policies aligned with climate science. NZAM is a good example of this contradiction: speaking up on the need to address all fossil fuels and yet, still lacking even adequate guidelines on ending investments in coal. Among the 130 members of the NZAM currently covered in Reclaim Finance’s Coal Policy Tool, only 13 exclude finance for a majority of coal developers, and less than a half (51) have one or more criteria to exclude a part of the coal sector. Even the AOA, considered the most ambitious of the alliances, still allows under its coal position paper continued investment in companies developing the approximately 195 coal plants under construction around the world.
Until GFANZ and its member alliances publish robust guidelines requiring its members to stop supporting fossil fuel expansion, we are left to rely on commitments made by individual financial institutions. And up to now, there have been very few. While Belgian bank KBC has announced it will no longer finance any new oil and gas development and exploration projects, and a few big banks and investors now exclude coal developers (4), commitments are still few and overwhelmingly weak and no way near what is needed to address the climate emergency.
Flawed decarbonization targets will not be enough
One of the only requirements for members of the net-zero alliances is to set decarbonization targets for their portfolios. But there are huge flaws in how this is being done. The recent scandal around HSBC attempting to weaken the criteria of the Net-Zero Banking Alliance is also revealing as to the seriousness of GFANZ members’ commitments to halve their emissions by 2030. On the investor side, according to the NZAM’s November 2021 progress report, the 43 of their 220 members who have set targets have so far only committed to manage 35% of their assets in line with net zero, undermining significantly their potential to reduce emissions (5). UBS AM announced targets covering just 20% of its assets under management. LGIM’s target covers 40%. And while 13 asset managers have announced targets covering all of their assets, most (and none of the biggest ones) have not.
Furthermore, members are allowed by NZAM to apply their fossil fuel phase out policies only to the portion of these assets committed to net zero (6). This is extremely problematic, as many of the biggest asset managers are refusing to set any fossil fuel exclusion criteria for their huge and rapidly growing passive index funds. Eight big NZAM members – including UBS AM and BlackRock – have more than 60% of their total assets under management with absolutely no restrictions on coal (7). This is another illustration that the GFANZ leadership is not bringing adequate solutions to the problem (8): credible decarbonization targets should be supported by clear and robust policies phasing out support for fossil fuels.