Addendum to a blog post originally posted on June 17th 2022:

In September 2022, in response to legal concerns, the Race to Zero made some minor changes to the language in paragraph 5 of its Interpretation Guide on restricting the development, financing and facilitation of new fossil fuel assets. This original language is quoted in the article below. The new language reads “Each Race to Zero member shall phase out its development, financing, and facilitation of new unabated fossil fuel assets, including coal, in line with appropriate global, science-based scenarios” and so retains the requirement for Race to Zero members to end their support for fossil fuel expansion.

The United Nation’s (UN) Race to Zero Campaign, an initiative of the UN climate convention, has updated and strengthened the criteria that must be followed by its more than ten thousand members. The new criteria explicitly mention for the first time the need for “phasing down and out all unabated fossil fuels as part of a global just transition” and require Race to Zero members to “restrict the development, financing, and facilitation of new fossil assets”. The UN “climate champions” who lead the Race to Zero have urged all its members to comply with these criteria within one year or risk being removed from the race. Glasgow Financial Alliance for Net Zero (GFANZ) must now pick up the gauntlet and ensure that all its members align with the new Race to Zero targets and expectations.

The Race to Zero’s (1) newly strengthened and expanded criteria are the product of a five-month long participative process involving more than 200 experts from the worlds of science, academia, business, finance, and civil society. The experts’ recommendations were synthesized by the Race to Zero’s Expert Panel Review Group and received final approval from the leaders of the Race to the Zero, the UN’s “High-Level Climate Champions”, Nigel Topping and Dr Mahmoud Mohieldin.

The Race to Zero criteria are divided into “Starting Line” criteria, which are the minimum requirements that all members must meet, and a set of optional high-ambition “Leadership Practices.”

The new Starting Line criteria reiterate that members must pledge to “reach (net) zero greenhouse gases as soon as possible, and by 2050 at the latest” and must commit to a “fair share” of the 50% cut in global CO2 emissions that the Intergovernmental Panel on Climate Change (IPCC) says is needed by 2030 in order for global warming to stay under 1.5°C. The “Interpretation Guide” that accompanies the new criteria provides analysis of this “fair share” requirement and implies that fairness at the global level will require businesses and financial institutions with most of their business in developed countries to do even more than halve their emissions in the next 7.5 years (2).

The new criteria give much more detail on what will be needed to achieve these reductions including with regard to fossil fuels, which despite being overwhelmingly the main contributor to global warming were not mentioned in the previous criteria. The criteria are clear that reaching (net) zero will require Race to Zero members to “accelerate the deployment of market-ready, existing technologies such as energy efficiency and renewable energy” while “phasing down and out all unabated fossil fuels as part of a global just transition.” Members also “must restrict the development, financing, and facilitation of new fossil assets.” The criteria stress that “this includes no new coal projects” (3).

Despite failing to provide clarity on the use of offsets to meet decarbonization targets (4), the Race to Zero has provided welcome clarity in their additions to the Starting Line criteria. Together with phasing down fossil fuels and restricting new fossil assets, these important additions include:

• Members’ targets should be aligned to scenarios that are “based in the latest, widely recognized climate science, such as those scenarios created by the IPCC or International Energy Agency (IEA)”; “provide for no or limited overshoot”; and do not “make unrealistic assumptions on development and deployment of future technologies” (5);
• Financial institutions must include in their targets all the emissions caused by their investments, lending, underwriting and insurance, including the Scope 3 emissions of the companies to which they provide these financial services (6);
• “In most cases, absolute emission targets are necessary for ensuring real-world reductions” although it can be useful to complement these with intensity metrics (7);
• Members must “align external policy and engagement, including membership in associations, to the goal of halving emissions by 2030”.

These new Race to Zero criteria pose a major challenge to GFANZ, its seven sectoral net-zero alliances, and all of their more than 450 members. GFANZ is not structured to have its own demands for its members — instead it requires its member alliances to join the Race to Zero and made clear in its 2021 Progress Report that “all GFANZ members must align with the Race to Zero criteria” (8). The Climate Champions state that “all existing [Race to Zero] members and Partner organizations will need to meet the criteria by 15th June 2023 at the latest” (9). GFANZ members should also note both that the Race to Zero’s expert group is currently discussing an independent compliance mechanism to be launched in September, and that climate champions Nigel Topping and Dr Mahmoud Mohieldin say that members that fail to comply “risk being removed from the Race” (10).

The sectoral alliances (which are among the Race to Zero’s “Partner organizations”) and their financial institution members have a year to close the now yawning gap between the level of ambition in their current guidelines (11) and what is now required by Race to Zero. The most important areas on which GFANZ members will need to upgrade their guidelines and policies are on financing fossil fuel expansion, accounting for their investee and client Scope 3 emissions, and setting targets based on absolute rather than intensity metrics (12). They are also now required to publish transition plans to show how they will meet their commitments, including what actions they will take within the following 12 months, 2-3 years, and by 2030 (13).

Overall, the Race to Zero’s new criteria mark a significant step forward in efforts to clarify what must be done to turn net-zero commitments into meaningful real-world emission cuts that are aligned with 1.5°. It’s now up to the whole GFANZ ecosystem, from its co-chairs Mark Carney and Micheal Bloomberg down through its member alliances to its individual financial institution members, to ramp up their ambition and put in place the policies and guidelines that will close the gap between the financial sector’s claims of concern for the climate, and the reality of their actual business activities.

Notes:

1. The Race to Zero seeks to mobilize non-state actors such as local/regional governments, businesses and non-profit institutions to meet the goals of the Paris Agreement.
2. The criteria state that “developing country actors may require more flexibility on their pathway to net zero and may find it challenging to halve their emissions by 2030” therefore implying that actors in developed countries will have to go beyond the required global 50% cut in emissions (Interpretation Guide, “Pledge”, 3.d.ii).
3. Interpretation Guide, “Pledge”, 5.b. Also see paragraph 6.b which notes that “phasing down and out fossil fuels” should not mean “simply passing fossil fuel assets from one owner to another.”
4. Probably the weakest and least clearly written parts of the new criteria are those dealing with offsets and carbon markets. While the criteria stress that members must “prioritize reducing real world emissions” they also allow for the use of “high quality” independently verified carbon credits. More than two decades of experience with attempting to regulate carbon offsets, however, shows that the concept of offsetting is inherently flawed and cannot be fixed with well-meaning regulations (See e.g. “The not-zero asset owner alliance? Pushing offsetting only undermines climate action,” Reclaim Finance, 1 October 2021). The only way to stop offsets from weakening the integrity of carbon targets is to prohibit them being used to meet these targets.
5. Interpretation Guide, “Pledge”, 4.b
6. Interpretation Guide, “Pledge”, 2.b
7. Interpretation Guide, “Pledge”, 7.a, 7.c
8. “GFANZ: Our progress and plan towards a net-zero global economy,” November 2021, p.11.
9. “‘Race to Zero’ campaign updates criteria to raise the bar on net zero delivery,” Climate Champions, 15 June, 2022.
10. “‘Race to Zero’ campaign updates criteria to raise the bar on net zero delivery,” Climate Champions, 15 June, 2022.
11. See e.g. “It’s Not What You Say, It’s What You Do: Making the finance sector’s net-zero alliances work for the climate,” Reclaim Finance, November 2021.
12. All of the alliances currently allow their members to base their targets only on the emissions intensity of their investees and clients.
13. On June 15, the same day as the new Race to Zero criteria were released, GFANZ released a draft for comments of a paper on voluntary guidance on net-zero transition plans for financial institutions. Race to Zero notes GFANZ’s work on this issue and says that it “looks to update” its Interpretation Guide “as specific guidance emerges that meets the Race to Zero criteria.” (Interpretation Guide, “Plan”, 1.c.