Addendum to a blog post originally posted on July 20th 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 Glasgow Financial Alliance on Net Zero (GFANZ) is currently seeking comments until July 27th 2022 on proposed recommendations for financial institution net-zero transition plans. Because of their endorsement of the Race to Zero, all of the nearly 500 members of GFANZ are required to publish net-zero transition plans by June 2023. Reclaim Finance underlines that GFANZ needs to clarify several key criteria that should be included in financial institution transition plans, especially: a commitment to halving emissions by 2030; an immediate end to support for fossil fuel expansion, and clear targets to ensure the phasing out of financial support for fossil fuels on a 1.5°C-aligned timetable.

A basic element of joining GFANZ is to also become a member of the UN’s Race to Zero campaign. In June 2022, the Race to Zero released an update to its criteria which, among other new requirements, insist that its members produce a plan explaining how they will meet the other Race to Zero criteria. These plans should describe what actions will be taken within the next year, two to three years, and by 2030. Members need to disclose these plans within a year of joining the Race to Zero. Existing members have to disclose them by June 2023.  

At the same time as the Race to Zero released their new criteria, GFANZ released a draft of a detailed set of recommendations for “ambitious and credible” financial institution net-zero transition plans. This paper states that transition requires “rapid scaling of climate solutions to replace fossil fuels and the accelerated phaseout of fossil fuel energy sources in an orderly and just manner.” It notes that any continued financing of fossil fuels “should be consistent with a 1.5°C pathway to ensure the energy sector continues along a net-zero transition and is not creating assets that will be stranded,” and “should be vigorously scrutinized to ensure net-zero alignment.”  

Credible and transparent financial institution transition plans — if accompanied with regular reporting on their implementation — allow their shareholders, regulators and other analysts to hold them accountable to their climate commitments. It is important to note that financial institutions should require their clients and investees, regardless of whether or not they have signed up to the Race to Zero, to develop their own transition plans. GFANZ is currently working on advice for what its members should expect from corporate transition plans (what GFANZ calls “real-economy” transition plans). These corporate transition plans allow financial institutions to monitor whether their clients and investees are serious about aligning with 1.5°C.  

Reclaim Finance has submitted comments to GFANZ on its draft recommendations. Our key comments on what improvements are needed to this paper are explained below: 

  • The GFANZ draft does not adequately emphasize the importance of transition plans requiring an end to financing fossil expansion. As is noted by the Sustainable Finance Group at the University of Oxford’s Smith School, “ending fossil reserves expansion in line with the IEA [Net Zero road map] or equivalent scenarios ought to be a prerequisite for a transition plan to be credible.” (1)  
  • The draft also fails to emphasize the need for transition plans to include targets and timetables to ensure the Race to Zero’s required “phasing down and out of all unabated fossil fuels as part of a global, just transition.” 
  • The draft paper fails to emphasize the Race to Zero stipulation that aligning with 1.5°C requires its members to commit to a “fair share” of the 50% cut in global emissions needed by 2030. Indeed, this crucial target is mentioned explicitly in the 103-page draft only in a single footnote. 
  • The draft notes that financial institutions should ensure transparency and accountability for their transition plans but fails to explain adequately how to ensure this. GFANZ alliances should delist any of their financial institution members who fail to adopt credible transition plans. Similarly, alliance members should make the disclosure and implementation of transition plans a requirement of the continued provision of financial services to their client/investees companies. 
  • The draft should clarify that engagement with clients/investees should aim to ensure that high-emitting assets are closed down rather than sold to other operators, and that GFANZ members should not assist in any such asset sales for example via mergers and acquisition advice and financing, and should not provide investments, insurance or banking services in companies that buy high-emitting assets in order to keep them in operation. 
  • The section on escalation strategies in corporate engagement should be expanded to clarify that successful use of escalation should include clearly defined demands with benchmarks and deadlines and clear consequences for failure to meet them, transparent criteria for shareholder votes, and disclosure on voting records and of the concrete results (or lack thereof) of engagement strategies. 

Notes :

  1. Implications of the IEA Net Zero Emissions by 2050 Scenario for Net Zero Committed Financial Institutions: Briefing Paper,” C. Wison et al., Oxford Sustainable Finance Group, 2022, p.22. The Race to Zero is also clear that its members must “must restrict the development, financing, and facilitation of new fossil assets.”  
  2. “Frontier” (a private sector initiative to buy permanent carbon removal credits funded by Stripe, Alphabet, Shopify, Meta, and McKinsey) defines permanent as being more than 1,000 years (see https://frontierclimate.com/ and https://stripe.com/blog/first-negative-emissions-purchases#criteria-table). The IPCC implies in AR6 WGII that permanent equals more 10,000 years (p.12-47). 
  3. The Science-Based Targets initiative states: “Although most companies will reduce emissions by at least 90% through their long-term science-based targets, some residual emissions may remain.” (“SBTi Corporate Net-Zero Standard: Version 1.0,” October 2021, p.10)