GFANZ has recently released a paper on the ‘managed phaseout’ of high-emitting assets. The paper notes that a 1.5°C-aligned world will require not just restrictions on building new fossil fuel-based infrastructure, but also plans to ensure the decommissioning of existing infrastructure. The paper identifies some key issues in credible retirement plans, and notes the central responsibility of the finance sector in ensuring that these plans are developed and implemented. GFANZ is planning further work on this key issue. It will need to be closely scrutinized to ensure that it promotes approaches that have real climate benefits and are not primarily motivated by financial institution interests.

The Glasgow Financial Alliance on Net-Zero (GFANZ) commissioned consultants McKinsey to work with a group of their members led by BlackRock and Citi to produce a report on the “managed phaseout” of high-emitting assets. (1) The paper argues that to align with 1.5°C, financial institutions must support both climate solutions and initiatives to ensure “the early retirement of a significant amount of high-emitting assets.” These “assets” (which in reality are liabilities in a climate sense, and increasingly in a financial sense) can include everything from oil fields, coal mines and gas power plants to planes and ships.

The need to shut fossil infrastructure early

The paper notes the Intergovernmental Panel on Climate Change’s (IPCC) conclusion that CO2 from existing fossil power plants and other infrastructure would exceed the 1.5°C carbon budget by 30% if allowed to continue operating until the end of their design lives. (2) It also quotes a recent paper showing that CO2 emissions from existing and under-construction oil and gas fields and coal mines would be almost twice the 1.5°C budget. (3) These statistics make clear the urgency of finding viable mechanisms for shutting down fossil fuel facilities early. 

The paper recognizes that to be politically sustainable, high-emitting asset phaseouts must be developed in partnership with affected stakeholders, must be perceived as just and must contain mechanisms to protect the wellbeing of workers and local communities. GFANZ uses the term “orderly transition” to refer to “a net-zero transition in which both private sector action and public policy changes are early and ambitious, thereby limiting economic disruption.” (4)  

Retirements should happen on a timeframe “that is consistent with the net-zero transition” with asset-by-asset retirement plans which give clarity on which assets will be retired when. This is indeed vital not just for financial institutions to monitor the implementation of commitments, but also to give clarity to workers and communities. The paper mentions that finance for high-emitting assets can be made “conditional on plans to cease operation of those assets.” However in this case it is imperative to ensure that the shut-down plans are 1.5°C aligned and that the financial institution has clear monitoring and compliance processes in place to ensure that the retirement occurs on time.  The paper notes that feasibility studies for new fossil fuel projects should include 1.5°-aligned retirement timetables. This would help clarify the risk of stranded investments in these projects. 

Ensuring real-world, not paper, decarbonization

A key issue addressed in the paper is that net-zero financial institutions and companies need “to manage down the GreenHouse Gas (GHG) emissions from their portfolios, not pass them to someone else.” A corporate transition plan that relies simply on selling high-emitting assets to new owners will represent decarbonization only on paper. The paper fails to note, however, that financial institutions, including GFANZ members, are not just bystanders on these deals, but play essential roles in facilitating them as mergers and acquisitions advisors, as well as being investors, bankers, and insurers of the companies both selling and purchasing the assets. (6) GFANZ members should not assist in paper decarbonization deals and should insist that their clients/investees shut down assets and do not sell them.  

A key problem with the paper is its repeated criticism of divestment approaches, even claiming, without evidence, that “divestment movements may result in overall GHG emission increases . . . as high-emitting assets are transferred to companies and/or countries that are less sensitive to decarbonization pressures.”  The paper should emphasize that divestment (along with debanking and deinsuring) are essential elements of meaningful approaches to engagement. Experience with Climate Action 100+ indicates that engagement alone does little to push corporations to take the actions necessary to achieve real GHG emissions reduction by 2030 and align with 1.5°C. (7)  

The paper also notes that an inducement for companies to adopt credible transition plans for high-emitting assets is that this “can ensure a wider pool of prospective financiers, reducing the cost of capital and unlocking higher valuation and liquidity of assets.” In saying this, the paper acknowledges that divestment approaches are impacting corporate access to capital and implies that the threat of cutting off financial services can be a key incentive for companies to develop plans to retire their dirty assets. 

The paper notes that GFANZ intends to carry out various work streams to further promote the retirement of high-emitting assets, including commissioning more guidance on how to finance these mechanisms. One potential source of finance that is mentioned is carbon credits. This is highly problematic and should be removed from the paper. The most likely reason for a company to purchase carbon credits generated from retiring assets early would be to use them as offsets for their own emissions. This could negate the emissions benefit of retired dirty assets and thus be counterproductive. 

Retiring dirty assets is key to avoiding disastrous climate change. It is positive that GFANZ recognizes this but they need to do more to push the GFANZ sectoral alliances and their members to restrict financial services to clients and investees who do not adopt meaningful plans.

Notes :

  1. The Managed Phaseout of High-emitting Assets: How to facilitate the early retirement of high-emitting assets as part of a just transition to a net-zero world,” GFANZ, June 2022.
  2. IPCC AR6 WGIII, April 2020, p.TS-26. If all existing and planned infrastructure is allowed to continue to the end of their design lives ahead the budget would be exceeded by 66%. 
  3. Existing fossil fuel extraction would warm the world beyond 1.5°C,’ K. Trout et al., Env. Res. Letters, May 2022. 
  4. This can be seen as a reframing of the “managed decline” of fossil fuels which NGOs have long called for (see e.g. “A Managed Decline of Fossil Fuel Production,” Heinrich Böll Stiftung, 2018).  
  5. GFANZ defines finance as lending, investment and insurance (see p.13). It should also include capital markets underwriting and advisory services. 
  6. The top 3 financial advisors on oil and gas mergers and acquisitions 2017-2021 were Goldman Sachs, JPMorgan and Citi — all members of the NZBA. Out of the top 20 advisers on oil and gas M&A deals over this period, 13 are NZBA members (“Transferred Emissions: How Risks in Oil and Gas M&A Could Hamper the Energy Transition,” EDF, May 2022.) 
  7. See e.g. “Climate Action 100 benchmark: too much carrot, not enough stick for the biggest polluters,” ACCR, 31 March 2022.