Targeting Net Zero: The need to redesign bank decarbonization targets

Reports

19 September 2024

The focus of banks’ efforts to address climate change has in the past few years shifted to sectoral decarbonization targets. Before this, policies to restrict financing to some fossil fuels was the main way in which banks acted on their climate commitments.

But are existing decarbonization targets likely to achieve the rapid emission reductions that we need? Are they a relevant indicator of bank climate transition efforts?

To answer these questions, Reclaim Finance has investigated the design, implementation and impact of the various sectoral targets adopted by major banks.

Key findings:

  • Banks have set an unnecessarily complex and opaque mix of target types, most of which fail to create a direct link between achieving targets and reducing corporate emissions.
  • 25 banks out of the 30 banks analyzed use what are known as financed or facilitated emissions for at least one of their targets, in particular for oil and gas. These target types are linked to unrelated changes in corporate value as much as to changes in emissions.
  • Only two of the 13 distinct types of targets used by the 30 banks in our analysis are likely to be effective in driving decarbonization.

Recommendations:

  • Targets for fossil fuel companies should be based on reducing finance to these companies (unless they are making credible efforts to transition, including ending all coal, oil and gas expansion).
  • Targets for sectors that are currently major consumers of fossil fuels should be based on physical intensity (e.g. CO2/tonne of steel, CO2/kWh).
  • Absolute emission targets should be based on the total emissions from the companies in a bank’s sectoral portfolio, without the use of a corporate value-based attribution factor.
  • Financial regulators and supervisors must ensure the quality and ambition of bank targets as part of robust transition plans.
  • Net-zero committed banks must set robust 1.5°C targets and make serious efforts to meet them. They must push voluntary bodies like the Net-Zero Banking Alliance to adopt strong target-setting guidelines and practices.