What should a bank, investor or insurer’s climate transition plan look like? With requirements for transition planning being included in new legislation or demanded by financial supervisors and specific standards being discussed, this question has taken a prominent place in the debate on the decarbonization of the financial sector. The new briefing from Reclaim Finance outlines recommendations for robust financial institution transition plans and identifies “red flags” to rule out clearly inadequate efforts. While this work will be used to analyze all the elements disclosed by banks, a recent Reclaim Finance report has already revealed the massive gap before they can credibly claim to be in transition by showing how banks are continuing to support fossil fuel development.
A new map: robust financial institution climate transition plans
Financial institution transition plans are essential because financial institutions are not financing “today’s economy”, they are financing the economy of next year, of 2030, 2040 and the decades after. The services they provide enable companies to develop new projects, to launch products and to expand. By doing so, financial institutions are shaping the economy of the future. But, if they model it on today’s economy they will contribute to inaction and the perpetuation of a climate-wrecking status quo.
To chart a new course, we need a new map. And, providing sufficient ambition, robustness and enforcement is ensured, climate transition plans can play that role. Indeed, transition plans are progressively becoming one of the main criteria to assess how financial companies tackle – or fail to tackle – climate change in their strategies. (1)
Reclaim Finance’s new briefing provides recommendations to build robust financial climate transition plans. It lays out essential criteria regarding decarbonization targets, decarbonization strategies, public and private engagement, reporting and governance, and biodiversity and the just transition. Among these criteria, it identifies “red lines” that represent major gaps and shortcomings in potential plans. (2)
Looking at the (fossil fuel) elephant in the room
The end of financial services to fossil fuel development is an essential feature of any financial institution climate transition plan, and therefore one of the “red flags” identified by Reclaim Finance. Indeed, this need stems from the physical reality that consuming exploited coal, oil and gas reserves will push us beyond a 1.5°C – and even 2°C – warming. (3) It is clear in 1.5°C pathways that rely on realistic hypothesis, including the International Energy Agency’s Net-Zero by 2050 (IEA NZE). (4) It is also widely acknowledged in transition planning frameworks and recommendations, including from the High-Level Expert Group of the United Nations or from the Assessing-Low Carbon Transition Collective (ATP-Col). (5)
However, the 20 largest European banks are light years away from meeting that requirement because they have been involved in 982 deals to upstream or midstream oil and gas developers since 2021. And, the argument that a significant share of those deals went to companies that are also developing sustainable energy is swiftly demolished by the fact that 72% of the financing from these banks to the six biggest European oil and gas companies went to fund fossil fuels from 2021 to 2023. (6)
These stark findings can only mean that the European banks analyzed cannot claim to have a transition plan. Sadly, beyond these banks, research from Reclaim Finance shows only a handful of financial institutions – whether banks, asset managers, asset owners or (re)insurers – have cut their support to coal, oil and gas development. (7)
The new briefing from Reclaim Finance provides recommendations that financial institutions should leverage to build robust transition plans. If an exhaustive analysis of current climate strategies is useful – and will soon be carried out by the NGO for European banks – we cannot ignore the fact that they cross the most basic “red flag” identified: continued support to fossil fuel development. Policymakers and financial supervisors must mobilize all tools at their disposal to require financial institutions to adopt transition plans that ensure an end to these services which are at odds with climate goals and any claim of being in transition. (8)
