The need to redesign bank decarbonization targets
Scores of banks have announced sectoral decarbonization targets in recent years. These targets are intended to mark interim steps on the way to “net zero” emissions by 2050, with the goal of keeping global warming under 1.5°C. Most interim targets are currently set for 2030.
Since the emergence of the UN-Convened Net-Zero Banking Alliance (NZBA) in 2021, these decarbonization targets have come to replace sectoral policies as the main vehicle for banks to implement their climate commitments. Their use is likely to grow further in coming years including as they are becoming embedded in emerging regulations on transition plans, most notably in the EU.
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, of existing bank decarbonization targets to achieve emission reductions in the real economy, Reclaim Finance has analyzed in depth the 243 decarbonization targets set by 30 of the largest members of the NZBA, covering the most carbon-intensive industrial sectors, including oil and gas, power generation, steel, cement and transport.
Our analysis is published in a technical briefing that explores the design of the targets adopted by banks and their likely effectiveness. It is accompanied by a downloadable spreadsheet that provides a detailed breakdown of key data on the 30 banks’ sectoral targets.
We find numerous problems and inconsistencies with target design, and a lack of transparency that hinders understanding of target coverage and ambition. We explain which target types must be urgently dropped, including widely used financed and facilitated emission targets, and which are most likely to ensure meaningful changes in banking practices, as long as they are appropriately applied.
While targets can undoubtedly be improved, they will remain insufficient on their own and must be integrated into a comprehensive transition plan that includes measures excluding activities incompatible with the 1.5°C trajectory.
methodology
Our detailed analysis covers 243 sectoral targets set by 30 of the largest banks in Europe, North America and Japan, which are among the 45 largest global banks by assets as of April 2024. Other types of targets, such as for nature, and for increasing financing of sustainable activities and phaseouts of fossil fuel infrastructure, are also important but are outside the scope of this work.
The banks covered are Bank of America, Banque Postale, Barclays, BBVA, BMO, BNP Paribas, BPCE/Natixis, Citi, Crédit Agricole, Crédit Mutuel, Deutsche Bank, Goldman Sachs, HSBC, ING, Intesa Sanpaolo, JPMorgan Chase, Mizuho, Morgan Stanley, MUFG, NatWest, RBC, Santander, Scotiabank, SMBC, Société Générale, Standard Chartered, TD, UBS, UniCredit, and Wells Fargo.
All data on bank targets was taken from documents on bank websites such as TCFD reports, climate reports and annual reports. Reclaim Finance sent each bank their relevant data. 18 banks confirmed and/or amended the data on their decarbonization targets.
key findings
Among the 13 distinct types of targets used by the 30 banks in our analysis, we found that only two of these target types are likely to be effective in driving decarbonization: SPFV and WAPI targets. These targets are adapted to the features of different economic sectors, SPFV targets being relevant for fossil fuels, which need to be phased out, and WAPI targets being relevant for sectors such as electricity generation, steel, cement and transport which need to be decarbonized. These emission and finance reduction targets could be supplemented with two additional target types, ASPE and SPC targets, which are currently not being used by banks.
Sectoral portfolio financing volume (SPFV) targets
Weighted average physical intensity targets (WAPI) targets
Absolute sectoral portfolio emissions (ASPE) targets
Sectoral portfolio coverage (SPC) targets
The attribution problem : why financed and facilitated emissions must be dropped
All bank fossil fuel absolute emission reduction targets, and many intensity targets across all sectors are based on what is called “financed emissions” — those associated with loans and investments — and “facilitated emissions” — those from bank capital market activities.
These concepts have been promoted by an industry body known as the Partnership for Carbon Accounting Financials (PCAF). They use attribution factors which are based on the logic that the higher the proportion of financing a bank or other institution provides for a client or investee, the more of its emissions that institution should take responsibility for.
The use of these attribution factors, however, means there is only a weak link between changes in financed and facilitated emissions and real-world corporate emissions. The attribution factors are based on corporate value, with the result that a bank’s financed and facilitated emissions for a sector could drop if the combined value of the companies in the bank’s sectoral portfolio increases, even without any fall in the companies’ emissions and/or in the bank’s volume of financing to that sector. The opposite is true if the value of the companies in a portfolio falls.
Contrary to financed and facilitated emissions, absolute sectoral portfolio emissions (ASPE) targets are the sum of all the emissions from the companies in a bank’s sectoral portfolio without the use of an attribution factor. Consequently, ASPE targets are not dependent on volatile financial indicators and would be simpler and more transparent than financed or facilitated emission targets. They are particularly relevant for fossil fuel sub-sectors where they should be used to supplement financial targets. They can also be used to supplement intensity targets for non-fossil fuel sectors.
Three essentials for setting targets
In addition to using the right target types, banks also need to ensure that their targets are comprehensive, transparent, 1.5° aligned and do not allow the large-scale use of offsets.
Current targets mostly include only partial coverage of bank and client activities, and the extent of coverage is rarely fully transparent. The biggest gap in bank target coverage is for capital market activities. Around half of bank finance for fossil fuels is provided via the facilitation of bond issuances. Only six banks in our analysis have one or more targets with at least partial coverage of their capital markets activities. All are based on a facilitated emissions formula using an attribution factor.
More than half of the targets in our sample are said to be benchmarked to the IEA’s Net Zero Emission pathway or other explicitly 1.5°C scenarios. But partly due to the NZBA’s failure to specify detailed and robust target design parameters and disclosure practices, and partly due to the banks’ own lack of commitment to credible and transparent targets, it is impossible to evaluate if most targets are indeed aligned with 1.5°C.
Judging alignment with 1.5°C scenarios is also complicated by banks potentially allowing their clients to “meet” their targets through the large-scale use of offsets instead of real-world emission cuts. A third of the banks in our sample explicitly state that they do not allow their clients to use offsets for meeting their targets, at least until they judge more credible offsetting standards and practices to be in place. The rest either explicitly allow offsets or have not published a position.
