The withdrawal of major North American banks from the Net-Zero Banking Alliance (NZBA) earlier this year has reignited concerns about the credibility of banks’ climate action. While some view sustainable finance targets as evidence of a bank\u2019s commitment to addressing climate change, these broad, multi-sector targets are not suitable for this purpose. To effectively measure a bank’s efforts to support the decarbonization of the real economy, we need to focus on key sectors that are critical to this, such as the power sector. Power financing targets and energy supply financing ratios are more reliable indicators that banks should adopt as part of a credible climate strategy.<\/p>\n<\/div>
More than half of the 60 largest banks in the world have set sustainable finance targets (1). These targets are intended to demonstrate a bank’s ambition to increase its financing in support of sustainability objectives, such as environmental and social issues. Sustainable finance targets take different forms from bank to bank. Banks may use different terminology and may have multiple targets that complement each other.<\/p>\n<\/div>
The adoption of sustainable finance targets by banks is not inherently problematic, although there is a risk of greenwashing due to the lack of a common and sufficiently rigorous methodology to define \u201csustainable\u201d sectors and projects. The problem arises when banks\u2014and other stakeholders, including the media\u2014use these targets as a yardstick for climate action (2), often implying that higher financial commitments automatically translate into meaningful impact.<\/p>\n
Sustainable finance targets usually cover a wide range of sectors and activities, from clean transport and agriculture to affordable housing and healthcare. For instance, Barclays\u2019 US$1 trillion \u201cSustainable and Transition Financing\u201d target includes 26 environmental, social and transition \u201cthemes\u201d\u2014one of which is renewable energy\u2014broken down into numerous sub-themes and activities (3).<\/p>\n
Even targets focused exclusively on environmental or climate-related sectors lack the specificity needed to assess their ambition and actual contribution to supporting the decarbonization of the real economy. Other, more precise indicators need to be considered to properly assess a bank’s climate action.<\/p>\n<\/div>
The power sector is the main driver of decarbonization of the global economy. According to the International Energy Agency\u2019s (IEA) Net Zero Emissions (NZE) scenario, tripling global renewable energy capacity between 2023 and 2030 will deliver the largest emissions reductions compared to other decarbonization levers (4). Many banks have already set sectoral decarbonization targets<\/span><\/span><\/a><\/span> for the power sector, indicating that they recognise the importance of addressing this key sector in particular. However, only eight of the world’s 60 largest banks<\/span><\/span><\/a><\/span> have set power financing targets for alternatives to fossil fuel power\u2014despite the fact that sustainable finance targets typically include the power sector in their scope.<\/p>\n Power financing targets provide a concrete indicator for assessing banks\u2019 climate commitments. Their effectiveness can be measured within a set timeframe and evaluated against a credible 1.5\u00b0C trajectory. To meet the IEA’s NZE scenario goal of tripling renewable energy capacity by 2030, investment in renewable power, grids, and battery storage must double to US$2.5 trillion by 2030 (5).<\/p>\n Power financing targets also allow investors, regulators, and other stakeholders to assess how banks plan to transform their financing activities\u2014something that broad sustainable finance targets or power sector decarbonization targets alone cannot achieve. In fact, power financing targets lend credibility to power sector decarbonization targets by demonstrating how banks will redirect their financial flows to meet the challenge (6). They can also be a subset of broader sustainable finance targets that already include the power sector in their scope.<\/p>\n<\/div> Achieving a credible 1.5\u00b0C trajectory will require not only stepping up the development of alternatives to fossil fuels, but also phasing out fossil fuels themselves. According to the IEA\u2019s NZE scenario, by 2030, for every dollar allocated to fossil fuels, six dollars should be allocated to their sustainable alternatives for energy supply (mainly power generation, storage and grids) (7). This translates into a 6:1 energy supply financing ratio.<\/p>\n By their very nature, sustainable finance targets are too broad to be used to estimate a bank’s energy supply financing ratio. Comparing them with fossil fuel financing to gauge a bank’s performance would present an incomplete and misleading picture.<\/p>\n Banks should therefore disclose their current energy supply financing ratio and commit to achieving a 6:1 ratio by 2030. Organisations such as Bloomberg New Energy Finance (BNEF) and the Science Based Targets Initiative (SBTi) have highlighted the importance of this metric for banks (8). SBTi, in particular, advises financial institutions to increase their annual ratios to meet the IEA’s 2030 target.<\/p>\n Some banks are taking steps in this direction. Following agreements with the New York City Pension Fund and the NYC Comptroller, Royal Bank of Canada, Citi, and JPMorgan have committed to publishing their \u201cclean to fossil\u201d ratios by 2025 (9). However, so far only four of the world’s 60 largest banks<\/span><\/span><\/span><\/a>\u2014<\/span><\/span>\u2014BNP Paribas, Cr\u00e9dit Agricole, JPMorgan Chase and Santander\u2014have published their current energy supply financing ratio. BNP Paribas is the only one to have set a 2030 target for its energy supply financing ratio, although its methodology has important limitations.<\/p>\n<\/div> Sustainable finance targets should not be mistaken for evidence of climate action, nor should they be compared with fossil fuel financing. Many banks already recognise the power sector\u2019s critical role in decarbonization, as demonstrated by their decarbonization targets for this sector. They must now go further by setting power financing targets that at least double annual financing for alternatives to fossil fuel power supply\u2014generation, storage and grids\u2014by 2030. In addition, banks should disclose their current energy supply financing ratio and commit to achieving a 6:1 ratio by 2030.<\/strong><\/p>\n<\/div><\/div><\/div>The second key indicator: an energy supply financing ratio<\/h2><\/span>