Introduction
With rising climate hazards and disasters in the world, including earthquakes and flood, it is time for banks around the world, including all Arab banks, to take the transition to net-zero more seriously.
This article traces the path for the transition to net-zero for Arab banks and urges the need to put a serious climate strategy that can help and support coping with natural disasters and climate change.
The article overviews the concept of net zero, and highlights the important role that banks can play in the transition to net zero, knowing that this transition requires a global action. Net zero regulations are briefly overviewed, and the various steps and the best practices for the transition towards net zero are presented. The article concludes with the World Economic Forum call to honour the net zero pledge by 2050 and with recommendation for Arab banks in their transition to net zero.
What is net zero?
Net zero means that the total greenhouse gas (GHG) emissions of an organisation, a city or a country, must be equal to or less than the emissions it removes from the environment.
While carbon neutral and net zero have similar meanings, there are small but important differences between them. Net zero refers to all greenhouse gases (carbon dioxide, methane, nitrous oxide, etc.), whereas carbon neutral only refers to carbon dioxide. For example, a company is carbon neutral if the amount of carbon dioxide it emits is the same as or less than the amount of carbon it removes from the atmosphere.
Climate change is the biggest threat facing humanity. The rate at which we are emitting greenhouse gases is unsustainable and could be irreversible if a global action is not taken immediately.
If global temperatures continue to rise, the world will experience extreme weather conditions and biodiversity loss. To stop global warming, net zero must be achieved at a global level. It must also be permanent, meaning that any greenhouse gases removed from the atmosphere are not re-released.
While individual action is crucial, businesses and governments must drive action to help society transition to net zero.
Important role for banks
Today it is more and more pressing to tackle climate change. The world must achieve net zero greenhouse gases (GHG) emissions. To achieve net zero, all sectors of the real economy will need to follow science-based transition pathways to reduce their GHG emissions. This will require significant investment. As providers and facilitators of financing, banks have an opportunity to play a pivotal role in supporting the transition,
which will need to be enabled by supportive policy conditions.
In order for banks to develop a robust approach for measuring and setting targets for emissions within their portfolios, they need the best available economic and technological knowledge to achieve the transition of the real economy to net zero. Net zero strategies must be laid down and translated into action towards closing the transition finance gap, and active collaboration with clients and policymakers to enable a net zero real economy. Banks must also disclose progress to all stakeholders.
THE NEED FOR A GLOBAL WORLD ACTION
The transition of the real economy to net zero is not an individual or a single institution action, it needs a global world action to consolidate efforts and put joint targets and milestones.
The industry-led, United Nations UN-convened Net-Zero Banking Alliance NZBA brings together a global group of banks, currently representing over 40% of global banking assets, which are committed to aligning their lending and investment portfolios with net-zero emissions by 2050.
NZBA is the flagship climate initiative under the Principles for Responsible Banking to accelerate science-based climate target setting and develop common practice. NZBA is open to all banks globally. The Alliance reinforces, accelerates and supports the implementation of decarbonisation strategies, providing an internationally coherent framework and guidelines in which to operate, supported by peer-learning from pioneering banks. It recognises the vital role of banks in supporting the global transition of the real economy to net-zero emissions.
Net zero regulations
The Net-Zero Banking Alliance have pledged to reach net-zero carbon emissions by 2050. Consumers and governments are putting increasing pressure on financial institutions to take climate action and drive the pursuit to net zero. Consumers are demanding banks to stop investing in assets linked to fossil fuels and deforestation. And many clients are wondreing how sustainable is their bank.
Regulation around sustainability reporting has also gained momentum. The mandatory ESG (Environmental, Social, and Governance) reporting requirements and political pressure around carbon mitigation have affected the banking industry.
The urgency for banks to take action is increasing. Banks need to adopt sustainability in their processes and operations and commit to achieving net zero by 2050.
Recognizing that climate risk is a financial risk, the Financial Stability Board (FSB) created the Task Force for Climate-related Financial Disclosure (TCFD) to develop recommendations on the types of information that companies should disclose to support investors, lenders, and insurance underwriters in appropriately assessing and pricing a specific set of risks including the risks related to climate change. The disclosure recommendations are centred on four thematic areas representing the core elements of how companies operate, including governance, strategy, risk management, and metrics and targets.
Steps FOR THE TRANSITION TO NET ZERO
Many banks may struggle to meet their net-zero goals. Many banks have set themselves targets across their business sectors to enable them to meet their net-zero commitments. But some have yet to devise an appropriate roadmap, with achievable milestones, to direct them and their credit customers on the journey to becoming carbon neutral. Furthermore, the processes that banks are often using to manage this transition are frequently developed as they are required rather than as part of long-term strategies. Without well thought out architectures and tools, banks will not be able to meet their net-zero commitments and will fail to support the global drive to sustainability.
To reach their net-zero objectives, banks must begin by ensuring that they can measure the carbon emissions generated by their own operations and those produced by the companies they finance. They need far-reaching data solutions that source, track and report in-house and customer carbon emissions. Once banks have appropriate data solutions in place, they can then advance on the journey to net-zero.
Peter Beardshaw from Accenture identified key steps that will help banks and financial institutions reach their net-zero goals. These steps are:
- Understand net-zero pathways: Review the pathways that lead to the reduction of carbon emissions in each of the sectors that the organization finances. After selecting the most appropriate pathways, set interim emissions targets for each sector.
- Establish baselines: Analyse current portfolio emissions. Set emissions baseline for each lending sector, and for the whole finance portfolio, so that progress towards net-zero goals can be measured.
- Analyse gap-to-target: Use data modelling to estimate likely changes in the carbon emissions of the current lending portfolio if no further action is taken. This analysis will enable banks to determine the action they must take to close the gap between their current levels of carbon emissions and their net-zero targets.
- Develop transition strategies: Collaborate with the corporate customers that are currently being financed to develop strategies that help them reduce their carbon emissions.
- Communicate targets: Communicate carbon emissions reduction targets to external audiences using channels such as sustainability reports and mandatory climate-related financial disclosures (MCFDs).
- Embed net-zero objectives across the organization: Identify and implement changes to the institution’s operating model to ensure that its net-zero objectives are embedded across its value chain.
Best practices towards net zero
According to McKinsey’s research, over the past few years, many banks have made public commitments to reduce their “financed emissions” in line with the objectives of the Paris Agreement. This commitment is seen in the number of banks joining the Net-Zero Banking Alliance (NZBA), which grew from 43 to 122 banks, representing 40 percent of global banking assets, in just over a year. Membership requires that banks commit to transitioning the emissions from their lending and investment portfolios to align with a net-zero pathway. Even more banks have conducted internal assessments of their financed emissions and are considering whether they want to set a public target. Yet more are considering the journey to measure and set targets for their financed emissions.
The process of assessing and setting targets for financed emissions is not simple. It involves multiple complexities arising from differences between sectors, geographic variation, shifting counterparty plans, changing industry standards, and a nascent and rapidly evolving data environment. Furthermore, the actions that banks take to achieve targets often create pressure on other objectives, such as revenue growth in critical business areas, and require changes to key processes and policies, a situation that calls for careful reconciliation. Finally, banks must balance their goal of reducing financed emissions with the simultaneous goal of financing reduced emissions, which often involves increasing financing to responsibly heavy emitters who need capital to decarbonize their businesses.
McKinsey research identified some best practices enabling banks to create durable, reliable emissions measurement capabilities; set and monitor progress toward well-defined targets; and identify opportunities to support clients in their decarbonization transition.
Countries net zero targets
Since the adoption of the Paris Agreement, a growing number of countries have committed to net zero emissions targets.
More than 70 countries, including the biggest polluters, China, the United States, and the European Union, have set a net zero target, covering about 76% of global emissions.
Over 1,200 companies have set science-based targets in line with net zero, and over 400 financial institutions have joined the Race to Zero, pledging to take immediate and rigorous action to halve global emissions by 2030.
HSBC Guide to net zero
The Hongkong and Shanghai Banking Corporation Limited, HSBC, produced a guide that walks through the steps needed to implement a net-zero strategy for financed emissions. It provides recommendations about the key choices banks will face as they develop robust strategies, alongside an overview of the potential trade-offs involved. The guide provides critical insight into the decision-making processes of some of the world’s largest banks, highlighting areas for potential common ground across the industry. It explores how banks can engage with clients and policymakers to deliver financing to help accelerate the transition to a low carbon economy, and disclose progress transparently for stakeholders. Ultimately, the guide looks to progress the industry dialogue on how banks can move from net zero ambition to implementation and action.
Barclays bank best practice in transition to net zero
Seventy-five of the world’s central banks and financial regulators have joined together to form the Network for Greening the Financial System, which seeks to mobilise mainstream finance to support the transition toward a sustainable economy. Barclays bank is amongst the 197 banks to have signed the United Nations Environment Programme UNEP Finance Initiative’s Principles for Responsible Banking, which calls for banks to align their business activities to the Paris Agreement.
Barclays bank journey to becoming a net zero bank by 2050 is guided by six principles.
- Transparent disclosure: tracking progress in aligning financed emissions with the Paris Agreement, starting with energy, power, cement and steel.
- Working with clients to accelerate and help facilitate clients transition to a low-carbon economy wherever possible.
- Evolving adopted approach: Barclays bank approach to becoming a net zero bank is evolving over time, as the world changes.
- Recognising the commercial opportunity: The transition to a low-carbon economy is defining opportunity for innovation and growth. There is a significant opportunity for Barclays to play a leading role in helping to meet the demand for climate change related financing to support the transition.
- Supporting negative emissions technologies: Barclays bank is taking steps in the short, medium, and long term to facilitate the development of negative emissions technology and markets. This includes investing in early-stage innovation and research in the near term.
- Deploying negative emissions technologies to offset any residual gap-to-net-zero by adopting an approach which is principally focused on emissions reduction.
To align Barclays bank financing to the Paris Agreement, including capital markets activity, it was necessary to create a methodology that builds on and extends existing industry approaches.
WORLD ECONOMIC FORUM call for honoring net-zero pledge by 2050
The World Economic Forum advocated banks to honor their pledges and help reduce global carbon emissions meaningfully. For this purpose, it suggested that the broader incentive systems driving global business activity need to be realigned in numerous ways:
- Banks and financial institutions need a universal way to estimate the volume and cost of the carbon they emit. Right now, it is a mixture depending in part on jurisdiction.
- A global carbon price, driven by collective policy actions and market dynamics, is needed.
- Banks need international agreement on the proper accounting practices for carbon so they can all measure their progress the same way. No one is entirely sure how much carbon companies are producing because the data are not readily and universally available. Banks will need to develop standards for their own use, but those might differ.
- Authorities could help by creating standards so that all companies use the same language when reporting their carbon activities.
- Central banks are not created to enforce climate policy. But they do seek financial stability.
- Banks need the ability to track carbon emissions around the world. In addition to a stronger emissions database, the net-zero future will not come about without a more coherent global approach to climate policy.
ROAD AHEAD FOR ARAB BANKS
The global transition to net zero will require a new commercial and industrial revolution. Huge changes have to be made to every sector of the economy including power generation, manufacturing, transport, housing and agriculture. Such transition will require significant investment.
Arab banks have an important role to play. Beyond being responsible for emissions related to their own operational footprint, Arab banks can act as climate partners to individuals, corporations and governments, providing and channelling the finance needed to invest in sustainable business models.
Arab banks journey to net zero will be at different speeds in different Arab countries and to varying degrees, given technology constraints.
Below are some recommendations to Arab banks in their transition towards net zero:
- Recommendation #1. Arab banks should have a clear vision on how to build their net zero strategies.
- Recommendation #2. Arab banks need to have a clear sustainability strategy and develop an action plan to deliver it.
- Recommendation #3. Arab banks should support green investments. Core part of banks’ sustainability strategy needs to involve investing in funds that help advance innovative carbon-efficient technologies and supply chains.
- Recommendation #4. Arab banks should help the development of eco products.
- Recommendation #5. Arab Banks can empower their customers to measure, reduce and offset their carbon emissions by integrating carbon management products into their mobile banking apps.
- Recommendation #6: Arab banks should play a leading role in setting standards and regulations for the transition to net zero.
