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European net-zero banks yet to tackle fossil fuel portfolios: ShareAction

13 September 2021 Cristina Brooks

UK-based activist investor non-profit ShareAction found the 25 largest European banks have not committed to absolute emissions reductions in their net-zero plans and do not have clear plans to cut their financing of fossil fuels, including coal.

A September report by the group singled out some of the banks as net-zero leaders, but found that, overall, few banks pledging net-zero emissions had promised to take "concrete steps" such as interim targets for emissions in projects they finance, absolute emissions reduction targets, or absolute emissions disclosures.

Only five of the net-zero-committed banks had an interim target for emissions reductions prior to reaching net zero by or before 2050. Such targets serve to hold the banks to account and ensure final targets can realistically be reached.

What is more, all but three of the 25 largest European banks' net-zero plans avoid pledging absolute emissions reductions in their portfolios.

The group wants the banks to upgrade their net-zero pledges prior to the 26th UN Climate Change Conference of the Parties (COP26) in Glasgow this November.

On the back of shareholder activists piling pressure on majors Chevron and ExxonMobil in the US, the nonprofit may replicate the movement in Europe, which could see investors pressure banks to set interim targets for the emissions of projects they finance and make obtaining finance for fossil fuel projects more difficult.

Investor pressures like these are likely to continue. "Financial firms like those targeted by ShareAction have been taking a leading role in identifying and pricing climate change risk, but along with that leading role comes increased attention on their tactics for managing it," IHS Markit Climate & Cleantech Executive Director Peter Gardett said.

Governments are poised to require banks to disclose their climate risks, a move likely to spur greater investor pressures. The UK is currently planning to require disclosure of climate risks by financial institutions and large companies under rules set to come into full effect by 2025. New Zealand introduced similar rules in April. The governor of the Bank of France has suggested EU states' central banks should be required to make disclosures.

New rules could also accelerate divestments by institutional investors. "As climate risk reporting requirements come into place, pressure will intensify on institutional investors to be sure financial portfolios are net zero in reality as well as in ambition. We're only at the beginning of this process, and financial firms should be prepared to face ongoing campaigns targeting their shareholders and stakeholders," Gardett said.

Plans to cut financing for fossil fuels critiqued

Despite a 9% decrease in fossil fuel financing overall amid the drop in demand during the pandemic in 2020, large banks in China and the EU nonetheless increased their financing for fossil fuels, according to a report by Rainforest Action Network (RAN).

Last year, capital market underwriting was the most common source of fossil fuel financing from banks, with 65% of bank financing for fossil fuels through the underwriting of bond and equity issuances, RAN found.

However, of the European banks assessed, only UK-based Barclays is targeting cuts to this portion of its activity.

While 20 of the 25 banks evaluated had a net-zero target covering the emissions of the projects they finance, ShareAction questioned whether adequate plans have been drawn up for meeting those targets.

The majority, or 18 of the banks in the ShareAction report, disclosed their high-carbon investments across various sectors, but fewer than half (11) revealed the extent of their fossil fuel financing specifically.

The non-profit noted that 15 of the banks now disclose data on their portfolios' alignment with their own net-zero aims, which it called "progress."

Three of the banks with net-zero targets—the UK's Lloyds Banking Group and NatWest Group, plus Finland's Nordea—have committed to halving financed emissions by 2030.

While not setting interim goals for emissions overall, eight banks have interim sectoral targets for fossil fuel extraction and power generation, but only three of them—Barclays and NatWest, and France's Crédit Agricole—use an absolute emissions metric or similar.

No European bank has yet pledged to completely stop financing new fossil fuel expansion, despite the International Energy Agency's recommendation that fossil fuel financing must end to stop global warming at 1.5 degrees Celsius above pre-industrial levels, one of the aims of the Paris Agreement.

Few limits on fracking

Italian public bank Intesa SanPaolo stands out as the only bank in the study that had committed to phasing out its exposure to all unconventional oil and natural gas sources, such as oil sands and fracking, ShareAction said.

No European bank currently limits how much they finance pre-existing unconventional projects, the non-profit warned.

Most banks restrict activity in one or more unconventional oil and gas activity, but the lack of thresholds for unconventional oil and gas overall meant the limits did not incentivize oil majors to phase out such projects, it added.

For example, Denmark's Danske Bank excludes project financing for the expansion of oil and gas exploration, as well as production, and NatWest's oil and gas policy excludes dedicated financing for companies exploring new oil and gas reserves.

Italian bank UniCredit does not offer new asset-level finance for some unconventional oil and gas activities and restricts corporate finance for companies with a revenue share of 25% or more from unconventional oil and gas sources.

However, even this threshold for financing was too low for ShareAction because producers like Russia's Gazprom and Austria's OMV don't meet it, allowing the bank to become Europe's "largest financier of Arctic oil and gas activities" since 2016.

ShareAction also thinks banks should commit to divesting their activities in biomass, a controversial source of fuel for power plants, heating, and transport that is set to continue to receive EU renewable energy subsidies.

Limits on coal

Many banks place limits on financing of coal projects, but these are also inadequate, said ShareAction.

For example, 12 of the banks committed to stopping financing activities relating to the thermal coal sector by 2030, and seven put limits on financing coal mining, the non-profit said.

But the pledges were not good enough for the non-profit. "Less than half of the banks have committed to a phase-out of financing to thermal coal-related activities and most of these policies are ridden with loopholes," said ShareAction.

Two French co-operative banks stand out for cutting back the most on coal investment, it said. Crédit Agricole has put in place coal policies ShareAction called "ambitious" and Crédit Mutuel was found to be the only bank which has both relative and absolute limits on investment in the coal power and mining sectors.

Posted 13 September 2021 by Cristina Brooks, Senior Journalist, Climate & Sustainability, IHS Markit

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