The world’s big banks are at the forefront of the planned transition to a low-carbon economy, but the early results of their pledges to reduce carbon-emissions financing are modest. The banks face an array of challenges that are beyond their control in meeting their goals.
Analysts with Moody’s Ratings examined a sample of banks that belong to the Net Zero Banking Alliance (NZBA). The group represents 145 of the world’s largest banks — including Canada’s Big Six banks — that have committed to reaching net zero in both their financed emissions and their own emissions by 2050. Financed emissions are calculated as a proportion of each bank client’s emissions roughly equal to the bank’s financing of that client. These banks are also expected to set interim reduction targets for 2030.
To examine the banks’ progress toward those goals, the Moody’s analysts reviewed a handful of NZBA banks that represent about 10% of the group’s members and account for 30% of their combined banking assets. The research found that, while many of the world’s largest banks have made commitments to cut their financed emissions, these promises are often contingent on factors the banks can’t control. These factors include the quality of the data on corporate emissions, borrowers’ ability to reduce their emissions, and government policy efforts to curb emissions and combat climate change.
At this stage, the biggest obstacle the banks face stems from a lack of high-quality data on client companies’ emissions.
“Limited availability of granular emissions data is a significant obstacle for banks and exposes them to the risk of having to revise their financed emissions data,” the Moody’s report stated.
Currently, banks rely on either company-reported emissions data or third-party data providers when calculating financed emissions. The quality of this data varies, sometimes utilizing models that don’t accurately reflect actual emissions of specific companies, it stated.
These data challenges are particularly acute for smaller companies, the report noted. For these companies, banks are more likely to rely on third-party estimates and sector-level reporting to calculate emissions financing activity.
Efforts to introduce more reliable reporting remain a work in progress. In late October, the Canadian Sustainability Standards Board (CSSB) indicated it is still reviewing the feedback received on its inaugural proposed sustainability disclosure standards, and that the finalized standards are likely to be published in December.
When the CSSB standards are published, they will be voluntary, at least until securities regulators, or other policymakers, mandate their adoption. Even then, the availability of high-quality emissions data is likely to remain uneven.
“While data quality is likely to be an area of continual improvement, emissions data for some sectors may remain subject to estimation,” Moody’s said, pointing to sectors such as residential real estate as likely having to continue to rely on approximations.
Amid these data limitations, most banks haven’t set targets for reducing emissions in the real estate sector. “Banks have large exposure to real estate lending, but they lack granular data on individual properties’ energy efficiency; as a result, the emissions footprint of the portfolio is subject to high sector-level estimation,” Moody’s said.
The banks have less sway over emissions coming from residential real estate compared with other industries that face significant climate-related risks, such as energy sector firms.
“For banks to achieve reduction targets [in the real estate sector], they would rely heavily on property owners retrofitting older housing stock to increase energy efficiency or on a growing proportion of renewable and low-carbon sources in a country’s energy mix,” the report noted.
Similarly, the agriculture sector is another area in which detailed emissions data aren’t yet available, and options for reducing emissions remain limited, the Moody’s report said. As a result, few banks are setting targets for this sector.
“The importance of housing and food security will make it difficult for banks to meaningfully reduce financed emissions from these sectors without an increase in the emissions efficiency of housing and agriculture,” the report said. That leaves banks more reliant on government policy to curb financed emissions by these sectors, compared with other areas for which data are more robust and banks have greater ability to favour the financing of lower carbon-producing activities.
For instance, Moody’s found that banks have been most active in setting targets for energy-related sectors, such as oil and gas and power generation, and this is where banks have made the greatest progress in reducing financed emissions. In most cases, “banks are still a long way from achieving their interim targets,” the rating agency reported. The report stressed, however, that these are early days for this reporting, as the banks have only recently begun setting these targets. “We expect more significant progress will become apparent as we approach 2030.”
In the meantime, the banks’ efforts to curb financed emissions in the energy-driven sectors “supports banks’ credit strength as the transition to lower carbon energy puts these sectors most at risk of stranded assets and heightens borrower exposure to carbon transition,” it said.
This article appears in the November issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.