Net Zero for Financial Institutions




In recent decades financial institutions have interpreted sustainability as an internal Corporate Social Responsibility (CSR) topic only. However the industry has begun to develop a profound understanding of the significant impact that sustainable finance really can have.

After the IPCC’s „Special Report on Global Warming of 1.5°C (SR15) in 2018 the global community accepted the scientists‘ warning. There was growing understanding that to avoid a climate breakdown with disastrous outcomes we must limit the global temperature increase to 1.5°C above pre-industrial levels and reach a state of net zero CO2 emissions by 2050.

How is Net Zero defined?

Net Zero is a term that is being used very frequently in the business sphere these days and it is often being mixed up with other terms such as climate neutral or CO2-neutral.

The Science Based Targets Initiative (SBTi) defines Net Zero as follows: To achieve a state of Net Zero a company has to abate all value-chain emissions in line with a 1.5°C temperature pathway (with no or limited overshoot) and neutralise all residual emissions that are not feasible to abate by permanently removing the equivalent amount of emissions. Even if companies reach that balance before the abatement of all necessary emissions they cannot claim a state of „Net Zero“.

What does Net Zero entail for the Financial Industry though?

It is easier to imagine a state of Net Zero for a corporate, for a financial institution with Scope 3, category 15 (financed emissions) emissions the concept is harder to grasp – financing the transition: Sure, but how can we measure it? How can we set targets accordingly?

There are a bunch of different initiatives – frankly it is hard to keep up if you’re not in the industry – that all wish to achieve Net Zero for Financials, e.g. Net Zero Asset Owner Alliance, the Net Zero Asset Managers Initiative, the Net Zero Banking Alliance or the Net Zero Insurance Alliance to name a few. All of those have been developing tailored approaches for banks, asset managers, insurers and asset owners. The Glasgow Financial Alliance for Net Zero (GFANZ) aims at becoming the umbrella organisation for all those initiatives – still highlighting the industry specifics but providing a comparable base framework.

Nonetheless, none of the initiatives have defined clearly what Net Zero means for the Financial industry and at what point such a state is reached. A common definition is lacking. This is about to change, the SBTi has started answering this important question.

Three different approaches are up for discussion in the Draft paper published in November 2022 (this is different from the Financial Sector science-based targets guidance):

  • Reducing the financed emissions exposure
  • Increasing Portfolio Alignment
  • Climate Solutions financing

The SBTi is also discussing the handling of fossil fuel financing and provides guidance on how to deal with carbon credits (either through company neutralization as described above or on a portfolio level) and how those can play a role in reaching a net zero state for a financial institution.

A first consultation has taken place:

  1. On the approaches: Most participants believe that a combination is needed
  2. On fossil fuels: they believe that transparency and target setting is crucial
  3. On the role of carbon credits most participants are in agreement that they should not be used to claim net zero but can be a useful addition. Just above half of the participants believe in the stricter company neutralization path, around a third believes in the portfolio neutralization.

The SBTi will take this feedback and integrate it into an updated Net Zero Standard for Financial insitutions which is set to be launched in the beginning of 2023. We believe it’s essential that the SBTi, an independent NGO-led initiative, will be defining what Net Zero means for Financial Insititutions. The bar will be set high and it could therefore play an important role in the decarbonization of the economy.