Net-zero: The new compass for the banking sector

Unpacking why net-zero roadmaps are vital tools for the finance industry to accelerate a low carbon world.

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The finance industry is at a critical turning point. A net-zero commitment is becoming an essential pillar for banks to transition the economy towards a low carbon future, whilst also mobilising capital towards the goals of the Paris Agreement in a scientific and credible way.

Why now?

The scientific community estimates that to protect our planet, we collectively need to limit the temperature rise to a maximum 1.5°C above pre-industrial levels by 2100. This implies that the global economy needs to be carbon neutral by 2050.

To respond to the scale of the climate crisis, 43 banks – including BNP Paribas – convened to commit to the Net-Zero Banking Alliance (NZBA). The NZBA is a coalition of banks with a common commitment to transition their lending and investment portfolios to reach carbon emission neutrality by 2050 at the latest.

The signing of a common net-zero carbon commitment, with intermediate targets, is a decisive step in the financial sector’s mobilisation in the defence of our climate. It sends a strong signal to all stakeholders, and provides a methodological basis for action, as well as a cultural lever for the environmental transition of banks and their customers,” said Jean-Laurent Bonnafé, Director and Chief Executive Officer of BNP Paribas.

What is the Net-Zero Banking Alliance?

By signing the Net-Zero Banking Alliance statement, banks in the coalition are committing to the following key actions:

  • Alignment: Align all operational and attributable carbon emissions from lending and investment portfolios with pathways to net-zero by mid-century, or sooner, including CO2 emissions reaching net-zero at the latest by 2050. 
  • Sectors: Prioritise efforts where banks have, or can have, the most significant impact, i.e. the most carbon-intensive and carbon-emitting sectors within portfolios.
  • Reporting: Annually publish progress and the associated action plans. 

The Net-Zero Banking Alliance is a pivotal step in the mobilisation of the financial sector to scale up climate action and is part of the Glasgow Financial Alliance for Net Zero (GFANZ), chaired by Mark Carney ahead of the 26th UN Climate Change Conference of the Parties (COP26).

How can banks scale up net-zero?

BNP Paribas UK Country Head Anne Marie Verstraeten recently joined the City of London Green Horizon Perspectives event on ‘Banking on Net Zero’ to share her insights on the role of the banking sector in accelerating the transition to net-zero. With other industry leaders from NatWest Group, Morgan Stanley and the World Economic Forum, the panel conversed on the key drivers and challenges for transition.

Alignment across a broad range of stakeholders is critical explained Verstraeten, “this is such a profound transformation that businesses and societies have to go through” highlighting how important it is to “come to a shared vision and to learn more about it all together as we move forward, so that we can speed up the process”.

The required inter-sector and inter-organisational learning is a collaborative effort involving many experts outside the finance industry. Verstraeten highlighted how BNP Paribas, in addition to close collaboration with clients is also “working together with scientists and academia” as these experts are enablers to trigger “a very dynamic process which can really be a catalyst to bring more innovative solutions in the different sectors, sub sectors and activities”.

Driving capital towards the transition is essential. A key development in the evolution of finance embracing climate science towards net-zero has been the mainstreaming of sustainability-linked finance. Banks are increasingly embedding credible decarbonisation key performance indicators (KPIs) into financing mechanisms for issuers and borrowers – primarily through sustainability-linked bonds and loans (SLB and SLLs). As the market grows, ensuring sustainable finance is grounded in science is vital.

Focussing on climate science within finance also relies on robust risk management frameworks, and BNP Paribas has been at the forefront of this through the creation of the Paris Agreement Capital Transition Assessment (PACTA). PACTA is an open source methodology used by banks to drive their corporate loan book to align with various climate scenarios. It was developed in coalition with other banks and in collaboration with the 2° Investing Initiative and UN Principles for Responsible Investment. The PACTA approach covers the majority of high-emitting greenhouse gas sectors including utilities, automakers, oil, gas and power generation.

The banks committed to the NZBA are due to set science-aligned interim (2030) and long-term goals to reach net-zero no later than 2050, with goals supplemented by member determined short-term targets and action plans.

Inger Andersen, Executive Director of the UN Environment Programme noted “the end goal is a net-zero transition of the economy in line with science. Nothing less. Immediate, transparent and accountable actions underpin these commitments”.

What’s next for net-zero on the road to COP26?

The UK, which is hosting COP26 in Glasgow in November 2021, is targeting to reach net-zero by 2050. More broadly, there is a notable momentum on transition across a broad range of sectors – including finance.

Nigel Topping, High-Level Climate Champion for COP26 highlighted, “Already, a fundamental shift in capital is accelerating, with the world’s largest asset owners and managers – and now banks – joining the Race to Zero.  But the finance gap remains in the trillions of dollars, particularly for developing economies, and concerted efforts are needed to translate necessary solutions into investable propositions, which is why I am delighted to be collaborating on GFANZ.”