Dive Brief:
- The United Nations-backed Net-Zero Banking Alliance released updated guidelines for how banks should set climate targets Tuesday, lowering the requisite ambition for financial institutions that are members of the group.
- The guidance released April 15 requires signatories of the climate group to align their targets with limiting global warming “to well below 2 [degrees Celsius], striving for 1.5°C.” This marks a departure from previous guidance requiring portfolio alignment with a 1.5°C warming scenario and comes after six of the largest U.S. banks left the group between late December and early January.
- The guidance puts the UN-backed industry group’s guidance at odds with that of the Science Based Targets initiative, which called on banks to align targets with a 1.5 degree warming scenario in its Financial Institution Net-Zero Standard. SBTi also maintained the target in the draft of its updated Corporate Net-Zero Standard.
Dive Insight:
This week’s update represents the third version of NZBA’s standards, which were also revised in March 2024. The weakened target comes a year after the UN-backed banking alliance stated that banks should commit to net-zero by 2050 and set “intermediate 2030 sectoral targets in line with the latest science using low or no overshoot 1.5°C scenarios” in the second version of the guidelines.
The latest version of the alliance’s guidance says banks’ “targets should align with the goals of the Paris Agreement” — targeting temperature rise well below 2 degrees — and “be science-based and support the global transition to a net-zero economy.” The ambition section of the guidance adds that “banks should also consider policy at the regional and national levels.”
“Achieving the objectives of the Paris Agreement and limiting global temperature increases to well-below 2°C, striving for 1.5°C, will require ambitious actions from all strands of the economy,” NZBA said in the summary.
“The window for action is small,” the organization added. “The consensus of climate scientists is that global warming must be limited to 1.5°C above the preindustrial average by the end of the century to avoid the worst impacts of climate change.”
The UN-backed climate organization recommends that banks "individually and independently” set and disclose near- and long-term targets that support reaching net-zero emissions in line with the Paris Agreement. Additionally, NZBA recommends that banks set emissions baselines and annually report and measure the emissions from their lending, investment and capital markets portfolios; “use widely accepted climate-based decarbonization scenarios” for target setting; and regularly review their targets “to ensure consistency with current climate science.”
On the final point, NZBA recommends that banks review their targets at least every five years to ensure they align with the latest reports and assessments from the Intergovernmental Panel on Climate Change.
The guidance change comes after Goldman Sachs, Wells Fargo, Bank of America, Citigroup, Morgan Stanley and JPMorgan Chase left the UN-aligned group in rapid succession. Some of the banks have dodged state-level probes from Republican state attorneys general in the wake of their exits and other climate retreats.
The lack of requiring a strict 1.5°C portfolio alignment does not come as a surprise, as reports that the banking alliance was considering ditching the goal have trickled out since late February. A member of NZBA’s steering group confirmed that the organization would vote on axing the requirement earlier this month.
The reception of the updated guidance has been mixed, and one bank announced their departure Tuesday after the formalization of the loosened standards.
Morningstar DBRS, the financial institution’s global credit rating agency, said in March it did not view the change “as material from a credit perspective,” following initial reports of the considered change.
“It would be a pragmatic move, given the slow pace of transition we have seen, but it would also remain an ambitious target because it would still mean that we are on path for an orderly transition towards net zero, which implies lower transition costs compared to an abrupt or disorderly transition,” the analysts wrote last month. “Based on climate models, a potential new NZBA pledge has no consequence on physical risk in the next decade.”
However, some climate and sustainable finance groups have been opposed to the lowered ambitions of the updated guidance since reports of its consideration began to come out. Those views were reinforced following Tuesday’s update by a mix of sustainable investment groups, nonprofits and banks.
Netherlands-based Triodos Bank announced it was departing NZBA Tuesday and explicitly blamed the lowered ambitions of the new guidelines for its departure. The bank said that though there were improvements made from draft updates that were circulated, “the new guidelines fall short of the needed urgency to align loans and investments portfolios with the 1.5 degrees Celsius global warming scenario.”
“The disturbing reality that the world is not on track for 1.5°C should not be taken as a reason to give up on trying to meet the target, but a flashing red light on the need to double down on efforts to cut emissions,” sustainable finance nonprofit Reclaim Finance said after the steering committee member confirmed the vote.
“Every 0.1 of a degree matters and the higher global temperatures get, the harder it will be to deal with these impacts, and the greater the financial risks for banks and their investors,” responsible investment group Share Action’s Co-Director of Corporate Engagement Jeanne Martin said on Tuesday.
