GLASGOW — Political leaders are showering financial titans with praise at global climate talks. But their show of pageantry and back-patting is masking a deeper concern: that the banking industry’s pledges to help fight global warming are vague and unenforceable.
Banks and other financial institutions took over COP26’s main stage Wednesday as companies holding assets totaling more than $130 trillion committed to hit net-zero emissions by 2050, a deadline scientists say is critical to limiting global temperature increases to 1.5 degrees Celsius. Under auspices of the Glasgow Financial Alliance for Net Zero, a coalition led by U.N. special envoy Mark Carney, the industry has pledged to shift trillions of dollars away from fossil fuels as part of a global effort to keep temperatures below the catastrophic level.
“Only mainstream finance can fund the estimated $100 trillion of investment needed over the course of the next three decades,” Carney said in a Wednesday speech. He called the effort the “gold standard for net-zero” that could lead banks to “reshape their business models to fund the sustainable transformation of our economies.”
But absent regulation, banks are establishing their own voluntary guardrails, which environmental advocates and some shareholders are eyeing with suspicion. Within their own ranks, banks are debating how to build reporting frameworks that will give credibility to their net-zero efforts. That could include imposing rules on the companies they finance.
“There is no regulation of what corporates have to do on the climate side,” said Danny Cullenward, policy director at the think tank CarbonPlan. “The corporates are very interested in saying they’ve got a climate plan. The question is, what counts?”
Central to the debate are carbon offsets, the much-debated practice of paying to plant trees, cap methane wells or fund other activity to compensate for greenhouse gas emissions.
While banks themselves don’t make big use of offsets, their clients do. And as climate change takes on new urgency, critics say those companies are making green promises they might not be able to keep. Offsets, suddenly, are in great demand and short supply. Banks, given their pledges, could be forced to police the actions of their customers.
The Net-Zero Banking Alliance, part of Carney’s $130 trillion GFANZ coalition, has itself underscored the uncertainties. An alliance fact sheet says net-zero targets must cover banks’ financed emissions “where data availability allows them to be measured sufficiently,” for example. The industry has told the Securities and Exchange Commission, which has proposed rules for climate disclosure, that those emissions are too difficult to decipher.
“It’s more of a future issue than a current issue,” said Patrick McCully, a senior analyst at Reclaim Finance, a non-governmental organization that tracks financial institutions' practices. “If they were to allow the companies that they finance to meet large parts of their supposed reduction commitments by buying offsets, which we believe will be fake, that will be a big problem.”
Reclaim Finance set off a commotion in Glasgow when it called out the financial services sector with a report critical of offset use. The study was circulated before publication and had Carney and financial groups scrambling to issue prebuttals on Tuesday.
Trust has been low since April, when Carney claimed that Brookfield Asset Management, where he is vice chair, had reached net zero with its portfolio. Environmental advocates were confounded by the remarks because Brookfield had investments in fossil fuels. Carney seemed to claim that the firm had offset emissions from those investments by investing in renewables.
Carney, accused of greenwashing, walked back his remark, saying that “avoided emissions” — such as investments in renewables — shouldn’t count toward net-zero claims.
Some offsets are accepted as valid. The LEAF Coalition, a collection of companies that includes Salesforce, Nestlé and Amazon, has earned praise. On Wednesday it said it had raised $1 billion for countries to protect forests. The approach scales credit management to states, countries or regions, which proponents say can ensure that transactions actually reduce emissions.
Project-based offsets, however, have been widely rejected. They can allow polluters to buy their way out of emission controls with little oversight and shift pollution from one area to another rather than reduce it. Powerful companies holding dodgy credits might advocate for including those less-than-stellar credits in accounting standards.
“If everyone in the world is relying on offsets to achieve their target, who’s actually generating greenhouse gas reduction?” Janine Guillot, chief executive of the Value Reporting Foundation, a voluntary accounting standard body, said in an interview.
Setting the rules requires some delicate handling, said Margaret Kuhlow, finance practice leader with the World Wildlife Fund, part of the Science Based Targets initiative that measures corporate climate progress.
Allowing low-quality carbon credits through the door is a non-starter, she said. But overcomplicating the effort could push banks toward divesting from fossil fuel assets rather than slowly changing their practices. Fossil fuel companies would then go in search of less scrupulous financiers.
“What is the pressure to just divest and where do those assets go? And do they decarbonize?” Kuhlow said.
BlackRock CEO Larry Fink and others have raised similar concerns. As publicly traded companies are pressured to reduce emissions, some are simply selling their dirty assets to private buyers that are less scrutinized by regulators and consumers.
The rush is on to force standards on all players. The International Financial Reporting Standards Foundation, or IFRS, on Wednesday said it would consolidate efforts to build an accounting framework for climate disclosure. In an early prototype, the voluntary standard-setter proposed requiring companies to disclose their reliance on carbon offsets and describe in detail the assumptions behind them.
“The transfer of dirty assets to private hands is a very, very significant issue,” Guillot said. “It’s one reason I have not wanted to overly rely on securities regulators to solve the disclosure problem.” Guillot’s Value Reporting Foundation will be incorporated into the IFRS effort, which could release voluntary climate reporting standards by 2023.
Even Carney’s critics agree that his goal is ambitious. Banks and other financial services companies are integral to greening the world economy because of their intersection with, and potential power over, polluters.
Under Carney’s GFANZ plan, banks have about a year to deliver pathways to achieving net zero. Many, including Citigroup and Bank of America, are experimenting with loans that reward borrowers for reducing emissions and exploring ways to finance untested technology to reduce emissions.
Wells Fargo & Co., JPMorgan Chase & Co., Goldman Sachs and other large banks are part of the pledge to reach net zero by 2050.
“Activists are absolutely right to be focusing on offsetting because there are a lot of companies that have not been very clear whether and to what extent they’ll use offsetting to achieve their net-zero targets,” said Thomas Hale, a professor of public policy at the Blavatnik School of Government at the University of Oxford.
“We’d like to see much more clarity on this,” Hale said, “but huge progress should not be in any way discounted.”
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