Written evidence submitted by ShareAction
EAC Inquiry: The financial sector and the UK’s net zero transition
Financial institutions cannot make credible net-zero commitments unless:
Introduction to ShareAction
ShareAction is a registered charity established to promote transparency and responsible investment practices by banks, insurers, pension funds and other institutional investors. We are a member organisation and count amongst our members well-known NGOs and charitable foundations, as well as over 26,000 individual supporters. Among other activities, we work with the financial services sector to promote integration of sustainability factors in investment decisions, long-term stewardship of assets and the consideration of the views of clients, beneficiaries and pension scheme members. This has included much engagement with many GFANZ members over the years.
Our written evidence submission will cover four key themes and suggested questions for GFANZ:
Written evidence in full
If the City of London were a country, its emissions financed by banks and asset managers would make it the ninth largest polluter in the world. The emissions it funds makes the UK financial sector a bigger polluter than Germany or Canada. GFANZ has huge potential to affect change considering its size and geographic footprint spanning the UK and beyond. It convenes 450 financial institutions across banks, investors and insurance companies, representing over $130 trillion assets under management.
Whilst progress has been made over the years, with members setting net-zero targets and publishing transition plans, GFANZ still has a long way to go if it wishes to reach net-zero by 2050. This is due, in part, to targets and plans not being ambitious enough.
Financial institutions cannot make credible net-zero commitments unless:
And yet, many GFANZ members choose to set targets using emissions intensity and fail to set financing restrictions in relation to fossil fuel expansion. The IEA and IPCC have made it clear that, as of July 2021, new fossil fuel projects are incompatible with a net-zero future. However, despite this:
● According to Reclaim Finance, only 60 out of 240 of the largest GFANZ members have any policy excluding support for companies developing new coal projects. Of these 60, just 11 have adopted robust policies to end financial services for all companies building new coal mines, plants and related infrastructure.
● Six of the eight top holders of stocks and bonds in the global coal industry as of November 2021 were GFANZ members. The biggest coal investor, BlackRock — a member of GFANZ’s Steering Group — held over $34 billion in companies developing new coal infrastructure, including mines and power plants.
● Out of 74 of the largest members of GFANZ, only five have policies with any mention of restricting some support for oil and gas supply expanders.
● In 2021, the 44 largest members of the Net-Zero Banking Alliance (NZBA) provided $143.6 billion in lending and underwriting for the 75 companies doing the most to expand oil and gas. In October 2021, JPMorgan Chase, Mizuho and Unicredit joined the NZBA. The following month they participated in a syndicate that underwrote the sale of $580 million in bonds for Gazprom (the company with the second biggest oil and gas expansion plans globally).
● NZBA member HSBC led 11 banks to lobby to weaken the requirements of the alliance before joining: in particular, they asked to ditch the need for science-based targets, and to have three years from signing the NZBA commitment – rather than 18 months – before setting their 2030 target.
GFANZ has a huge opportunity to accelerate members’ progress by being more assertive than it is currently. GFANZ consists of voluntary initiatives – members commit to follow a set of guidelines, determined by the UN’s Race to Zero (RTZ) campaign. However, there are limited accountability mechanisms in place in the case of inaction.
For example, Barclays – one of the founding members of GFANZ’s Net Zero Banking Alliance – put forward a Say on Climate plan to its investors at its 2022 AGM and it passed. However, ShareAction found that this plan is not net-zero aligned and urged investors to vote against it, not least because it flouted RTZ guidelines at the time. Notably, Barclays did not set a high-level interim target to halve its financed emissions by 2030 as opposed to some of its peers (e.g. Natwest). The need to set a 2030 target was part of former criteria set by RTZ, which as today has only been implemented by a handful of NZBA members. This casts doubt over whether GFANZ members truly need to comply with these criteria in practice.
Furthermore, only one of Barclays’ newly announced 2030 targets (Energy) truly aligns with the IEA NZE and 1.5°C. The rest – Power, Cement and Steel – only integrate this level ambition as the upper end of a target range, leaving significant scope for lower emissions reductions in these climate critical sectors. And finally, Barclays’ fossil fuel policies are still filled with loopholes. Despite several improvements to its coal policy, the bank is still in a position to support thermal coal expansion. And Barclays' policy on the dirtiest forms of oil & gas (e.g. Arctic oil & gas or oil sands) is one of the weakest among European peers.
Without credible, short-term plans of how to get there, and accountability mechanisms where guidance is disregarded or targets are missed, 2050 net-zero targets risk becoming empty promises. It is time policymakers and regulators step in to mandate financial institutions’ compliance with sustainability targets. See Chapter 4.
New RTZ criteria
ShareAction have been encouraged by the UN RTZ campaign’s new criteria for members, which include all of the GFANZ alliances, released on 15th June 2022. These new criteria are much more ambitious and explicit on fossil fuels than previous versions, which leaves some GFANZ members in an awkward position.
The new Starting Line criteria reiterate that members must pledge to “reach (net) zero greenhouse gases as soon as possible, and by 2050 at the latest” and must commit to a “fair share” of the 50% cut in global CO2 emissions that the Intergovernmental Panel on Climate Change (IPCC) says is needed by 2030 in order for global warming to stay under 1.5°C.
Among other criteria, the so-called ‘Starting Line’ requirements include the following:
● “Halting deforestation and phasing down and out all unabated fossil fuels as part of a global just transition” (Starting Line criteria, “Pledge”);
● members “must restrict the development, financing, and facilitation of new fossil assets.” The criteria stress that “this includes no new coal projects” (Interpretation Guide, “Pledge”, 5.b);
● financial institutions must include in their targets all the emissions caused by their investments, lending, underwriting and insurance, including the Scope 3 emissions of the companies to which they provide these financial services (Interpretation Guide, “Pledge”, 2.b);
● targets must include “land-based emissions” (Starting Line criteria, “Pledge”)
● members must develop transition plans to show how they will meet their commitments, including what actions they will take within the following 12 months, 2-3 years, and by 2030 (Starting Line criteria, “Plan”);
● members must “align external policy and engagement, including membership in associations, to the goal of halving emissions by 2030” (Starting Line criteria, “Persuade”).
These new Race to Zero criteria pose a major challenge to GFANZ, its seven sectoral net-zero alliances, and all of their more than 450 members. GFANZ is not structured to have its own demands for its members — instead it requires its member alliances to join the Race to Zero and made clear in its 2021 Progress Report that “all GFANZ members must align with the Race to Zero criteria”.
The Climate Champions state that “all existing [Race to Zero] members and Partner organisations will need to meet the criteria by 15th June 2023 at the latest”. GFANZ members should also note that members that fail to comply “risk being removed from the Race”. It remains to be seen if this will be enforced in practice.
New GFANZ transition plans guidance
However, on the same day, GFANZ released updated guidance for members regarding transition plans, which is far less ambitious. GFANZ’s recommendations are light-touch technical guidance and miss the opportunity to be explicit about the need for a clear end to the financing of fossil fuel expansion, including of coal companies, as highlighted in this Guardian article.
Notable exclusions from GFANZ’s updated guidance:
● There is nothing on absolute emissions in target-setting – it is left to each financial institution to decide which metric they use: intensity vs absolute reductions;
● The transition plan guidance on coal, oil and gas policies fail to make explicit that fossil fuel expansion is incompatible with net-zero;
● There is no mention about the need to phase-down financing of coal, oil, and gas financing along science-based timelines.
Also of note is that both RTZ and GFANZ ignore the financial sector’s responsibilities under international human rights law. RTZ criteria makes no commitment to international human rights law and the rights of Indigenous Peoples to Free, Prior and Informed Consent (FPIC). As a result, RTZ – as a high-profile UN-backed initiative – is effectively ignoring well-established soft and hard law including the UN Guiding Principles on Business and Human Rights (UNGP) which clarify that companies and financial institutions have the responsibility to respect human rights. A ‘just transition’ cannot be achieved without respect for human rights obligations.
The financial sector will not transition at the pace required to limit global heating to 1.5°C without new laws and regulations, that are properly enforced. We make the following recommendations for policymakers and regulators, which we consider critical to encourage private finance to play its necessary role in decarbonising the economy, that the EAC should consider through the inquiry process:
Thank you for taking the time to read through this evidence submission.
Senior UK Policy Officer, ShareAction
 Emission intensity targets do not necessarily lead to reductions in absolute emissions. This is because companies can reduce intensity in two ways – through decarbonising or by increasing market share. For example, if a bank or a company increased its investments in low-carbon assets at a faster rate than it is investing in high-carbon assets, it would reduce its emission intensity. Yet it would not necessarily reduce its absolute emissions – as it might still grow the size of its high-carbon assets and/or keep it constant. In addition, an emission intensity metric does not capture the climate impact of large emitters.