BANKS AND OTHER FINANCIAL INSTITUTIONS have a central role to play in decarbonizing the planet. Through their role in capital formation and the creation of credit and innovative financial instruments, they can help accelerate the transition by shifting the mix of their loan portfolios and other financing activities away from heavy emitters and towards more sustainable actors across different industries — including renewable alternatives in energy, industrials and materials. Climate change and the uncertainty of an orderly transition also create significant risks for banks with exposure to carbon-intensive industries.
While many of the world’s largest banks have expressed support for the Paris Agreement — even setting their own targets for reaching net-zero emissions by 2050 — our research indicates that the majority lag behind the pace of change necessary to hit those targets. Many continue to finance new fossil fuel infrastructure as they work within the reality of client transition plans and the world’s reliance on fossil fuels. Indeed, a relationship with a fossil-fuel producer in the loan or investment banking arm can create internal conflict with the rest of the organization, hindering a bank’s ability to be an effective steward of the net-zero economy.
How can investors assess whether a bank’s net-zero pledge will effectively steer assets under management, capital formation and credit activities to be Paris-aligned? How well do banks understand the climate-related risk embedded in their loan portfolio? And which banks are on track to achieve their zero-emission commitments?
We have developed a proprietary assessment framework to provide answers to these questions. While its primary function is to provide guidance to portfolio management All Country World Index’s bank sector weight — we found only to be fully aligned with the .
