2021-11-19 Reclaim Finance
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Huge pressure from civil society around COP26 pushed the financial sector net-zero alliances to acknowledge that they must tackle fossil fuels. This could spark a shift: the alliances have up to now been focused on gaining new members while underestimating the importance of developing strong guidelines and ensuring that these are followed by their members. Mark Carney was proud to announce during the first week of COP26 that the Glasgow Financial Alliance for Net Zero (GFANZ) that he chairs now has more than 450 members controlling over US$ 130 trillion in assets who have committed to halving the emissions from the companies they finance by 2030, on their way to reaching net zero by 2050. However a close look at the guidelines and criteria of the GFANZ alliances of investors, banks and insurers shows that they are completely inadequate to reaching this goal over the next eight years. While a few financial institutions have taken the lead and announced ambitious measures, we are still miles away from seeing adequate ambition across the members of GFANZ.
A (late) recognition of the importance of fossil fuels
It was about time. In the first days of COP26, the financial sector’s net-zero initiatives grouped together under the GFANZ umbrella (1) finally acknowledged the elephant in the room: fossil fuels. After being widely criticized for their weak criteria, GFANZ and two of its key member alliances published new documents admitting the need to act on fossil fuels.
- On day 1 of COP, GFANZ and the UN’s Race to Zero Campaign clarified via a fact sheet that it was trying to “accelerate the phase-out of fossil fuels”. It also stressed that it may remove members that “fail to live up to their published commitments” and in fact, had already done so (although it is unclear who has been removed and for what reason). GFANZ also published a progress report which says that “disclosing specific policies on the use of carbon credits, fossil fuels, coal and deforestation” is a best practice for net-zero plans.
- Second, the Net Zero Asset Managers initiative (NZAM) published on November 1st a vague (2) fossil fuel position calling members to adopt a “robust and science-based policy for the organisation in relation to fossil fuel phase out” and asked members to disclose information on their policies “on coal and other fossil fuel investments” when disclosing their 2030 targets.
- Finally, the Net-Zero Asset Owner Alliance (AOA), in a public response to the Reclaim Finance report on GFANZ, said it would accelerate the adoption by its members of coal policies — although it remained silent on the key issue of fossil fuel expansion.
Let’s not get carried away: at this point, these are very timid steps. Admitting the need to act on fossil fuels must pave the way for bolder requirements. Net-zero alliances now urgently need to publish robust and mandatory guidelines on how to end support for fossil fuel expansion.
Strategies and policies are not aligned with climate science
Unfortunately, the financial sector’s net-zero initiatives are not giving their membership the blueprints they need to tackle coal, oil and gas. Currently, none of the initiatives require ending investments in fossil fuel expansion, the red line drawn by the International Energy Agency to stay under 1.5°C. Most members do not have corporate strategies and policies aligned with climate science. NZAM is a good example of this contradiction: speaking up on the need to address all fossil fuels and yet, still lacking even adequate guidelines on ending investments in coal. Among the 130 members of the NZAM currently covered in Reclaim Finance’s Coal Policy Tool, only 13 exclude finance for a majority of coal developers, and less than a half (51) have one or more criteria to exclude a part of the coal sector. Even the AOA, considered the most ambitious of the alliances, still allows under its coal position paper continued investment in companies developing the approximately 195 coal plants under construction around the world.
Until GFANZ and its member alliances publish robust guidelines requiring its members to stop supporting fossil fuel expansion, we are left to rely on commitments made by individual financial institutions. And up to now, there have been very few. While Belgian bank KBC has announced it will no longer finance any new oil and gas development and exploration projects, and a few big banks and investors now exclude coal developers (4), commitments are still few and overwhelmingly weak and no way near what is needed to address the climate emergency.
Flawed decarbonization targets will not be enough
One of the only requirements for members of the net-zero alliances is to set decarbonization targets for their portfolios. But there are huge flaws in how this is being done. The recent scandal around HSBC attempting to weaken the criteria of the Net-Zero Banking Alliance is also revealing as to the seriousness of GFANZ members’ commitments to halve their emissions by 2030. On the investor side, according to the NZAM’s November 2021 progress report, the 43 of their 220 members who have set targets have so far only committed to manage 35% of their assets in line with net zero, undermining significantly their potential to reduce emissions (5). UBS AM announced targets covering just 20% of its assets under management. LGIM’s target covers 40%. And while 13 asset managers have announced targets covering all of their assets, most (and none of the biggest ones) have not.
Furthermore, members are allowed by NZAM to apply their fossil fuel phase out policies only to the portion of these assets committed to net zero (6). This is extremely problematic, as many of the biggest asset managers are refusing to set any fossil fuel exclusion criteria for their huge and rapidly growing passive index funds. Eight big NZAM members – including UBS AM and BlackRock – have more than 60% of their total assets under management with absolutely no restrictions on coal (7). This is another illustration that the GFANZ leadership is not bringing adequate solutions to the problem (8): credible decarbonization targets should be supported by clear and robust policies phasing out support for fossil fuels.
Financial institutions can no longer avoid tackling the elephant in the room: the fossil fuel industry and its expansion plans. Their flagship net-zero alliances are slowly recognizing publicly that their credibility goes hand in hand with robust fossil fuel phase-out policies. A key challenge ahead for GFANZ and its alliance members is for them to identify and insist upon strong fossil fuel policies – and to apply sanctions (including removal from the alliances) to financial institutions which don’t align with climate science and keep supporting fossil fuel developers.
- The initiatives are the UN-convened Net-Zero Asset Owner Alliance (AOA), the Net Zero Asset Managers initiative (NZAM) and the Paris Aligned Investment Initiative (PAII), the Net-Zero Banking Alliance (NZBA), the Net-Zero Insurance Alliance (NZIA), the Net Zero Financial Service Providers Alliance (NZFSPA) and the Net Zero Investment Consultants Initiative (NZICI). Zero Investment Consultants Initiative (NZICI).
- The NZAM Network Partners’ “expectation of signatories with regard to fossil fuel investment policy,” is misleadingly titled as its text mentions only coal and completely ignores oil and gas. Furthermore, the 5 positions on coal from different investor and related initiatives that are cited in the “expectation” are of widely varying quality and ambition: the “Thermal Coal Position” of the AOA allows investments in companies involved in coal plants currently under construction; the PAII Net Zero Investment Framework, is very weak on scaling down fossil fuel production; the Powering Past Coal Alliance guideline, contains four major loopholes. The NZAM should promote a more ambitious framework, aligned with the IEA NZE findings and with climate science, such as the SBTi RI10, and make it compulsory for members to align their coal policies with such guidelines, for all their assets.
- Based on the Coal Policy Tool. The 13 members that exclude the majority of companies developing new coal projects are AXA IM, Amundi, LFDE, WHEB, BNP PAM, DGAM, LBPAM, La Française, Candriam, CCLA, Danske AM, Rothschild & Co AM, and Tikehau.
- LGIM, the biggest UK coal investor, published on November 3rd an improved coal policy which excludes “companies making new investments in thermal coal”. There is however a huge loophole in the policy: it applies to less than 40% of LGIM’s assets under management. Credit Suisse, NatWest, Standard Chartered, all heavyweights of the European banking industry, have announced they will no longer finance (both lending and underwriting) companies developing new coal projects. Unfortunately, the three banks are yet to confirm their definition of such coal developers, which could potentially drastically weaken the implementation of this measure.
- A recent report by Universal Owner finds that just 10% of the NZAM members’ holdings were responsible for at least 85% of all their portfolio emissions. This figure shows why adopting targets based on a proportion (and not 100%) of total assets under management is a flawed approach, if all companies from carbon intensive sectors are not included in this subset.
- The NZAM fossil fuel position states “At a minimum this should cover the assets under management that a signatory commits to manage in line with net zero, and follow one of the positions below in relation to at least these assets.” With LGIM committing only 38% or UBS AM committing a mere 20% or their total AUM, this means the remaining 62% or 80% could be left out of the policies and still considered acceptable by the NZAM standards.
- Our scorecard on 29 asset managers, published in April 2021, revealed that the largest passive asset managers are failing to take appropriate steps to push companies to exit coal. It describes what such steps should be.
- Another illustration is the Asset Owner Alliance which allows its members to set targets based only on emissions intensity rather than absolute emissions. Of the 29 AOA members with targets, as of mid-October 2021, only one, French pension fund FFR, explicitly notes that its target is based on absolute emissions. There is also a lack of clarity from most of the asset owners on whether they count in their targets the Scope 3 emissions of the companies they own.