Most bank decarbonization targets are not fit for purpose and need to be redesigned to deliver effective emissions cuts, Reclaim Finance finds, following a detailed analysis of the sectoral targets set by 30 of the largest banks in the UN-convened Net Zero Banking Alliance (NZBA) (1). The report, published as delegates gather in New York for the UN Summit of the Future, identifies 13 different target types used by the banks, but finds that only two of these are likely to deliver real-world emissions reductions. The NGO is urging banks to rethink their targets, and in particular to jettison the widely used “financed emissions” and “facilitated emissions” targets. Reclaim Finance also wants regulators to take a more robust approach to assessing decarbonization targets within bank transition plans.

Reclaim Finance analyzed 243 decarbonization targets set by banks as part of their commitment to cutting greenhouse gas emissions. These targets are supposed to play a key role in reducing emissions from the bank’s clients in the most carbon-intensive sectors such as oil and gas, coal, power generation, steel, aluminum and real estate.

The analysis, which includes a foreword by Ilmi Granoff, Senior Fellow at the Sabin Center for Climate Change Law (2), shows an unnecessarily complex, confusing and opaque mix of target types, most of which fail to create a direct link between achieving targets and corporate emission reductions, because they link emissions to unrelated financial measures. Within each target type, many individual targets are incomplete (not applied to all sectors or to all greenhouse gases), and not adequately disaggregated, mixing different sectors, gases and types of finance.

Banks also fail to clearly differentiate between the types of targets needed for coal, oil and gas (which must be phased out) and other sectors (like cement, steel and transport) which must be cleaned up.

Banks need to ditch their financed and facilitated emissions targets, which fail to track real-world emission reductions. Bank targets are a morass of different methodologies, confused categories and inadequate ambitions. Delivering real-world carbon cuts requires transparent and ambitious targets that send a clear signal to bank clients that they will lose access to bank financing if they do not clean up their act. Banks must reduce lending and capital markets finance for fossil fuel clients and demand robust 1.5°C-aligned decarbonization strategies from all their emission intensive clients.

Paddy McCully, senior energy transition analyst at Reclaim Finance

In particular, the report finds that targets based on “financed emissions” (from lending) and “facilitated emissions” (from capital markets activities) are of little use in ensuring real-world emission reductions. This is because these types of targets are calculated using corporate value variables. The result is that if the value of the companies in a bank’s sectoral portfolio increases, its financed emissions can fall without the companies in the portfolio reducing real-world emissions.

Six of the target types analyzed, and 80 out of the 243 targets, are based on a variant of financed and/or facilitated emissions measurements. These target types are especially widely used for targets for absolute emissions from oil and gas portfolios. Twenty-five banks out of the 30 analyzed use financed/facilitated emissions for at least one of their targets (3).

Targets not based on financed or facilitated emissions may still suffer from other fatal flaws. One particularly egregious example of a target that mixes elements which should logically be separate is JPMorgan Chase’s energy intensity mix target which covers oil, gas and clean energy – allowing it to achieve its target by increasing finance for clean energy, but without reducing finance for oil and gas.

Just two existing types of targets were identified as meaningful for delivering real-world emissions targets:

• Targets which reduce financing to fossil fuel supply from both lending and capital markets activities (which we term sectoral portfolio financing volume (SPFV) targets) (4); and
• Those which lower the physical emissions-intensity of high fossil fuel consumption industrial sectors (which we term weighted average physical intensity (WAPI) targets) (5).

Reclaim Finance is urging banks to adopt two other target types:

• Targets which reduce absolute client emissions (without the use of an attribution factor), which are especially relevant for fossil fuel supply; and
• Targets for the proportion of bank clients which meet robust decarbonization standards, such as the number to adopt robust 1.5°C-aligned transition plans.

No single type of decarbonization target is sufficient to adequately capture what banks must do, and must require from their clients, to achieve real-world decarbonization. Targets must be just one part of a bank’s comprehensive transition plan which must also include sectoral, client engagement and clean finance policies.

Banks that claim to be serious about climate leadership must work with the NZBA to push for the widespread adoption of targets that are fit for purpose. Regulators must also take note and ensure target integrity as part of their supervision of financial institution climate transition plans.

Paddy McCully, senior energy transition analyst at Reclaim Finance

Some financial regulators, most notably in the EU, already require companies to disclose their climate targets as part of their supervision of bank transition plans. Reclaim Finance urges regulators to not only require disclosures, but also assess the robustness of the design and implementation of targets.

Read the report

Supporting quotes:

The science is clear, new fossil fuel projects are incompatible with a 1.5ºC scenario. Therefore, NZBA members banks should live up to their commitment and stop financing such projects and companies developing them. Decarbonization targets that are not supported by ambitious sectoral policies only delay real climate action.

Quentin Aubineau, Policy Analyst, BankTrack, The Netherlands

Japan’s megabanks are the top global financiers of fossil fuel expansion, funnelling tens of billions of dollars into coal, oil and gas each year without concrete policies to steer us towards a safer climate. Japan’s big banks are failing to set effective targets to end funding for oil and gas companies without genuine transition plans aligned with global climate goals. As record-breaking storms and heatwaves devastate lives in Japan and across Asia, Japanese megabanks must urgently commit to real emissions reductions and adopt policies and decarbonisation targets that end funding for fossil fuel expansion.

Eri Watanabe, Japan Energy Finance Campaigner, Market Forces

Any decarbonization targets that still allow banks to continue to pour money into companies that are actively expanding fossil fuels are not worth the paper they are printed on. Unfortunately, last year alone the world’s largest banks funneled $347 billion into expansion companies. As this report details meaningful targets must be robust, transparent and drive real emissions reductions across high-emitting sectors, and they must cover all financing to those sectors whether via investments, lending or underwriting.

Allison Fajans-Turner, Bank Engagement and Policy Lead, Rainforest Action Network, USA

Decarbonisation targets as they are presently designed suffer from significant design flaws that enable banks to achieve climate goals without necessarily reducing emissions. Banks should be transparent about how much progress is driven by financial carbon accounting and how much is due to their clients reducing emissions. If what’s driving the bulk of their progress is financial carbon accounting, the usefulness and credibility of these targets could be seriously called into question.

Xavier Lerin, Senior Research Manager, ShareAction, UK

The decarbonization targets adopted by major banks are mostly smoke and mirrors. They obscure the fact that these institutions are still bankrolling the expansion of the fossil fuel industry with hundreds of billions of dollars each year. Banks that are serious about real world decarbonization need to phase out their support for coal, oil and gas companies and set standards that can drive real change in high-emitting industries like steel or cement. This report provides a blueprint for action.

Heffa Schuecking, Director, Urgewald, Germany

Notes:

1. Targeting Net Zero: The Need to Redesign Bank Decabonization Targets, published by Reclaim Finance, September 2024
2. Ilmi Granoff, Senior Fellow at the Sabin Center for Climate Change Law, Columbia Law School, and Principal at Climate Technology Group.
3. The 25 banks using financed / facilitated emissions targets are: Barclays, BBVA, BMO, BNP Paribas, BPCE/Natixis, Citi, Crédit Agricole, Crédit Mutuel, Deutsche Bank, HSBC, Intesa Sanpaolo, Mizuho, Morgan Stanley, MUFG, NatWest, RBC, Santander, Scotiabank, SMBC, Société Générale, Standard Chartered, TD, UBS, UniCredit, and Wells Fargo.
4. Eleven banks in the analysis already use lending exposure targets for fossil fuels. None have yet set corresponding targets for their facilitation of capital markets financing for corporations.
5. Around half of the targets in our analysis are WAPI-type.

This press release was originally published on Reclaim Finance's website here.