Reclaim Finance, Sierra Club and seven other NGOs including BankTrack (1) have warned that a proposed new method for financial institutions to measure their decarbonisation impact is “opaque, easily manipulated, and likely counter-productive”. The comment was made in a detailed response to a consultation paper on how financial institutions can measure their contribution to financing the energy transition, published by the Glasgow Financial Alliance for Net Zero (GFANZ) (2).

In the paper, GFANZ argues that the current approach of setting targets for financed emissions incentivizes financial institutions to deprive companies of the finance needed to transition to cleaner practices. The Alliance proposes a new “Expected Emissions Reduction” (EER) methodology which would reward financial institutions based on the estimated volume of emissions that would be avoided due to their investees’ and clients’ transition plans.

The NGOs warn that while the current approaches to decarbonization promoted by GFANZ and its member alliances need to be greatly improved, the EER approach is “fatally flawed”, and risks being used to justify continued high levels of finance for fossil fuel companies without putting any meaningful pressure on them to change. They note the  risk that EER could become a core “transition” metric for financial institutions, and could be taken up by financial regulators.

It is simply not credible to argue that oil and gas companies need more cash to support them in the transition, the NGOs say. Finance is needed, however, for sectors such as steel and cement to transition, and to shut down polluting infrastructure like coal plants. This transition and phaseout finance can be incentivized with robust policies that end finance for new fossil fuel consuming infrastructure, promote engagement practices with financial penalties for non-performance, and encourage funding for coal phaseouts.

Patrick McCully, Senior Energy Analyst at Reclaim Finance: "Oil and gas companies are currently awash with cash, and only a pitiful proportion of that money is going to developing sustainable energy supplies. It is nonsensical to believe that shoveling even more money in the direction of fossil fuel companies is the key to reducing their emissions. The proposed ‘expected emissions reductions’ approach is based on subjective counterfactual guesstimates that will be easily gamed by companies and their funders. This is in fact the same approach used to generate carbon offsets, and is the main reason why the offsetting market is suffering from a crisis of legitimacy, something GFANZ should pay careful heed to."

Adele Shraiman, Senior Campaign Strategist with the Sierra Club’s Fossil-Free Finance campaign: "The recent proposal from GFANZ on how financial institutions can measure their decarbonization impacts enables a new paradigm of greenwashing, in which financial institutions can continue businesses as usual while patting themselves on the back for so-called transition financing. The financial sector plays a key role in facilitating the transition to a clean energy economy. But this won’t happen if voluntary initiatives pave the way for polluting companies to game the system and raise billions of dollars without doing anything to actually align their business with global climate goals."

The NGOs note that the answer to the flaws and lack of ambition of finance sector decarbonization targets is to improve their design, level of ambition, and implementation. It is also imperative that decarbonization targets be just one part of financial institution net-zero transition plans. Key elements of credible transition plans have been outlined by the UN High-Level Expert Group on net zero (HLEG), and must include effective engagement, exclusion and voting criteria, and an end to finance for fossil fuel expansion.

Notes:

1. The comments were submitted by Reclaim Finance and endorsed by the Sierra Club, AnsvarligFremtid (Denmark), BankTrack (Netherlands), Carbon Market Watch (Belgium), Center for Energy, Ecology and Development (Philippines), Rainforest Action Network (USA), ReCommon (Italy) and Urgewald (Germany).  Read more in this blog.
2.  GFANZ, Defining Transition Finance and Considerations for Decarbonization Contribution Methodologies: Consultative Document, September 2023.

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