The withdrawal of major North American banks from the Net-Zero Banking Alliance (NZBA) earlier this year has reignited concerns about the credibility of banks’ climate action. While some view sustainable finance targets as evidence of a bank’s commitment to addressing climate change, these broad, multi-sector targets are not suitable for this purpose. To effectively measure a bank’s efforts to support the decarbonization of the real economy, we need to focus on key sectors that are critical to this, such as the power sector. Power financing targets and energy supply financing ratios are more reliable indicators that banks should adopt as part of a credible climate strategy.

More than half of the 60 largest banks in the world have set sustainable finance targets (1). These targets are intended to demonstrate a bank’s ambition to increase its financing in support of sustainability objectives, such as environmental and social issues. Sustainable finance targets take different forms from bank to bank. Banks may use different terminology and may have multiple targets that complement each other.

Sustainable finance targets should not be mistaken for climate action indicators

The adoption of sustainable finance targets by banks is not inherently problematic, although there is a risk of greenwashing due to the lack of a common and sufficiently rigorous methodology to define “sustainable” sectors and projects. The problem arises when banks—and other stakeholders, including the media—use these targets as a yardstick for climate action (2), often implying that higher financial commitments automatically translate into meaningful impact.

Sustainable finance targets usually cover a wide range of sectors and activities, from clean transport and agriculture to affordable housing and healthcare. For instance, Barclays’ US$1 trillion “Sustainable and Transition Financing” target includes 26 environmental, social and transition “themes”—one of which is renewable energy—broken down into numerous sub-themes and activities (3).

Even targets focused exclusively on environmental or climate-related sectors lack the specificity needed to assess their ambition and actual contribution to supporting the decarbonization of the real economy. Other, more precise indicators need to be considered to properly assess a bank’s climate action.

The first key indicator: a power financing target

The power sector is the main driver of decarbonization of the global economy. According to the International Energy Agency’s (IEA) Net Zero Emissions (NZE) scenario, tripling global renewable energy capacity between 2023 and 2030 will deliver the largest emissions reductions compared to other decarbonization levers (4). Many banks have already set sectoral decarbonization targets for the power sector, indicating that they recognise the importance of addressing this key sector in particular. However, only eight of the world’s 60 largest banks have set power financing targets for alternatives to fossil fuel power—despite the fact that sustainable finance targets typically include the power sector in their scope.

Power financing targets provide a concrete indicator for assessing banks’ climate commitments. Their effectiveness can be measured within a set timeframe and evaluated against a credible 1.5°C trajectory. To meet the IEA’s NZE scenario goal of tripling renewable energy capacity by 2030, investment in renewable power, grids, and battery storage must double to US$2.5 trillion by 2030 (5).

Power financing targets also allow investors, regulators, and other stakeholders to assess how banks plan to transform their financing activities—something that broad sustainable finance targets or power sector decarbonization targets alone cannot achieve. In fact, power financing targets lend credibility to power sector decarbonization targets by demonstrating how banks will redirect their financial flows to meet the challenge (6). They can also be a subset of broader sustainable finance targets that already include the power sector in their scope.

The second key indicator: an energy supply financing ratio

Achieving a credible 1.5°C trajectory will require not only stepping up the development of alternatives to fossil fuels, but also phasing out fossil fuels themselves. According to the IEA’s NZE scenario, by 2030, for every dollar allocated to fossil fuels, six dollars should be allocated to their sustainable alternatives for energy supply (mainly power generation, storage and grids) (7). This translates into a 6:1 energy supply financing ratio.

By their very nature, sustainable finance targets are too broad to be used to estimate a bank’s energy supply financing ratio. Comparing them with fossil fuel financing to gauge a bank’s performance would present an incomplete and misleading picture.

Banks should therefore disclose their current energy supply financing ratio and commit to achieving a 6:1 ratio by 2030. Organisations such as Bloomberg New Energy Finance (BNEF) and the Science Based Targets Initiative (SBTi) have highlighted the importance of this metric for banks (8). SBTi, in particular, advises financial institutions to increase their annual ratios to meet the IEA’s 2030 target.

Some banks are taking steps in this direction. Following agreements with the New York City Pension Fund and the NYC Comptroller, Royal Bank of Canada, Citi, and JPMorgan have committed to publishing their “clean to fossil” ratios by 2025 (9). However, so far only four of the world’s 60 largest banks——BNP Paribas, Crédit Agricole, JPMorgan Chase and Santander—have published their current energy supply financing ratio. BNP Paribas is the only one to have set a 2030 target for its energy supply financing ratio, although its methodology has important limitations.

Sustainable finance targets should not be mistaken for evidence of climate action, nor should they be compared with fossil fuel financing. Many banks already recognise the power sector’s critical role in decarbonization, as demonstrated by their decarbonization targets for this sector. They must now go further by setting power financing targets that at least double annual financing for alternatives to fossil fuel power supply—generation, storage and grids—by 2030. In addition, banks should disclose their current energy supply financing ratio and commit to achieving a 6:1 ratio by 2030.

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

Notes:

1. Research conducted by Reclaim Finance in January 2025, based on banks included in the Sustainable Policy Power Tracker. The research treats sustainable, green, ESG, climate or other similar finance targets with similar names and objectives in the same way.  
2. See, for example, communications from Wells Fargo, Standard Chartered and the National Australia Bank using sustainable finance targets as net zero milestones and indicators. See also this article from Bloomberg, which uses sustainable finance targets to illustrate banks’ efforts to meet climate goals.  
3. See Barclays’ Sustainable Finance Framework of February 2024 and its Transition Finance Framework of February 2024.  
4. According to the IEA’s NZE scenario, annual investment in the energy transition will need to more than double from US$1.8 trillion in 2023 to over US$4.2 trillion in 2030. See IEA, World Energy Outlook, p.197, October 2023. 
5. See IEA, World Energy Investment 2024, p. 19, June 2024.  
6. Well-designed and ambitious decarbonization targets are only one part of a robust climate transition plan for banks. Robust transition plans should also include policies to end financing for new fossil fuel projects and the companies developing them, plans to finance the decommissioning of existing fossil fuel infrastructure, and targets to significantly increase financing for sustainable power supply. See Reclaim Finance’s full analysis of banks’ decarbonization targets. 
7. According to the IEA’s NZE scenario, around US$2.5 trillion will be invested in clean electricity and low-emission fuels and around US$1.8 trillion in energy efficiency and end-use transformation by 2030, while investment in fossil fuel supply falls to around US$0.4 trillion. This translates into an overall ratio of 10:1 for the energy transition (i.e. energy supply, energy efficiency and end-use transformation), including a specific ratio of 6:1 for “clean” power supply. See IEA, Net-Zero Roadmap, p.162, September 2023. 
8. The SBTi recommends that financial actors increase their annual ratios to meet the IEA’s 2030 target, and BNEF has highlighted the importance of banks’ energy financing ratios in a comprehensive study.  Other examples include the Institute of International Finance and the Institut de la Finance Durable, which have emphasised the use of energy ratios by banks in their publications. 
9. See Bloomberg, NYC Pensions Reach Deal With RBC on Green-Funding Disclosure, April 2024.