Financial institutions failing to back a low-carbon economy
The World Benchmarking Alliance (WBA) has claimed that financial institutions are failing to back a low-carbon economy, with capital allocation and fossil fuel phase-out presently far behind what is required for an orderly and resilient economic transition.
In their latest Financial System Climate Assessment, the WBA analysed 400 of the world’s most influential financial institutions including Allianz, BlackRock and HSBC. The Alliance found that whilst over a third (146) of companies have climate transition plans addressing at least some of their financial activities, only a quarter of these plans cover financed activities (not just institutions’ own operations).
Further, while the research argues that credible transition plans require short‑term targets (e.g. by 2030) for financing low‑carbon solutions aligned with a 1.5°C pathway, uptake is lacking. Of those institutions with transition plans, only 47 companies have embedded one or more short‑term financing targets that jointly align with the pathway. Interestingly the pattern varies by institution type, with a fifth of banks’ transition plans include a time‑bound financing target aligned with 1.5°C, compared with less than 3% of asset managers; insurers and pension funds sit at 10% and 7% respectively.
Fossil phase out plans are a bottleneck for credibility
The researchers also find what they describe as a critical gap in the sector’s transition readiness, where most institutions still lack comprehensive fossil fuel restrictions and credible strategies to manage the long-term transition risks associated with fossil fuel dependence. The WBA argue that repeated fossil fuel crises are exposing global financial institutions to economic and financial instability, therefore a greater urgency in shifting capital towards a low-carbon economy is required.
Pauliina Murphy, Engagement & Communications Director of the World Benchmarking Alliance, Comments: "Repeated fossil fuel crises have starkly illustrated how vital transition planning is for global economic stability. Financial institutions are central to this; their decisions on allocating capital to low-carbon solutions and phasing out fossil fuels will determine how fast the global economy can rebuild its resilience.”[i]
The research found that a particular bottleneck, in terms of plan credibility, lies in fossil fuel exit commitments. Just two financial institutions- ING and Zürcher Kantonalbank, were found to be demonstrating robust fossil fuel restrictions, these included commitments to both phase out existing exposure and stop new financing flows.
Murphy adds: “The opportunity now is to link transition plans to capital allocation decisions and clear policy commitments to phase out fossil fuels. As expectations from regulators, markets and stakeholders continue to evolve, financial institutions that move early to strengthen credibility and transparency will be better positioned to benefit from the transition.”[ii]
Lack of transparency & regional disparities
The WBA finds that financial institutions with a transition plan are roughly eight times more likely to disclose the share of financed activities allocated to low-carbon solutions, than those without plan. However, transparency across the sector remains limited, with only 15% of institutions reporting financed fossil fuel activity. Further, while there is evidence for different aspects of transition planning, none of the companies assessed demonstrate both sufficient ambition and sufficient reduction of their financed emissions, resulting in consistently low scores across the WBA’s assessment[iii].
Despite the limitations of public disclosure, the assessment suggests that low-carbon activities represent on average a modest 2.7% of the total financed activities of the 400 financial institutions. Regional differences, however, are evident:
· Europe and Central Asia have the highest share of institutions with transition plans that cover financial activities (over 60%). In addition, regional average share of disclosed low carbon financial activity is 3.6% of total activity, higher than the global average of 2.7%.
· North America has the lowest prevalence of transition plans among the regions highlighted (18%). Its average share of disclosed low carbon financial activity is 3.2%, in line with the global average.
· East Asia has a low prevalence of plans (42%). Across Asia overall, institutions report the lowest average share of low carbon financial activity at around 1.1%, indicating the largest potential uplift[iv].
References
[ii] Ibid
