Take stock of recent climate commitments from Chase, HSBC and Morgan Stanley

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In recent months, some of the world’s largest private banks, including JPMorgan Chase, HSBC and Morgan Stanley, have taken important steps towards climate action. What distinguishes this latest wave of climate commitments from financial institutions from past announcements? Building on past commitments that increase green investments or limit funding to certain high-emission activities, recent commitments add to growing evidence that banks are taking a more holistic approach to the climate emergency.

Looking at their investments in different sectors and regions, more and more banks are thinking about how to reduce the carbon intensity of entire portfolios over time. After all, through their product offerings, lending activities, and customer engagement, financial institutions can play a key role in influencing the transformation needed for a net zero emissions economy.

What we have given to the market is the ambition that our total funding by 2050 will be net zero. That’s a much bigger price or goal than picking a sub-segment of our portfolio and saying “I’m not going to bank you” because that’s not what everyone needs. That industry or that customer can then just go to Bank X, Bank Y, or Bank Z. They won’t have changed their business model.

– Noel Quinn, CEO of HSBC, in a interview with Reuters October 9, 2020.

While recent commitments signal increased ambition, their content and structure vary across institutions. RMI established our Center for Climate-Aligned Finance in July to help financial institutions – as well as their stakeholders and shareholders – overcome the practical challenges of aligning portfolios and investment decisions with a 1.5 degree Celsius world. As part of this work, the center seeks to bring transparency to the new landscape of climate commitments – by discerning obstacles to success and identifying opportunities to ensure a measurable impact from this promising momentum.

Climate commitments between institutions may have similar stickers – Paris alignment, climate alignment, or net zero by 2050 – but what’s under the hood?

Unpacking commitments

The October announcements from JPMorgan Chase and HSBC outline their expected contribution to the low-carbon transition over a period of time. Specifically, JPMorgan Chase announced in October that it shape your financing portfolio in three key sectors to align with the Paris Agreement; three days later, HSBC announced its declaration of net zero ambition. The past year has seen a series of similar statements, including from Barclays in May – making it one of the first banks to announce its ambition to become net zero by 2050 – then from Morgan stanley in September. Although this blog focuses on a subset of global banks, their commitments are part of a larger movement in the financial sector which includes institutional investors and broader coalitions.

Climate commitments between institutions may have similar stickers – Paris alignment, climate alignment, or net zero by 2050 – but what’s under the hood? Below, we identify panels to help distinguish the differences between similar sounding engagements. These categories represent critical questions facing a financial institution that has committed or seeks to commit its portfolio to aligning with a climate goal.

Blanket

Coverage refers to the business units and financial products included in the commitment to measure, manage and reduce emissions. For example, several banks have made commitments to align their loan portfolios. Barclays’ accounting further covers the capital markets activity it supports. Coverage can also often be delimited by sectors, such as BNP Paribas’ decision to prioritize decarbonisation in its electricity portfolio, or the inclusion by ING of nine sectors in its annual report. Terra Report. ING again iterated by indicating which part of the sectoral value chain is included in the scope (upstream of oil and gas rather than trading, in the middle, storage or downstream). JPMorgan Chase is committed to a sector specific approach that will seek to address all emissions, including scope 3 emissions in their priority sectors.

Targets and Pathways

For designated coverage, commitments are further distinguished by targets (which portfolio emissions will be reduced by and when?) And pathways (what trajectory will portfolio emissions take over time towards the target? specified?). Pathways incorporate technology roadmaps based on a set of assumptions about what the world will look like over time.

The extent of decarbonization achievable over time depends on the low-carbon technologies that will be available when – projections that are based on assumptions about investment rates, policies, demographic changes and beyond. BNP Paribas and Barclays are among the institutions that will use the IEA Sustainable Development Scenario (SDS) to guide their energetic and energetic commitments, but many other avenues exist. RMI Setting the course points out that selecting a path from the almost limitless options represents a major challenge for financial institutions taking meaningful steps towards alignment.

Analysis tools

Many analytical tools, methodologies, models and platforms exist to help institutions understand where their issues stand today and how they can evolve their portfolios over time. For example, Morgan Stanley, Bank of America and Citi recently announced its participation in Partnership for Carbon Financial Accounting (PCAF) – a coalition working on the measurement of financed emissions and the improvement of transparency through disclosure.

Other tools are more forward-looking to support investments that steer portfolios in line with climate commitments over time. For example, 17 global banks recently piloted PACTA for banks to analyze their business loan portfolios with different climate scenarios and inform future decision-making. And 58 financial institutions have committed to SBTi’s financial sector framework, which helps financial institutions “set scientific goals to align their lending and investment activities with the Paris Agreement.”

Disclosure and reporting

Disclosure in accordance with the recommendations of the Climate-Related Financial Disclosure Task Force, like other financial risk disclosure requirements, is essential for transparency and accountability, and to ensure that risks are properly assessed in financial markets. . There are currently many voluntary standards and frameworks to point out important factors in all sectors, creating a complex landscape and motivating five standardization groups – Sustainability Accounting Standards Board, Global Reporting Initiative, Climate Disclosure Standards Board, International Integrated Reporting Council and CDP – collaborate on a commonly accepted reporting framework. These existing standards could ultimately indicate what the disclosure and reporting mandates of forward-looking regulators might look like in the future.

Implementation actions

How do banks turn statements of ambition into progress along their journey and, in turn, into measurable impact in the real economy? When investing in a world supposed to be on track to warm to 4 degrees Celsius, increasing the volume of green finance is essential. However, it alone cannot create the low-carbon world and the related investment opportunities needed by banks to meet their climate alignment commitments. On the contrary, by influencing the availability and cost of capital, banks can more strategically and actively shape the real economy.

When investing in a world that is currently believed to be warming to 4 ° C, it is essential to increase the volume of green finance.

Break the code», RMI’s August survey on climate action efforts in the financial sector, describes the different levers of influence that financial institutions have. and should be used uniquely across business units and asset classes depending on the particular commitments of an institution and the individual context.

Organizational approach

Finally, banks adopt different organizational responses to support the implementation of new products, offers and services resulting from commitments. One of these approaches reflects an “integrated” model, in which responsibility is distributed among existing business lines, for example by placing a climate expert within a bank’s asset management team. Alternatively, banks can opt for a more “centralized” model involving some sort of systemic reorganization around their engagement. A centralized model may involve the creation of new business units with a dedicated mission covering the institution.

JPMorgan Chase, for example, is launching its Center for Carbon Transition, which will provide clients with centralized access to sustainability-focused finance, offer research and advisory solutions, and engage clients on their long-term business strategies and associated carbon disclosures. Of course, important variations exist. Notably, Credit Suisse has taken a somewhat hybrid approach approach involving elements of both a centralized and integrated model.

JPMorgan Chase has placed partnering with its customers in carbon-intensive industries at the center of its new commitment.

– Paul Bodnar, President, Center for Climate-Aligned Finance

JPMorgan Chase is one of the centers founding partners, alongside Wells Fargo, Goldman Sachs and Bank of America.

Next steps

The landscape of climate commitments for financial institutions is changing rapidly. At the center, we expect our analysis to broaden and deepen as we work with this sector to first crystallize and then actualize commitments to climate alignment. Innovation is at the heart of competition between financial institutions, and actions for climate alignment should not be any different. We expect that future analysis will focus on frameworks that allow comparability between institutions. Our aim is to broaden the path forged by these pioneers of alignment, stepping up their efforts to accelerate change on the scale required to meet the challenge of climate change.

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