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Banks call for better government guidance on net-zero path amid energy crisis

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According to Market Intelligence, December 2022

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Banks call for better government guidance on net-zero path amid energy crisis

The Glasgow Financial Alliance for Net Zero has urged G-20 governments to provide greater clarity on how response measures to the unfolding energy crisis are impacting the energy transition.

The alliance also wants better guidance on how nations intend to get "back on track" in terms of their climate commitments.

The ongoing energy crisis has exacerbated uncertainty over whether G-20 governments will follow through on their net-zero commitments by implementing policies, which is diminishing the financial sector's ability to support a just and orderly transition, according to a new report by the Glasgow Financial Alliance for Net Zero, or GFANZ. The paper was released a few days before global government representatives are due to meet in Egypt for COP27, the U.N.'s climate change conference.

GFANZ, a coalition spearheaded by U.N. Special Envoy for Climate Action Mark Carney, comprises more than 550 financial institutions, including banks, insurers, asset owners and managers, which have committed to achieving net-zero emissions by 2050 and to mobilizing the investment required to transition the global economy.

Finance plays a critical role in supporting the transition, but "this cannot be a substitute for government action," the alliance said.

"In many G-20 countries, the current energy crisis has resulted in policies that either delay or partially reverse progress toward reduced dependency on fossil fuels," according to the report.

Urgent update needed

GFANZ called on governments to "urgently update" their energy transition strategies to take into account any short-term policy measures in response to the energy crisis. Governments should also clarify how they will "get back on track" to deliver on energy security and net-zero transition policy objectives.

"Having that clarity will make a huge difference to the real economy and the financial sector, so that they can put their capital to work in the most appropriate way," said Alice Carr, executive director for public policy at GFANZ, speaking during a media briefing Oct. 31.

This comes as energy disruption caused by Russia's war in Ukraine has prompted several EU nations, including France and Germany, to reopen or extend the lifespan of coal plants in an attempt to mitigate the decline of Russian gas supplies. The U.K. has opened up a new licensing round to allow oil and gas companies to explore for fossil fuels in the North Sea.

GFANZ said it is "imperative" that governments explain how "any new, short-term reliance on fossil fuels" will be accommodated within longer-term transition plans consistent with science-based pathways. They must also provide appropriate timelines for transitioning energy systems to clean alternatives, the alliance said.

Insufficient policies

While nearly all G-20 governments have committed to reaching net-zero emissions, only a handful of jurisdictions have made policies that could be sufficient to align with a trajectory for 1.5 degrees C warming, according to the report. Most nations have policies that are considered "insufficient" or "critically insufficient," it said.

Banks need better clarity over the policy pathway to net-zero or they risk causing economic shocks, warned Chris Faint, the Bank of England's head of climate, in a speech Oct. 3. Ideally governments should give clarity over the whole transition period toward 2050 to allow financial institutions to create appropriate funding schemes for polluting clients, rather than withdrawing financing too quickly, Faint said.

Speaking at the Sibos financial services conference Oct. 10, ING Groep NV CEO Steven van Rijswijk also called on governments to set "clear targets" for how they want to drive the transition to net-zero.

"What do we want to focus on?" van Rijswijk said. "For example, in the Netherlands, there is a debate on nuclear. There is a possibility to go to hydrogen, but that takes quite a lot of investment. In many countries, there are challenges in terms of whether there is the room or ability to put up wind parks, or to upgrade the grid. But to have clear guidance on what the targets are in the next five to 10 years is important."

GFANZ also urged the G-20 to recognize managed phaseout as a legitimate financing strategy.

GFANZ faced criticism after it last week dropped an obligation for its members to sign up to the U.N.'s Race to Zero campaign, which requires members to phase out financing of new unabated fossil fuel assets, including coal. The decision was driven by a need to be more flexible in highly regulated financial industries in 50 jurisdictions, GFANZ said, according to Reuters.

It comes after Wall Street banks including JPMorgan Chase & Co., Morgan Stanley and Bank of America Corp. reportedly threatened to leave the alliance, citing concerns that the commitments leave them open to legal challenges, according to the Financial Times (London). In late September, the newspaper reported that pension funds Cbus Super and Bundespensionskasse had left GFANZ, citing the resources needed to meet data reporting requirements.