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Path to net-zero: Banks weather storm, win buy-in on climate plans

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Path to net-zero: Banks weather storm, win buy-in on climate plans

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Proposals that big banks adopt policies to end financing of new fossil fuel development have been rejected by substantial majorities of shareholders so far.
Source: Thomas Lohnes/Getty Images News via Getty Images

Large banks have scored some early wins as they seek to assure stakeholders they are taking meaningful first steps on climate change with concrete benchmarks for net-zero emissions pledges.

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This story is part of a series of articles examining the net-zero climate pledges of companies across a range of sectors.

As regulators step in, push for climate disclosure intensifies

Miners dump coal to slash emissions, appease investors

European, U.S. oil and gas companies split on Scope 3 emissions

U.S. utility execs insist 'we can'

European utilities to shift 'harder and faster' post-Ukraine

U.S. chipmakers balance growth vs. going green

Get-out clauses undermine insurers' climate targets

Banks weather storm, win buy-in on climate plans

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A string of climate-related shareholder proposals failed to gain approval at recent annual meetings for big U.S. banks including JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Goldman Sachs Group Inc. Support for the measures averaged about 10% across the companies — indicating that, while disfavor for current action plans is not trivial, investors overall are buying into the banks' road maps.

"There is some of that initial willingness from investors to give the banks that have net-zero plans some benefit of the doubt," said Dan Saccardi, a program director at Ceres, which works with companies and investors on sustainability issues.

That willingness is unlikely to last forever. It took years, and growing agitation, for shareholder initiatives to gain traction at oil and gas companies. "It's safe to say that there could be a similar trend here," Saccardi said. "This is really an opportunity for banks to get out ahead of this in this year and in the next 12 to 18 months."

What's ahead

All of the 30 largest banks in North America and Europe made pledges under the Net-Zero Banking Alliance, committing them to reach carbon neutrality across Scope 1, 2 and 3 by 2050. Scope 3 "financed emissions" refers to the pollution produced by clients that banks finance through loans and securities, where financial institutions have the biggest footprint and impact. More than 20 of the banks in the sample have published interim emissions reduction targets for their financing to select high-polluting sectors, with most covering their oil and gas and power generation financing portfolios.

In power, the targets generally call for a reduction in emissions per unit of electricity generated of between 45% and 75% from 2019 baselines, though the targets can be difficult to compare because they use different climate scenarios and different boundaries for covered emissions.

Banks still face intense skepticism from campaigners and activist shareholders, and the 2022 votes are unlikely to be the last word. HSBC Holdings PLC shareholders, who withdrew a climate resolution for the second time in light of new pledges from the bank, already signaled they are ready to act again in 2023 if unsatisfied with how the lender implements its commitments, according to ShareAction, which coordinates investor campaigns.

Shareholders are also intensifying their direct engagement with companies. The percentage support for investor-led resolutions is "one very, very narrow lens of a much bigger picture" and cannot be used as the sole indicator of ownership engagement activity, said Kimberley Lewis, head of active ownership at Schroders, a U.K.-based asset manager and a shareholder of banks such as Barclays PLC and HSBC. Direct engagement with a company, rather than a binary yes-no shareholder resolution, can be more impactful and also help to avoid unintended consequences, Lewis said May 12 during a webinar.

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Focus on transition

The provisional willingness among investors to let banks see their climate programs through echoes the banks' own approach with clients. Much of the industry is steadfastly rejecting divestment in favor of giving oil giants and other clients space to develop and implement transition plans. Banks have argued that there is scope for the further development of more efficient fossil fuel projects as the world's demand for energy grows and Russia's invasion of Ukraine forces an overhaul in supply lines.

Citi's targets "are focused on transition and really doubling down with our clients, all of whom are willing and able to transition and drive those emissions down in line with climate science," said Val Smith, the bank's chief sustainability officer. Citi said it is conducting a client-by-client review through the end of 2023, and it has set 2030 targets for a 29% reduction in absolute emissions in its energy lending portfolio and a 63% reduction in emissions intensity in power.

"There will be clients that are leaders in the transition," Smith said. "Most clients will probably be in this realm where they want to decarbonize, they want to transition [but] they don't have a full plan. ... That's really where we have organized ourselves internally, to lean in and provide the advisory and financing to help those clients transition."

Critics, meanwhile, argue that providing hundreds of billions of dollars of financing to energy companies that are pursuing new fossil fuel development is incompatible with the need for a rapid pivot that is likely to leave existing reserves and infrastructure stranded.

Many banks have used transition scenarios developed by the International Energy Agency, or IEA, to build their interim decarbonization targets. They have not adopted the "no expansion" policies for fossil fuel that clients demanded in the 2022 U.S. shareholder resolutions, which highlight that the IEA's 2021 net-zero road map says there is no need for investment in new fossil fuel supply.

"That's kind of an elephant in the room around the kind of engagement track that's under the banks' envisioning," said Eden Coates, a senior analyst at InfluenceMap, a think tank. "Companies that are expanding their assets are out of line with what the IEA said we need to do."

"Science is telling us that there's no need to develop new oil and gas fields and expand coal," said Xavier Lerin, a senior banking analyst at ShareAction. "If you do that, down the line, you're going to face increased transition and climate risk in your portfolio. So, for investors, there's a clear rationale. "

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Critics are also asking banks with targets that encompass only balance sheet lending to expand them to include the debt and equity underwriting activity through which banks provide the majority of their financing to fossil fuel companies.

A key measure of banks' progress will be their ability to tally up growing numbers of clients with credible transition plans, Saccardi said, including among large, publicly traded companies that publish their climate strategies directly.

"The emissions are not going to immediately start falling because there is the hard work of engagement that's going to need to happen," Saccardi said. "Something that should be able to be measured [is] how many companies in these sectors have transition plans now and how many of them have them in 2023."

Growing engagement

BlackRock Inc., one of the world's largest asset managers and a major force in determining the outcome of shareholder votes, said in May it is not likely to support proposals that "are unduly prescriptive or constraining on decision-making," and that it is inclined to support management proposals seeking approval for climate policies over similar, competing shareholder proposals.

Nevertheless, broad engagement is critical for Citi’s approach, according to Smith. Interlocutors "range from many of our largest investors to the more activist investors to [nongovernmental organizations] to NGO activists," Smith said. "Those conversations are always fruitful because we believe that it's important for Citi to understand the range of perspectives outside in the world, communicate how Citi is approaching this challenge — the climate crisis, the transition challenge, how we're approaching it — and to take those lessons learned from all of those constituents back into how we develop our net-zero plan and how we talk about it."

Even if shareholder resolutions do not win majorities, they play a "pivotal role" in making banks more resilient to climate-related risks, ShareAction's Lerin said. Previous resolutions against Barclays and HSBC have prompted the two British lenders to engage in talks with investors and publish stronger commitments, the analyst said.

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