This column finds limited evidence to suggest that net zero commitments lead to significant reductions in financed emissions or substantial increases in financing for sustainable activities. It raises questions about the effectiveness of voluntary private-sector initiatives ...
In recent years, banks have increasingly embraced net zero commitments as part of their strategy to address climate change. This column finds limited evidence to suggest that net zero commitments lead to significant reductions in financed emissions or substantial increases in financing for sustainable activities. It raises questions about the effectiveness of voluntary private-sector initiatives in driving decarbonisation efforts. There is a need to enhance the credibility and accountability of net zero commitments, including greater data availability and transparency, and it underscores the importance of complementary regulatory measures to accelerate the transition to a sustainable economy.
Banks play a central role in capital allocation, so they are key to financing the green transition. Banks have made ambitious public commitments to reduce financed emissions and increase financing for sustainable activities. Most prominently, more than 138 banks, representing over 40% of global banking assets, have made explicit net zero commitments through the Net Zero Banking Alliance (NZBA), one of the most stringent voluntary climate initiatives.
These ‘net zero banks’ have made a commitment to “align lending and investment portfolios with net-zero emissions by 2050” with “intermediate targets for 2030 or sooner”. These targets must be set within 18 months of joining the alliance, and they specify the sectors that each lender has targeted as high priority for decarbonisation. In addition to announcing sectoral targets for reducing financed emissions, net zero banks also make outright pledges to scale up sustainable finance.
The announcement of bank net zero commitments has triggered contrasting reactions. Many laud the NZBA initiative as evidence that banks are beginning to seriously incorporate climate change concerns in their lending and investment decisions, suggesting that banks can help to bridge the large financing gap for the net-zero transition. In the US, some even go further, taking lender divestment from fossil fuels as a given and holding net zero banks responsible for divesting. Others, however, have pointed out that these net zero commitments are voluntary and could simply reflect greenwashing behaviour.
For the banking sector, a small recent literature seeks to quantify whether lenders have divested from polluting sectors. The evidence is mixed. Some papers find evidence of lender divestment from firms in the coal mining sector (Green and Vallee 2022). There is also some evidence that lenders charge relatively higher interest rates to polluting firms (Altavilla et al. 2023). However, other studies find no evidence of divestment from firms with high carbon emissions (Bruno and Lombini 2023, Giannetti et al. 2023).
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