The Banking Executive Magazine - February 2023 Issue

Transition To Net-Zero requirements and political pressure around carbon mitigation have af- fected the banking industry. The urgency for banks to take action is increasing. Banks need to adopt sustainability in their processes and operations and commit to achieving net zero by 2050. Recognizing that climate risk is a fi- nancial risk, the Financial Stability Board (FSB) created the Task Force for Climate-related Financial Disclo- sure (TCFD) to develop recommen- dations on the types of information that companies should disclose to support investors, lenders, and insur- ance underwriters in appropriately assessing and pricing a specific set of risks including the risks related to cli- mate change. The disclosure recom- mendations are centred on four thematic areas representing the core elements of how companies operate, including governance, strategy, risk management, and metrics and tar- gets. STEPS FOR THE TRANSITION TO NET ZERO Many banks may struggle to meet their net-zero goals. Many banks have set themselves targets across their business sectors to enable them to meet their net-zero commitments. But some have yet to devise an ap- propriate roadmap, with achievable milestones, to direct them and their credit customers on the journey to becoming carbon neutral. Further- more, the processes that banks are often using to manage this transition are frequently developed as they are required rather than as part of long- term strategies. Without well thought out architectures and tools, banks will not be able to meet their net-zero commitments and will fail to support the global drive to sustain- ability. To reach their net-zero objectives, banks must begin by ensuring that they can measure the carbon emis- sions generated by their own opera- tions and those produced by the companies they finance. They need far-reaching data solutions that source, track and report in-house and customer carbon emissions. Once banks have appropriate data solu- tions in place, they can then advance on the journey to net-zero. Peter Beardshaw from Accenture identified key steps that will help banks and financial institutions reach their net-zero goals. These steps are: • Understand net-zero pathways: Review the pathways that lead to the reduction of carbon emissions in each of the sectors that the or- ganization finances. After selecting the most appropriate pathways, set interim emissions targets for each sector. • Establish baselines: Analyse cur- rent portfolio emissions. Set emis- sions baseline for each lending sector, and for the whole finance portfolio, so that progress towards net-zero goals can be measured. • Analyse gap-to-target: Use data modelling to estimate likely changes in the carbon emissions of the current lending portfolio if no further action is taken. This analy- sis will enable banks to determine the action they must take to close the gap between their current lev- els of carbon emissions and their net-zero targets. • Develop transition strategies: Col- laborate with the corporate cus- tomers that are currently being financed to develop strategies that help them reduce their carbon emissions. • Communicate targets: Communi- cate carbon emissions reduction targets to external audiences using channels such as sustainability re- ports and mandatory climate-re- lated financial disclosures (MCFDs). • Embed net-zero objectives across the organization: Identify and im- plement changes to the institution’s operating model to ensure that its net-zero objectives are embedded across its value chain. BEST PRACTICES TOWARDS NET ZERO According to McKinsey’s research, over the past few years, many banks have made public commitments to reduce their “financed emissions" in line with the objectives of the Paris Agreement. This commitment is seen in the number of banks joining the Net-Zero Banking Alliance (NZBA), which grew from 43 to 122 banks, representing 40 percent of global banking assets, in just over a year. Membership requires that banks commit to transitioning the emissions from their lending and investment portfolios to align with a net-zero pathway. Even more banks have con- ducted internal assessments of their financed emissions and are consider- ing whether they want to set a public target. Yet more are considering the journey to measure and set targets for their financed emissions. The process of assessing and setting targets for financed emissions is not simple. It involves multiple complex- ities arising from differences between sectors, geographic variation, shifting counterparty plans, changing indus- try standards, and a nascent and rap- idly evolving data environment. Furthermore, the actions that banks take to achieve targets often create pressure on other objectives, such as revenue growth in critical business areas, and require changes to key processes and policies, a situation that calls for careful reconciliation. Finally, banks must balance their goal of reducing financed emissions with the simultaneous goal of financ- ing reduced emissions, which often involves increasing financing to re- sponsibly heavy emitters who need capital to decarbonize their busi- nesses. McKinsey research identified some best practices enabling banks to cre- ate durable, reliable emissions meas- the BANKING EXECUTIVE 32 ISSUE 170 FEBRUARY 2023