Financial institutions can keep financing high-polluting sectors, like fossil fuels, as part of their net-zero strategy, provided they set an "early retirement date" or manage a transition for such assets, the Glasgow Financial Alliance for Net Zero said.
The alliance's new guidance seeks to alleviate mounting pressure on banks, equity investors and insurers to withdraw finance from high-carbon sectors to meet their climate goals.
"While this pressure may encourage decarbonization, it can also have unintended consequences such as prolonging the life of high-emitting assets and even worsen their emissions profile if they simply end up being financed by those with less climate ambition," said Ronan Hodge, technical lead for the Glasgow Financial Alliance for Net Zero, or GFANZ, who oversees work to support financial institutions' net-zero transition planning.
Phaseout strategy
Instead of divestment, GFANZ proposes that financial institutions adopt a managed phaseout strategy for assets within high-emitting sectors including fossil fuels, industrial sectors such as steel mills, ships and cement plants, and consumer sectors such as vehicles. Such a strategy could be aligned with a net-zero commitment if there is a clear objective to retire the assets, according to GFANZ.
This can ensure the "responsible stewardship of high-emitting assets" by supporting an orderly transition, mitigating financial marginalization and allowing financial institutions to stay engaged with high-carbon companies, which will ultimately lead to better outcomes for the climate, it said.
More than 500 financial institutions have committed to net-zero emissions by 2050 through GFANZ, a coalition of seven financial sector climate alliances that includes the Net-Zero Banking Alliance and the Net Zero Asset Managers initiative.
Banks have come under particular pressure from campaigners and shareholder groups, who argue that financing major fossil fuel companies is a clear contravention of climate science and against lenders' net-zero pledges. Financial institutions, meanwhile, say they want to help their clients transition to a low-carbon future. The Net-Zero Banking Alliance now counts more than 110 members, including some of the world's largest fossil fuel funders.
GFANZ acknowledges that a significant number of high-emitting assets are "ultimately incompatible" with net-zero and will need to be retired within their normal design life, said Hodge.
"If they aren't [retired early], and these assets continue to operate, they will blow through the remaining carbon budget that's consistent with keeping global warming to 1.5 degrees," Hodge said.
The U.N.-backed Intergovernmental Panel on Climate Change's latest report suggested that if historical operating patterns are maintained, existing fossil fuel-based infrastructure would exceed the carbon budget by 30% and by 66% when taking into account the currently planned projects.
In the short term, however, some high-emitting assets can continue to be operated as long as the retirement date aligns with the downward sloping emissions trajectory to net-zero, according to GFANZ. Its guidance is intended to help financial institutions identify such assets and adopt financial mechanisms that could support a managed phaseout.
Transition support
GFANZ also recommends that financial institutions take other approaches to execute their net-zero commitments and support the transition of their customers. For example, they should finance the development and scaling of climate solutions, back companies already aligned to a 1.5-degree pathway, or support entities that are just starting their transition journey.
The recommendations form part of a common voluntary framework that financial institutions can use to develop, implement and disclose their net-zero transition plan, which GFANZ has now released for public consultation.
"We hope this work will help to enable transparency and accountability of financial sector financing activities and help clarify what financing is truly in furtherance of the net-zero transition rather than obscuring business-as-usual financing or attempts at greenwashing," said Mary Schapiro, vice-chair of GFANZ.