The world's banking heavyweights have been lining up behind promises to achieve carbon neutrality by the middle of the century, although they warned that it will take time before the emissions they finance drop materially.

. This story is part of a series of articles examining the net-zero climate pledges of companies across a range of sectors. Click on the links below to see other stories in the series. Overview: Stakeholders demand action on ambitions as pledges swell Oil and gas: Oil, gas industry on trajectory to miss 2-degree climate goal Mining: Drive to lower emissions pays in metals, mining sector Utilities: Progress by US utilities 'too slow' Healthcare: EU pharma accelerates pledges while US plays catch-up Technology and media: Plenty of 'E', but less 'S' or 'G' in tech, telecom Banking: Banks' pledges come with reluctance to ditch polluters .

It is important to retain high-emitting clients and support them through the transition rather than simply cut them loose, the banking giants said.

In the last year, the largest 30 lenders by assets in the U.S., Canada and Europe have all signed up to the Net-Zero Banking Alliance, committing to bring greenhouse gas emissions linked to their lending and investment portfolios to net-zero by 2050 and to publish interim targets for 2030 or sooner. Only one institution, France's La Banque Postale SA, has set an earlier goal of net-zero by 2040, according to S&P Global Market Intelligence's net-zero tracker.

The pledges are just a first step, and banks face intensifying pressure from shareholders demanding rapid action and more restrictive lending policies. Investors are ready to act through resolutions and campaigns ahead of 2022 annual meetings if banks fail to take convincing steps, said Xavier Lerin, a senior banking analyst at ShareAction, which coordinates investor campaigns.

"Investor pressure on banks has definitely been growing, with more resolutions, but more importantly, the resolutions that have been filed are getting higher and higher levels of support," Patrick McCully, senior analyst at Reclaim Finance, a think tank, said in an interview.

HSBC Holdings PLC already launched a new climate strategy earlier in 2021, including a complete coal phase-out commitment, in the wake of a $2.4 trillion investor campaign led by ShareAction.

Dumping clients is last resort

Banks are viewed as linchpins in the shift to a low-carbon economy since the money they control is the lifeblood for activities ranging from thermal coal extraction to the development of solar power farms.

While the financial sector generally has low Scope 1 and Scope 2 emissions, it is within Scope 3 — mostly because of pollution produced by clients that banks finance through loans and securities — where financial institutions have the biggest footprint and impact. On average, emissions associated with banks' financing activities are over 700 times higher than their operational emissions, according to an April study by nonprofit CDP. Seventeen of the 30 banks in Market Intelligence's sample have reached carbon neutrality in Scope 1 and Scope 2.

A handful of banks, including JPMorgan Chase & Co., Morgan Stanley and Barclays PLC, have already published interim decarbonization targets for select, high-emissions portfolios, with many more to follow in 2022. Members of the Net-Zero Banking Alliance, an industry group convened by the United Nations, pledged to establish the interim goals within 18 months of signing up and then report on progress annually, a framework that will allow the market to hold institutions accountable.

But senior bankers warned that it will take time before banks' climate efforts will be reflected in their emissions profile.

"We are not talking about a year-on-year reduction in financed emissions," said Valerie Smith, chief sustainability officer at Citigroup Inc., speaking at the FT Global Banking Summit on Nov. 30. Banks need leeway as they start a lengthy process of assessing clients and helping carbon-intensive companies build their transition strategies, Smith said.

Engaging with clients and supporting them through their transition will be the priority, said Imène Ben Rejeb-Mzah, head of group corporate social responsibility methodologies and data at BNP Paribas SA, in an interview. The bank will only end relationships with companies that fail to come up with a plan aligned with the Paris Agreement as a last resort, Rejeb-Mzah said.

Shareholders are concerned about the "relaxed urgency" reflected in the deadlines prescribed under the Net-Zero Banking Alliance and want banks to act faster, ShareAction's Lerin told S&P Global Market Intelligence. After establishing targets for their most greenhouse gas-intensive portfolios within 18 months of joining, signatories have another 18 months to set targets for other relevant sectors and an additional year to show how they intend to meet them.

Financial institutions argue that it is challenging to set up decarbonization targets and measurement methodologies. Banks are short of robust data that is key to monitoring portfolios, and they rely on climate change scenarios put forward by international bodies to develop transition strategies for their portfolios, but these still lack geographic and sector-specific granularity, said BNP Paribas' Rejeb-Mzah.

Engagement is preferable to divestment, and banks are needed together with investors, policymakers and society at large to apply enough pressure to force through "fundamental business transformation" at high-polluting industries, said Dan Saccardi, senior director at the sustainability nonprofit Ceres.

But engagement cannot be a cover for inaction, Saccardi said.

"Banks can't take five years to set 2030 targets and then have three years to actually achieve those targets," Saccardi said. "They need to be doing all of this in parallel: to be setting targets, to be engaging companies in sectors where targets have been set, to be doing the measurement and disclosure and build upon this as other sectors and asset classes come into the fold of their goal setting."

The devil is in the detail

While observers have welcomed banks' 2050 net-zero pledges as an important first step, the true test of their commitment will emerge in the details of their interim targets and how their lending policies change.

Any sectoral target that aims for less than 50% reductions in financed emissions by 2030 is "by definition not going to be adequate," said McCully of Reclaim Finance. In signing up for the Net-Zero Banking Alliance, lenders commit to meeting the U.N.'s Race to Zero criteria, which outline that institutions' 2030 targets must represent "a fair share of the 50% decarbonization required by the end of the decade."

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Targets for absolute carbon reductions — as opposed to setting only intensity goals based on emissions relative to total energy financed or other metrics — is another "must-have," said Lerin of ShareAction. This will ensure that banks focus on reducing production in carbon-intensive sectors rather than just improving carbon efficiency, Lerin added.

Targets alone will also not be sufficient unless backed by robust policies and clear expectations spelled out for clients, said Jeanne Martin, a senior campaign manager at ShareAction.

Banks' financing of fossil fuels has actually increased since the Paris Agreement on climate change was signed in late 2015, illustrating the insufficiency of their lending policies so far, according to research by an alliance of nongovernmental organizations, including the Rainforest Action Network and BankTrack. The alliance found that from 2016 to 2020, the world's 60 largest banks have financed fossil fuels to the tune of $3.8 trillion.

Financial institutions have started introducing stricter policies for fossil fuel lending, led by European banks such as UniCredit SpA, Crédit Agricole SA, Société Générale SA and BNP Paribas, which have now set dates for the complete exit of thermal coal.

But stricter policies also covering oil and gas will be needed if banks are to align their portfolios with a net-zero by 2050 pathway. The International Energy Agency projected that there is no room for new oil and gas exploration projects in its net-zero scenario, meaning bank fossil fuel policies will be inadequate unless they adopt a "no-expansion principle," according to BankTrack, an NGO.

Positive momentum

While most of the heavy lifting remains, observers said the recent wave of net-zero pledges is evidence of positive momentum.

"The direction of travel is clear — greater financial sector commitments and demands for transparency [and] reporting will increase pressure on [financial institutions] to realign their portfolios," Maria Malyukova, an assistant vice president at rating agency Moody's, said in an email. That, in turn, puts pressure on borrowers that lack credible transition plans and raises the chances for "a more rapid energy transition than previously expected."

Banks will likely have to do more, "driven by carrots and sticks, stakeholders and government," Charles Sincock, managing principal and environmental, social and governance lead at consultancy firm Capco, said in an interview.

But the big banks have formed a critical mass, setting a tone on climate change that is hard to ignore.

"If you're in the U.S. or Europe, if you haven't signed up to it yet, you're probably just going to get hammered," Sincock said.