Banks' decarbonization goals for high-emissions portfolios have become increasingly fragmented and lack meaningful measurements, fueling greenwashing and confusing investors.

Major European banks HSBC Holdings PLC, Standard Chartered PLC, Société Générale SA and ABN Amro Bank NV in 2023 unsubscribed from the Science Based Targets initiative, a UN-backed nonprofit that sets mandatory emissions-reduction requirements. All four remain in the Net-Zero Banking Alliance (NZBA), but the organization does not mandate such requirements and instead asks members to broadly commit to carbon neutrality.

A lack of cohesion has led to a "real jungle" of climate goals from financial institutions, according to Paul Schreiber, senior policy adviser at French nongovernmental organization Reclaim Finance. The initiatives created under the umbrella of the Glasgow Financial Alliance for Net Zero (GFANZ) — of which the NZBA is one — have so far failed to standardize targets, leaving a "mountain of diverse and largely incomparable plans and objectives," Schreiber told S&P Global Market Intelligence.

Odious comparisons

The largest US and European banks have all signed up to the NZBA, a UN-convened coalition launched in April 2021. They commit to achieving net-zero in their Scope 3 emissions — those produced by companies that they finance — by 2050, and to publishing 2030 interim targets, but the latter are designed by the banks themselves and can therefore be difficult to compare between companies.

UK-based, Asia-focused Standard Chartered aligns its targets with scientific third-party providers' scenarios, and hence they are "validation in themselves," a bank spokesperson told Market Intelligence. In terms of measuring targets, EY provides StanChart with nonfinancial reporting advice regarding its progress and thus "they mark our homework," the spokesperson said.

There is a danger in this happening across the board, however, because measurements and performance at banks must be easily comparable, according to Antoine Halff, research scholar at the Center on Global Energy Policy at Columbia University.

"We need consistency in definitions and standards across geographies, so that we can compare apples with apples," Halff told Market Intelligence. Nonfinancial accounting should be as consistent as financial accounting, otherwise you open the door to fragmentation with each company having its own, potentially opaque protocols, he said.

A lack of standardization around climate goals and progress not only makes meaningful comparison difficult, but it can also confuse investors and blur the lines of accountability at banks. Together with a lack of firm action by regulators to address misleading statements and unrealized commitments, this opens a "boulevard for greenwashing" in the financial sector, Reclaim Finance's Schreiber said.

A November 2023 report from environmental group ShareAction found that the 20 largest listed European banks publish inadequate green targets and disclosures that could lead to misleading claims or greenwashing.

Regulators in Germany and the UK both published anti-greenwashing measures in the second half of last year after acknowledging the harm it causes to investor confidence, while the European Banking Authority warned that there was a "clear increase" in financial institutions inflating their climate credentials.

US divergence

Sentiment in the US has exacerbated fragmentation around net-zero targets. In the insurance space, large global groups including Allianz SE and Lloyd's of London quit the GFANZ-centered Net-Zero Insurance Alliance (NZIA) in May 2023 amid pressure from Republicans. It came after more than 20 US state attorneys general wrote to NZIA members to explain how the group's targets and requirements possibly violated federal and state antitrust laws.

Meanwhile, the largest US bank, JPMorgan Chase & Co., which previously targeted a 15% reduction in oil and gas emissions by 2030, officially altered its methodology by bundling oil and gas together with renewable energy. It now aims to reduce the carbon intensity of this "energy mix" activity by 36% by 2030, which it said encompasses a broader view of energy supply that better supports the system-wide shift from oil and natural gas to low-carbon fuels and zero-carbon electricity generation contemplated under the International Energy Agency's net-zero scenario. It will also look at emissions on a three-year basis rather than the usual one-year basis, which it says reduces volatility and gives a more accurate picture.

Carbon intensity — facilitated and financed emissions divided by the energy produced by its clients — has been highlighted by environmental organizations including Reclaim Finance and Sierra Club for its potential to distort progress.

When contacted by Market Intelligence, a JPMorgan representative said the change is "not an accounting maneuver, nor is it intended to distract from our progress to date on our existing targets." The bank added that an "energy mix" target allows it to take a "holistic view" of the world's energy supply, which it considers important in driving a successful transition.

JPMorgan was first in a list of banks financing the top 100 key oil, gas and coal companies expanding fossil fuels between 2016 and 2022, according to a 2023 "Banking on Climate Chaos" report authored by Sierra Club, Reclaim Finance and other environmental groups. The New York-based bank made more than $11 billion available to such companies in 2022, although this is less than half the amount reported six years earlier. US counterparts Citigroup Inc. and Bank of America Corp. followed in second and third place.

JPMorgan pointed to its latest climate report when contacted, and said the report was "well received by investors, as we had engaged with them fairly extensively."

Science Based Targets initiative

There may, though, soon be more impetus for US banks to sign up to the Science Based Targets initiative (SBTi), a nonprofit whose general standard is the world's most widely adopted target.

Lenders will likely find it hard not to pursue initiatives that increase their allure to investors as global ESG funds, according to Amritpal Virdee, a senior ESG consultant at consultancy Sustainable Investment Group.

"There is clear and growing investor interest in sustainable investments," Virdee told Market Intelligence. "US banks with more sustainability-inclined shareholders may find it more straightforward to pursue SBTi and other ESG initiatives."

But there is even disagreement between banks' views of the initiatives themselves.

Standard Chartered believes the SBTi is "not fit for purpose" or keeping pace with what is required to deliver a clean energy transition, given its delays in both validation and provision of critical sector guidance, such as for oil and gas, the bank spokesperson said.

Paris-based Société Générale, on the other hand, welcomes SBTi's latest update to its near-term guidance for pilot-testing specifically for financial institutions, and confirmed it would take part in the pilot, the French bank told Market Intelligence.

SBTi validated targets of over 2,100 financial institutions across 40 countries in 2023, up from 1,000 the previous year, the group told Market Intelligence.