Net Zero for Finance

Finance institutions can support the net zero movement by not only decarbonising their own practices, but taking responsibility for the emissions generated by their partners and beneficiaries. The major challenge for finance is not only bolstering funds for net zero projects (“financing green”), but updating market structures to reflect the effects of the climate crisis and align with net zero goals (“greening finance”). Further investment into net zero projects, stronger industry standards for sustainable investments, and a restructuring of finance norms are all needed to align this sector with global sustainability goals.

Progress Towards Net Zero

In recent years, a number of prominent finance institutions have announced bold climate action plans. In 2019, major insurance companies, including Swiss Re, Allianz, and Zurich, announced the creation of the UN Net Zero Asset Owner Alliance. This coalition commits to transitioning member portfolios to net-zero emissions by 2050, in line with the 1.5℃ framework put forth by the IPCC

In 2020, five banks, including Barclays, signed a Bankers for NetZero commitment, aiming to reach net zero emissions by 2050. However, it is important to acknowledge that net zero finance cannot be achieved through net zero commitments alone. Actionable plans to end investments in fossil fuel projects and to better incorporate climate concerns into finance markets are also needed to see ambitious change in this sector. 

“Asset Owners have a unique role in the global economy and financial systems. We can drive the development of industry best practice through our investment mandates.” – UN Net Zero Asset Owner Alliance

case studies

UN Net Zero Asset Owner Alliance

Announced in 2019, the UN Net Zero Asset Owner Alliance is a coalition of institutional investors committed to keeping global temperatures from reaching 1.5℃ warming above pre-industrial levels. 

Climate Action 100+

Climate Action 100+ is an investor initiative dedicated to pushing the world’s top emitting companies to take action on the climate crisis. Focused on 100 companies with the highest combined direct and indirect emissions.

The Investor Agenda

The Investor Agenda sets forth a framework for investors to set science-based targets for their portfolios and achieve net zero emissions by 2050. The initiative focuses on four steps…

Key Challenges

A major barrier to net zero finance lies in the structure of financial markets. Often, environmental costs, in particular greenhouse gas emissions and their secondary effects, aren’t appropriately calculated into cost-benefit analyses. Without fully accounting for the damage caused by heavy-emitting practices, financial incentives for reducing emissions aren’t high enough. Aligning our financial systems with global sustainability will facilitate greater investment in net zero projects and shift capital away from heavy-emitting ventures. 

Risk management also presents a challenge to net zero finance. Higher levels of uncertainty among emerging green alternatives limit the ability of some actors to dedicate support to these needed innovations. However, as the climate crisis presents a number of environmental and political risks to markets already, investing in net zero innovations early will help minimise damage.

A picture of wheat fields in Ukraine.

An image of Rochaverá Corporate Towers, São Paulo, Brazil.

Net Zero Innovations for Finance

Increase sustainable investment standards

A key pathway for achieving net zero finance lies in raising industry standards to better reflect global sustainability goals. Mandating that investment partners and clients have adequate net zero plans elevates the importance of reducing emissions and enforces a new industry norm. The Oxford Martin Principles outline how companies and investors can engage in climate-conscious conversations and commit to a net zero transition while still protecting profits.

Withdraw support for heavy emitting ventures without verifiable net zero plans

Along with implementing stronger sustainability standards, companies must re-evaluate the position of heavy-emitting companies within their portfolio. When engaging with partners on the need for ambitious net zero plans, investors should provide a timeline for clients to create and implement net zero practices. Failure to meet this goal on time should result in the withdrawal of support for companies out-of-line with the sustainability values of investors. 

Bolster financial support for net zero mitigation and adaptation efforts

As many net zero innovations require financial backing to begin, finance institutions can play a major role in giving sectors the support they need to quickly reduce emissions and implement green alternatives. Redistributing money towards clean energy infrastructure and carbon capture research can incentivise greater participation in these fields and promote faster, more wide scale change. 

“Green” finance practices

While financing net zero projects is a powerful tool for the finance sector, adapting current finance norms to better reflect environmental values is also a key step in “greening” global finance. More accurately accounting for the effects of the climate crisis in our financial markets will allow companies and individuals to better understand the financial risks associated with increasing greenhouse gas emissions. Within finance institutions, greater opportunities for oversight and reporting on the progress of net zero plans can also aid in net zero sectoral change.

Net Zero Policy for Finance

Achieving net zero in finance requires aligning capital flows with the goals of Paris in a way that is not incidental, but intentional. Using a framework presented by Dr. Ben Caldecott of the University of Oxford, policies should be implemented that forward three interlocking elements:

Measuring (In)compatibility

Procedures should be put in place that properly measure the degree to which different financial assets and portfolios are (un)aligned with the goals of Paris, and how robust these estimations are, to increase the effectiveness of decision making.

Making a Real Economy Contribution

Investments and portfolios should be further measured against their real economy impact, measured together and across: cost of capital, liquidity, risk management, adoption of sustainable practices, and spill-over effects.

Perseverance and Consistency

Periodic review and realignment of financial assets and portfolios is essential to ratchet up the ambitions of the sector towards a net zero goal.

Furthermore, there are several policies that could be implemented in the private finance sector to better align capital flows:

 

  • Capital charges for incompatible assets
  • Alignment targets for firms setting out what percentage of their portfolio(s) must be Paris-aligned
  • Financial carbon budgets that would mandate the carbon budget for a given firm and ensure that financial flows have greater net zero alignments
  • Paris-Aligned Senior Managers Regimes that would ensure oversight and accountability of senior executive management of financial firms
A picture of wheat fields in Ukraine.

An image of the Bank of England. 

Why Net Zero Finance?

There are a number benefits to transitioning the finance sector towards net zero outside of environmental benefits. For finance institutions, investing in sustainable solutions early will garner greater returns later on as these innovations become necessary for the survival of many sectors. Weaning off support for heavy-emitting ventures will also benefit companies, as many of these practices will become more costly and investments in harmful commodities, like oil, are likely to become stranded assets

As a central player in the global economy, changes made in the finance sector will also impact the transitions of other sectors. Shifting capital towards net zero projects will allow sectors to more easily implement sustainability measures, including costly initiatives such as 100% renewable energy or infrastructure retrofitting.