In recent years, pressure has mounted on the financial sector to take responsibility for its role in propping up the polluting industries driving the climate crisis. In response, financial institutions — from investment banks to insurance companies — have begun to make commitments to address their climate impacts, and align their financing with the goal of reaching net-zero emissions by 2050.
In 2021, in the midst of a flurry of climate commitments in the financial sector, the Glasgow Financial Alliance for Net Zero (GFANZ) was born. GFANZ is a global financial initiative, launched by the UN Special Envoy on Climate Action and Finance during the COP26 climate conference, which convenes financial institutions from around the world that have committed to the goal of reaching net zero emissions by 2050.
In the two years since its inception, GFANZ has sought to establish its own “best practices” for net-zero alignment in the financial sector. GFANZ has provided guidance to its members on a range of issues, including transition plans, net-zero portfolio alignment, and managed phaseout of high-emitting assets.
Problematic approach to measuring climate impacts of financial institutions
Earlier this year, GFANZ published a new proposal with the stated intention of providing clarity on what constitutes “transition finance” — or the financing necessary to support the transition to net-zero emissions by 2050. In the paper, GFANZ proposes a complementary approach to climate strategies that would calculate the potential impacts that financing activities are having on the real economy. GFANZ makes the case that in order to drive the transition, financial institutions — rather than restrict financing for high-carbon sectors — should instead focus on providing more capital and financial services to these sectors.
Following this logic, GFANZ has proposed a methodology that credits financial institutions with the emissions theoretically avoided as a result of their financing activities. This methodology, called “Expected Emissions Reduction” (EER), would reward financial institutions based on the estimated volume of emissions that would be avoided as a result of the transition plans of their clients or portfolio companies. This new approach relies on a wide range of complex and easily manipulated assumptions about everything from energy demand to economic growth.
The approach enables a new paradigm of greenwashing, in which financial institutions can continue businesses as usual while patting themselves on the back for so-called transition financing. That’s why the Sierra Club joined our partners from Reclaim Finance and other organizations around the world to voice our concerns in response to this GFANZ proposal.
'Expected emissions reductions' risks more business as usual
The new approach proposed by GFANZ encourages financial institutions to increase their financing for polluting companies, including those expanding fossil fuel production. This is based on their assumption that polluters need more cash, not less, if they are going to be able to decarbonize. Indeed, banks have argued for years that in order to drive the energy transition, they need to preserve — not sever — their relationships with major energy companies. This is true: if we are going to meet our climate goals, we need major banks to mobilize a massive amount of capital towards clean energy and energy efficiency.
But in the midst of last year’s record windfall profits, rather than invest in clean technologies, major energy companies doubled down on fossil fuels, and even walked back their climate commitments. Even flush with cash, fossil fuel companies refuse to invest in the energy transition. So, why does GFANZ want to encourage financial institutions to continue to pump trillions of dollars into these companies regardless of whether they take any real steps to decarbonize?
The path forward for transition finance
Financial institutions play a central role in decarbonizing our economy and delivering our global climate goals. But currently, the majority of the financial sector is actively standing in the way, pouring trillions into fossil fuel expansion, locking in our reliance on carbon-intensive technologies for decades to come.
The last thing we need now is for leading standard-setters like GFANZ to lead financial institutions down the wrong path. It’s true that climate strategies focused solely on financed emissions reduction targets won’t be enough to meet our net-zero goals. But while GFANZ proposes this approach to “complement” target setting, there is a real danger that this new strategy would completely replace quantifiable emissions reductions targets and subsequent efforts to meet them.
GFANZ is right to address the importance of transition finance, and the alliance is well positioned to lead the industry in the right direction. Unfortunately, this new proposal would do the opposite — enabling greenwashing and decades of stalling on real climate alignment.
In the coming months, it will be essential for GFANZ leadership to reconsider this approach, and encourage financial institutions to drive the transition by pushing clients to implement robust transition plans, and ending support for companies that are unable — or unwilling — to decarbonize in line with global climate goals.