How will large US banks deliver on their climate commitments?

If you work for a large US bank, chances are that your company has pledged to reach net zero emissions across lending portfolios by 2050. How are you going to hit this target while still growing the business?

Most of the large US banks have taken their first steps by developing a deeper understanding of their financed emissions, and setting targets - including interim ones - to reduce them. Now you need to figure out how to support the transition and help achieve low-carbon growth. This is easier said than done. In planning these moves, you need to think about a broad range of issues, including:

• What target operating model do you need to build?
• How do you embed the net zero commitments into your processes and policies?
• What are the business implications of continuing to fund high emitting sectors? And how can you support your customers into their transition strategy?
• How will you work with the front office to identify the opportunities and risks linked to each sector?
• How will you ensure that targets set by the net zero team are considered into climate risk management?
  
  

A unique opportunity for US banks

In some ways, banks in the US may find it harder than their peers in other regions to meet their climate commitments. For instance, banks operating in Europe face very prescriptive regulations around climate risk eg stress tests, disclosures, embedding, so they’ve tended to address each compliance requirement point by point and have developed a certain level of understanding of the climate challenges including the need for net zero.

In the absence of prescriptive regulations in the US to date, you’re not tied by these constraints. This means you have an opportunity to do things better. How?

Most US banks started their climate programs by making commitments in three areas: fossil fuel financing, sustainability financing, and embedding climate within their risk management function. Many banks are approaching these commitments in a siloed way. But if you take a step back, you can develop a comprehensive approach to tackle all three targets at once. This has two big advantages:

1. You can boost operational efficiency and reduce the risk of re-work by identifying dependencies early on and ensuring consistency between different climate activities.
2. You’ll have a better chance of meeting your climate commitments on time.
   
   

Forging a path ahead

To help large US banks take advantage of this opportunity and move ahead on their journey to net zero, we’ve put together a set of five recommendations:

1. Learn from other countries. Although banks in other regions face different requirements, you can still get a head start by looking at the frameworks, methodologies and initiatives they use to define target setting and their net zero operating model, and to reduce their financed emissions.
2. If you haven’t already, look at the Task Force on Climate-Related Financial Disclosures (TCFD) framework. It’s likely that US banks will face mandatory reporting on the TCFD framework within the next year or two. And beyond that, TCFD provides useful guidance on how you should tackle your transition strategy and plan.
3. Understand the sectors you’re financing – especially high-emitting sectors. The US economy remains heavily dependent on fossil fuels, and many thousands of Americans work in high-emitting sectors eg agriculture. But you can find a way to move to net zero while protecting jobs and reducing the risk of social impacts. After all, new clean technologies and government/regulatory intervention are reducing emissions in some sectors. You should develop a deeper understanding of the challenges, risks and opportunities in the sectors you finance, so that you can define a path forward.
4. Embed net zero into decision-making. The net zero target operating model impacts every part of the business. For instance, finance will face additional reporting and disclosure requirements. Risk management must monitor and mitigate additional risks. And front-office teams will need to help counterparties transition to net zero. You should start dialogs between these different functions to ensure your organization approaches climate-related activities in a structured, coordinated way.
5. Find opportunities. Net zero isn’t just about risk. You have a huge opportunity to unlock low-carbon growth by providing transition financing (targeted financial products to help counterparties decarbonize their operations and progress to net zero). These could include – for example – loans for power companies to build renewable energy infrastructure, for transportation companies to move to electric vehicles, or for consumers to make their homes more energy-efficient. Some transition financing will come from the government’s new Infrastructure Investment and Jobs Act, but the private sector will nonetheless play a significant role.

You have a huge opportunity to accelerate the journey to net zero, and become a leader among your peers. This will help you shield your business from climate risk, gain first-mover advantage by launching transition financing, and help protect the planet. It’s too big an opportunity to miss.

To learn more about how Baringa can help support your journey to net zero, contact Hortense Viard-Guerin.