Net Zero Banking Alliance at One Year: Impactful or Uneventful?
The Net Zero Banking Alliance (“NZBA” or the “Alliance”) is a recent private sector collaboration convened with United Nations support. The Alliance was created in April of 2021 with the intention of supporting its members’ efforts to align their respective investment and lending portfolios with net-zero emissions by 2050 and to provide a unifying framework to enable the banking industry to support the low-carbon transition. This 2050 target is consistent with the United Nation’s goal of limiting atmospheric warming to 1.5°C above pre-industrial levels by 2100. The Alliance is currently made up of 102 banking institutions from around the world, overseeing approximately $67 trillion in assets.
The NZBA was launched as an initiative under the broader Glasgow Financial Alliance for Net Zero (“GFANZ”), which is a sector-wide forum created in advance of the 2021 United Nations Climate Change Conference (referred to as COP26). The Alliance is supported by the United Nations Environmental Programme Finance Initiative (“UNEP-FI”). Forty-three founding banks joined the Alliance on launch. Since then, membership has grown beyond one hundred institutions, which together represent over 40% of global banking assets.
The NZBA seeks to help its members meet their net-zero goals through two fundamental pillars. First, the Alliance will provide a forum for its members to “demonstrate leadership, external consistency and credibility” for the banks’ collective commitments.1 Recognizing that there is increasing momentum behind a net-zero economic transition, the Alliance aims to provide a standard interpretation of what it means to be aligned to a 1.5°C trajectory, to require disclosure of progress made against such trajectory target, and to encourage adherence to announced targets. Second, the Alliance intends to foster collaboration through a structured forum to help banks meet their goals. The forum will help guide banks through this transition and enable the sharing of resources, methodologies, and experiences to help members overcome mutual challenges. Upon joining the NZBA, banks are invited to join working groups and forums dedicated to implementing these two pillars of the Alliance.
The NZBA is led by a two-tier “Steering Group” composed of twelve member banks and a UNEP-FI representative, each serving two-year terms. Under the terms of the NZBA Governance Arrangements, finalized in November 2021, the Steering Group’s responsibilities focus on public-facing advocacy, goal setting, and reporting on behalf of the Alliance members. The “Principal” tier of the Steering Group is comprised of C-suite level delegates who focus on the Alliance’s strategy, while the “Representative” tier meets more frequently and works directly with the Alliance’s working groups on developing the Alliance’s platform and structured forum. The UNEP-FI representative holds the position of Secretariat within the Steering Group.
Before joining the NZBA, a prospective member must sign the Alliance’s Commitment Statement, agreeing to the shared goals and practices of the Alliance. Signatory banks commit to doing the following:
- Transition all operational and attributable (Scope 1, 2, and 3)2 GHG emissions from their lending and investment portfolios to align with pathways to net-zero by 2050 or sooner.3 Where data is available, a bank’s Scope 3 emissions should include the Scope 1, 2, and 3 emissions of their clients.
- Prioritize efforts within their portfolios toward the most GHG-intensive and GHG-emitting sectors, where the most impact can be made.
- Use decarbonization scenarios from “credible and well-recognised” sources, rely conservatively on negative emissions technologies, and minimize misalignment with UN Sustainable Development Goals.
- Within 18 months of joining the Alliance, set 2030 targets and intermediary targets at five year increments until 2050, consistent with the methodology provided in the UNEP-FI Guidelines for Climate Target Setting for Banks (the “Guidelines”).
- Annually publish absolute emissions and/or emissions intensity targets following specified reporting protocols and methodologies and disclose progress against a board-level reviewed transition strategy.
- Contribute to the ongoing development of the Guidelines.
At this initial stage, the Alliance is focused on target-setting and disclosure. While attempting to be comprehensive regarding emissions within target boundaries, the Alliance acknowledges that Scope 3 emissions — those indirect emissions associated with the company’s activities throughout the value chain (for example, a customer’s end use of a product) — need only be included in target setting “where significant, and where data allows.” Notwithstanding current limitations, the Alliance expects that more inclusive targets will be set in the future, as “coverage is expected to increase between each review period.”4 Targets must be reviewed every five years, at a minimum, to reflect material changes, for example, portfolio adjustments or methodological advancements that may impact the relevance of then-existing targets.
The Alliance requires sector-level targets for carbon-intensive sectors, which the Alliance defines as “agriculture; aluminium; cement; coal; commercial and residential real estate; iron and steel; oil and gas; power generation; and transport.” The Alliance provides flexibility as to which methodologies and scenarios each signatory should use in their calculations and target setting, but does not provide guidance as to which existing tools should be used, beyond suggesting use of “credible” and “well-recognised sources” that rely conservatively on offsets.5
Alliance members must provide annual disclosures of individual targets and progress towards those targets. Members are required to publish a high-level transition plan approved by the bank’s highest executive level within 12 months of setting its targets. This requirement for executive approval is intended to ensure that member banks receive support from the highest levels of their organizations in setting and implementing these targets. Reporting must be done in a manner consistent with the Guidelines, applied on a comply-or-explain basis. As a result, Alliance members are permitted to make omissions or provide disclaimers in their reporting if accompanied by a proper explanation.
Each individual bank’s adherence to the Commitment Statement and Guidelines is reviewed by the Secretariat (i.e., the UNEP-FI representative) within 18 months after joining the Alliance and annually thereafter. Non-compliant banks are subject to a probationary period wherein the bank will execute a plan, agreed to by the Secretariat, to address its shortcomings with respect to the commitment. If the bank remains non-compliant after this period, or otherwise refuses to address the compliance issues, the Secretariat refers the matter to the Steering Group. The Steering Group is authorized remove members “that consistently fail to meet their commitment,” but may instead declare a member bank to be an inactive signatory for up to six months if it concludes the bank will be able to remedy its non-compliance within that time period.
Expected Upcoming Developments
At the first annual meeting of the Steering Group’s upper tier in late December 2021, the Alliance identified five focus areas for development in 2022. The first and primary area of focus for the NZBA in 2022 is the “construction of a strong net-zero architecture that includes clear implementation guidelines within the Alliance.”6 The Alliance expects the development and promulgation of these implementation guidelines will enable the creation of more granular financing plans for high-emitting industries and best practices for the financial sector as a whole. The implementation guidelines may also include criteria for selecting decarbonization scenarios and more precise standards for employing negative emissions technology projections and aligning with UN Sustainable Development Goals. It is unclear when these implementation guidelines will be published in 2022.
Other areas of focus for the NZBA include harmonizing disclosure standards, collaboration with policymakers, and improving its geographic representation. A final area of focus for 2022 recognized the need to improve clean energy investments and capital flows to emerging markets and developing countries to meet net-zero goals in these regions by 2050. The Steering Group pointed to efforts among member banks to improve the prospects of “climate-friendly investments,” create public-private partnerships, and eliminate knowledge gaps as the primary pathways to address this deficiency.7
Sometime this year, the Alliance also plans to publish its first annual progress report, which is planned to include the first set of interim 2030 targets from most of its signatories, pending their availability. The report should provide more transparency into how Alliance banks will approach decarbonization industry-by-industry and how Alliance banks will incorporate their capital market and underwriting activities into their respective NZBA reporting and goal setting obligations. A first revision to the current target-setting Guidelines is expected by April 2024.
1 Industry-led, UN-convened, Net-Zero Banking Alliance Governance arrangements, UNEP-FI (Nov. 2021), https://www.unepfi.org/wordpress/wp-content/uploads/2021/11/211024_-NZBA-Governance_final.pdf.
2 Scope 1 emissions include GHG emissions a company creates directly from its operations; Scope 2 emissions include GHG emissions a company creates indirectly, like the emissions resulting from production of the energy the company buys; Scope 3 emissions include all remaining GHG emissions associated with the company’s business, from emissions stemming from the use of the company’s products to emissions created by the production of the raw materials the company uses. Zero in on Scope 1, 2, and 3 emissions: What you need to know, Deloitte, https://www2.deloitte.com/uk/en/focus/climate-change/zero-in-on-scope-1-2-and-3-emissions.html.
3 While the NZBA asserts that “all material attributable emissions will be covered” by the time net-zero is achieved, presently, the commitment only requires “on-balance sheet investment and lending activities [except for] securities held for client facilitation and market-making purposes.” NZBA Commitment Statement, UNEP-FI, at fn. 1, https://www.unepfi.org/wordpress/wp-content/uploads/2021/04/UNEP-FI-NZBA-Commitment-Statement.pdf. As a result, off-balance sheet activities, such as facilitated capital markets activities, insurance, pension funds, or asset management, are not included within the scope of commitment emissions coverage. Id. However, the Alliance provides that “off-balance sheet activities, including facilitated capital markets activities, will be reviewed for inclusion in 2030 targets for the next revision of the Guidelines, which is planned by April 2024, once the required third-party methodologies have been finalised and adopted.” See NZBA Frequently Asked Questions, UNEP-FI (Oct. 20, 2021) [“NZB FAQ”], https://www.unepfi.org/wordpress/wp-content/uploads/2021/10/NZBA-Frequently-Asked-Questions.pdf.
4 See NZBA FAQ.
5 See NZBA FAQ. The reliance on carbon offsetting for achieving end-state net-zero should be restricted to carbon removals to balance residual emissions where there are limited technologically or financially viable alternatives to eliminate emissions. Offsets should always be additional and certified.
6 Net-Zero Banking Alliance Convenes First Annual Meeting of Steering Group’s Principals, UNEP-FI (Dec. 20, 2021), https://www.unepfi.org/news/industries/banking/net-zero-banking-alliance-convenes-first-annual-meeting-of-steering-groups-principals/.
7 See id. The NZBA does not further elaborate on what it means by “climate-friendly investments,” but considering that such projects are included as part of an NZBA focus area for 2022, we may see additional explanation in forthcoming guidance from NZBA.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.