Confusion Over Net Zero

Net zero” has quickly become part of the lexicon on Wall Street and in the City of London, but there’s no consensus on what it means, laying the foundation for misrepresentation and confusion.

To help guide the finance industry, the Science Based Targets initiative, which certifies corporate climate policies and introduced a Net Zero Standard for companies last month, published a report on Wednesday aimed at providing a foundation for reaching consensus. The paper should be seen as a “first step” to develop a science-based net-zero standard for financial institutions, SBTi said.

The work is important because the world’s biggest banks and fund managers have committed to net-zero CO2 emissions by 2050 as part of Mark Carney’s Glasgow Financial Alliance for Net Zero. The “lack of consistent principles, definitions, metrics and evidence of effective strategies to meet the targets limits the ability of financial institutions to support the reduction of emissions in the real economy that is needed to stabilize temperatures at 1.5 degrees Celsius above pre-industrial levels,” SBTi said.

The absence of consistency “around what net zero means allows for financial institutions to claim they are doing more than they are and makes verification of any claims impossible,” said Cynthia Cummis, technical director and founding partner of SBTi. The initiative to provide more transparency to net-zero pledges comes as GFANZ, which is chaired by Carney, announces it now has commitments across the global financial industry representing $130 trillion.

GFANZ was convened by the United Nations in April and comprises six groups spanning all corners of the financial industry. Michael R. Bloomberg, the owner and founder of Bloomberg News parent Bloomberg LP, is co-chair of GFANZ.

By providing financial support to polluting businesses, banks, asset managers and insurers are the great enablers of global warming. They could use that same influence to push the companies they lend to and invest in to decarbonize their operations and by investing in green technologies.

Unlike companies, the bulk of banks’ contribution to climate change come not from their operations, but from the financing that they provide. For financial firms to help align the global economy with the goals of the Paris climate accord, they should use “their shared influence and responsibility for aligning incentives and eliminating barriers to emission reductions,” SBTi said.

The SBTi report was timed for “finance day” at COP26, the United Nations climate change conference in Glasgow. SBTi said it’s exploring three broad approaches for how financial firms can reach net-zero emissions: reducing so-called financed emissions consistent with the 1.5 °C decarbonization pathways for each sector; aligning “all financing activities with relevant net-zero pathways such that each individual asset achieves a state of net zero”; and making it possible for financial institutions to “contribute to net zero in a way that ensures transition financing for both decarbonization activities and an explicit shift to finance more climate solutions.”

UN Secretary-General Antonio Guterres has also called for a more stringent set of definitions around net zero. In a recent speech, he said that “there is a deficit of credibility and a surplus of confusion over emissions reductions and net zero targets, with different meanings and different metrics.” For that reason, Guterres said he plans to establish an expert panel “to propose clear standards to measure and analyze net zero commitments from non-state actors.”