By Jan Willem van Gelder

To limit global climate change, financial institutions should ensure that sufficient financing is available for all kinds of companies to invest in developing new products and transforming their production processes. While this challenge is clear, most financial institutions are not yet addressing it with the urgency required. This Expert View provides guidance on what can be demanded from them based on our recent assessment of the climate action plans of ten major Dutch financial institutions.

The IPCC report published this week was very clear: “Climate change is a threat to human well-being and planetary health. There is a rapidly closing window of opportunity to secure a liveable and sustainable future for all.” If we want to limit global temperature rise to 1.5 °C, “immediate greenhouse gas emissions reductions in all sectors this decade” are needed. And the financial sector has a huge role to play: “Finance, technology and international cooperation are critical enablers for accelerated climate action. (…) There is sufficient global capital to close the global investment gaps, but there are barriers to redirect capital to climate action.”

How are banks, insurance companies, pension funds and other investors across the globe answering this challenge to “redirect capital to climate action”? The commitment to publish climate action plans ultimately in 2022, signed already in 2019 by most Dutch financial institutions, could provide some answers which are useful for foreign peers as well. For the Dutch Fair Finance Guide, Profundo assessed the quality of the climate action plans published by ten major Dutch financial institutions: three banks (ABN Amro, ING, and Rabobank), three insurers (Achmea, ASR, and NN Group) and four pension funds (ABP, BpfBouw, PFZW and PMT).

The climate action plans were assessed against recent recommendations in authoritative (international) publications and guidelines, such as the United Nations’ High-Level Expert Group on the Net-zero Emissions Commitments of Non-State Entities, the Race to Zero Campaign, the Net Zero Banking Alliance and the Net Zero Asset Owners Alliance. Based on these publications and on the assessment of the Dutch plans, we can formulate some key expectations for the climate action plan of any financial institution:

• Make a commitment: A climate action plan can only be credible when it starts with an explicit commitment by the financial institution to align all its financing and investment portfolios with the Paris Agreement and a 1.5 ºC scenario. This seems obvious, but banks such as ING tend to make such a commitment only for their credit portfolios and forget to make it for the investment portfolios of their asset management and private banking divisions, no matter how large these are.
• Be transparent: Sufficient disclosure and transparency are a prerequisite to making the climate action plan effective, comprehensive and understandable. The climate action plan should help any stakeholder to understand the financial institution’s contribution to the greenhouse gas emissions of the companies included in its financing and investment portfolios, the carbon footprint of the financial institution. Building on that baseline, the climate action plan needs to clarify what the reduction targets are and which instruments will be used to meet these targets. While Achmea and PMT have measured their carbon footprints, they do not disclose them in their climate action plans, making their targets hard to understand and evaluate.
• Measure carbon footprints: The carbon footprint needs to be measured and disclosed in absolute terms, in volumes of greenhouse gases. And to determine priorities, it should be broken down by asset class (for investors) or type of credit, including underwritings (for banks). While especially ING is very active in underwriting share and bond issuances to help fossil fuel companies and other carbon-intensive companies to attract financing, the bank does not report a carbon footprint for this activity.
• Include scope 3 emissions: The scope 3 emissions of portfolio companies, emitted by their suppliers and the consumers of their products, are hardly measured or disclosed by financial institutions. For many companies, such as energy and automobile companies, by far the largest part of their emissions occur in the consumption phase. The Partnership for Carbon Accounting Financials (PCAF) recommends to start reporting - from 2021 onwards - the scope 3 emissions of portfolio companies in the fossil fuel and mining sectors, but this is only done to some extent by three pension funds.
• Cover the entire portfolio: The emission reduction targets of NN Group, PFZW and Rabobank only cover a part of their portfolios, while emission reduction targets for the entire investment portfolio in 2030 are set by ABP (minus 50%) and ASR (minus 65%).
• Add short-term targets: The new IPCC report reemphasises that there is no time to lose. Emission reduction targets and net-zero commitments for the long term (2040 or 2050) are not enough; what is needed are absolute reduction targets for the short term (2025) to the medium term (2030). However, none of the Dutch financial institutions has clear targets for the short-term.
• Avoid only relative targets: Action plans should include both an absolute emission reduction target for the whole portfolio as well as absolute and relative (intensity) targets for the various economic sectors represented in the portfolio. Setting only relative targets for the entire portfolio, as ABN Amro and PMT do, is not enough as it can lead to an absolute growth of emissions when the portfolio increases.
• Phase out fossil fuels: Financial institutions should exclude any form of financing for new fossil fuel extraction plans as recommended by the International Energy Agency and define - like ABP - a credible phase-out strategy for the fossil fuel sector. Other insurers and pension funds still believe that talking to oil and gas companies makes any sense, Rabobank increases its financing for gas trading, and ING only wants to reduce its oil and gas financing by 19% in 2030 - while the IISD concludes that a 30% reduction is crucial.
• Do not rely on carbon offsets: Only ABP and ING clearly state that their emission reduction targets will be achieved by pursuing real carbon emission reductions and not through the use of carbon offsetting.
• Set targets per sector: As there are huge differences in both the urgency of, and the opportunities for, emission reductions between companies from different economic sectors, a credible climate action plan cannot do without specific targets (which also cover scope 3 emissions) for all economic sectors represented in the portfolios. Banks have more targets for important sectors, although these only cover 37% of ABN Amro’s carbon-intensive corporate loans. Most insurance companies and pension funds, except for PMT, have not started yet with defining sector targets.
• Develop a strategy: The financial institution needs to develop a balanced strategy employing different instruments, including climate-related screening, engagement, exclusions and divestments, loan clauses, a targeted voting policy, financial incentives, and collective influencing initiatives to advance climate objectives. These actions should be time-bound, goal-oriented, monitored through concrete milestones, and transparently reported about. Most financial institutions have an exaggerated belief of what they can achieve by engaging with companies. Only ABP and ASR state clearly they will divest companies if engagement on their climate targets yields no progress.

If financial institutions rapidly integrate the above recommendations in their climate action plans, they could become effective in redirecting capital to climate action. But if they are not able or willing to take these steps, governments should step in and give them mandatory guidance. The new IPCC report makes sufficiently clear that there is no more time to waste until all stakeholders - including financial institutions - take their responsibility seriously.

The report “Climate action plans of ten Dutch financial institutions” is available here. For more information, contact Jan Willem van Gelder (jw.vangelder@profundo.nl).

(Photo: Markus Spiske on Unsplash)