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What does Net Zero mean for financial institutions in practice?

By Philip Mitchell
24th August 2021

Latest research from the Energy and Climate Intelligence Unit shows that 124 countries and over 20% of the world’s largest companies have now set Net Zero targets.  Google searches for Net Zero have doubled in the past 12 months. The financial sector is rapidly catching up with the launch (and expansion) of Net Zero organisations such as the Asset Managers Initiative, the UN-convened Banking Alliance, and the Asset Owner Alliance in the last 12 months. 

But what does setting a Net Zero target mean in practice for a financial institution?  

Engagement and education 

The most impactful corporate initiatives happen when there is buy-in from all levels of the company, and this requires all employees to understand the science, the objectives and the language behind Net Zero.  The process of teach-ins and engagement with senior management can often take months depending on employee numbers but can normally be done in parallel with subsequent stages.

Defining the business case 

Net Zero plans may well result in financial savings at an operational level but they are also about investor expectations, employee retention, brand loyalty, and better risk management. Helping your company abide by regulatory changes is one more reason given the recent introduction of mandatory disclosure regulations such as SFDR and TCFD.

Understand how to set a credible target

Baselines need to be calculated and credible targets set for future emission reductions. Net Zero by 2050 or 2030? Which emissions categories and assets will be considered ‘in scope’? Financial service companies face an intimidating array of possible options given the nature of their business with emissions heavily weighted to Scope 3 (emissions from suppliers and/or investments). Given many, often justified, claims of greenwashing in finance it’s important that targets adhere to acceptable frameworks for calculating emissions (such as PCAF). 

Finally, regular, quantifiable progress needs to be made towards hitting these targets and reducing emissions to Net Zero. For some institutions, this may rely on divestment, but rightly it’s engagement which is seen as having the greatest real-world benefits. Companies with a range of different funds will have to decide how they balance obligations to Net Zero with each fund’s mandate. Especially as a credible Net Zero target should rely as little as possible on offsets to achieve its goals – an area of controversy still for many financial players. 

The cost of all the above will depend on many factors: size of the institution, breakdown of assets, chosen methodology for emissions assessment. For many asset classes, data availability will be poor, and investors must decide whether to use rough sector proxies (cheap) or more company-specific information (expensive). For private equity companies, there is often a decision to be made about who is responsible for setting Net Zero – top-down from the GP or bottom-up from the portfolio companies. Fortunately, most Net Zero frameworks appreciate these challenges, and allow members to change and improve their process over time.  

Find the approach to Net Zero that is appropriate for your company

It’s a complex landscape to navigate and the team at Carbon Intelligence can help you choose the right approach that incorporates your asset class mix, sector exposure, positions you well within your peer group and is credible in front of investor and public market scrutiny.

Our services simplify the complex to generate meaningful insights that reveal your portfolio carbon exposure and potential for climate impact. We translate insights into a single roadmap of pragmatic action against materiality and aligned to a pace that matches your decarbonisation appetite, capacity and resource. Contact us today to learn more.

 

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