Financial institutions have a critical role to play in accelerating the transition to a net‐zero economy. Many banks have outlined their climate ambition, including through joining the United Nations’ Net Zero Banking Alliance (NZBA), and have made commitments in financing climate action to accelerate the shift to net‐zero greenhouse gas emissions by 2050.
To achieve this ambitious goal, banks have been developing a set of metrics to externally report their net–zero efforts. This includes the reporting of the volume of sustainable finance provided, which is supported by a range of international taxonomies, such as the EU Taxonomy. More recently, banks have started measuring total financed emissions and setting sectoral decarbonization targets throughout their portfolios in an effort to reduce their own impact on the climate.
Banks’ strategies for managing climate impact have also matured, with banks moving from exclusionary policies and targeted sustainable finance to more wide‐ranging engagements with clients, especially large corporates. This type of engagements, frequently described as “Transition Finance”, encourages companies to accelerate their transition plans which, in turn, will support banks’ own net‐zero strategies as well.
Exploring better metrics to properly capture Transition Finance efforts
In a joint report with NZBA, we explore how banks can best report their Transition Finance efforts. We see a need for additional specific metrics, as existing metrics, such as the volume of sustainable financing provided and sector‐level decarbonization targets, may fail to provide a full picture of banks’ approaches to decarbonizing their portfolios. These prevailing metrics may show the progress of banks’ clients in their decarbonization journeys, but they do not explicitly capture the volume of financing provided nor the direct impact of the financing on the businesses.
We explore three categories of Transition Finance reporting metrics that banks may consider to provide additional transparency on their activities with transitioning companies:
Banks can provide further transparency on the volume of financing (new or in total) provided to companies who are actively transitioning, according to a defined segmentation of their transition status. For example, it could be beneficial to differentiate between companies which are already 1.5 degrees aligned and companies with not‐so‐ambitious targets. An example of an industry framework which seeks to define financing in this way is the “four financing strategies” defined by GFANZ which can provide a starting point for banks to report their transition finance efforts.
Banks that go through the effort of collecting and assessing their clients’ transition plans may also consider reporting the aggregate decarbonization that they are financing. This would involve aggregating the decarbonization impact (i.e., future emissions reduction) supported within a given timeframe and reporting this alongside other metrics. Several metrics exist to represent this, such as the Expected Emission Reduction (EER) metrics or the simpler Committed Emissions Reduction (CER). These metrics are, however, at a very early and exploratory stage and should be used with notable care as they continue to evolve.
Additional supporting metrics
Reporting future decarbonization could be met — at least initially — with a degree of skepticism, in part because, without a globally standardized set of definitions or frameworks, metrics will initially require a high degree of banks’ own definitions. Banks should therefore consider ways to support the credibility of their forward-looking metrics. This may include using simpler measures of the impact achieved and back‐testing their EER and CER calculations against actual experience of achieved decarbonization.
Although this report serves to advance the discussion of which metrics may be most useful for banks to increase transparency on their Transition Finance activities, it does not seek to replace any existing metrics, but rather to complement current metrics to make them more specific and purposeful. These metrics are intended to add clarity around a bank’s activity and not to replace already‐committed portfolio emissions reduction metrics or decarbonization targets.
While banks remain a key enabler in the net‐zero transition, they should not be the sole active player — the success of these efforts is also deeply dependent on supportive government policies and proactive decarbonization by real economy companies.
Additional contributors Tomohiro (Tomo) Ishikawa, chair of NZBA Transition Finance work track, MUFG, Simon Messenger, NZBA implementation lead, UNEP FI, and Satomi Komachi, vice president of government and regulatory affairs, MUFG.