In the fourth episode of our Climate Responsibility in Banking series, Katherine addresses what banks mean when they talk about “net zero” and climate targets.
We unpack climate-jargon, expose banks' greenwashing pitfalls, and reveal what credible climate commitments look like in banking. Read on for practical tips to spot real progress – and empty promises – in your bank’s climate claims.

Let's break down classic climate terms

Anoushka: This week we've got quite an exciting topic – targets! Specifically, the kinds of targets that banking should aim to have, or are currently aiming to have, in the environmental realm.

Let's dive right into it! So there are a lot of confusing terms going around in the climate space, especially with regards to targets. So for example, I hear about net zero a lot, I hear about carbon neutral, I hear about carbon positive.

I'd love to know a little bit more what these actually entail, and what it means for a financial institution.

Katherine: Yes, indeed. There are so many terms and they can be extremely confusing. So let's talk about carbon neutrality first.

Carbon neutrality

Katherine: So, carbon neutrality means balancing manmade emissions within a defined boundary – so for example, a bank's carbon footprint – and within a certain timeframe, so typically one year, with either avoided or removed greenhouse gas emissions elsewhere. So the bank is essentially compensating for their own emissions by either reducing them, avoiding them, or sequestering them from the atmosphere somewhere else. Now, there's no single standard that is used to define a carbon neutrality target. There are a handful of organisations that would verify such targets.

So there will consider an application and then verify and confirm that an organisation or a project is carbon neutral. Carbon neutrality targets are actually falling out of fashion because of all the controversies that we've seen recently with different carbon credit projects. And also many banks do not even measure the totality of their emissions.

If they're only measuring their operational emissions, for example, from their direct operations like branches, then they're leaving out 99% of the emissions, which are the emissions that are enabled by their lending. So yeah, they could be making a claim that they're carbon neutral for that 1%, but really they should be considering the entire 100% of their emissions – and that's just not happening. So if a bank tells you they're carbon neutral, the first thing I would do is see exactly what types of emissions – what we refer to as scopes of emission – does that claim actually cover? Because this could be really highly misleading.

Now, turning to other concepts: climate neutrality climate positivity, climate negativity, all these terms, they're not defined, there isn't a standard. They can be very confusing. Some people say carbon positive when they mean climate positive. And so I would steer clear of those terms.

Net zero

Katherine: So, I would say the most credible term of them all is net zero, particularly as it is defined by the recommendations of the International Panel on Climate Change: IPCC and so IPCC sets guidelines and standards as to what that path to net zero looks like between now and typically 2050. And then there's another organisation called SBTI, Science Based Targets Initiative, which then translates those big international goals into what that actually means for companies.

And they've developed an SBTI Net Zero standard for companies and they also have a separate standard for financial institutions such as banks. So a science-based target that is a net zero target that abides by the principles of the IPCC, and ideally the one that's independently validated by SBTI, is the most credible target.

What is a good climate target for a bank?

Anoushka: Great. Thank you for making that differentiation. And I'd love to know what would be a good target for a bank to have in the environmental space? And also, Bank.Green's website mentions science-based targets. What are those, and do they have anything to do with banks? 

Katherine: Yeah. So as I've just outlined a second ago, so the IPCC has defined what the trajectory needs to look like for the world to reduce emissions to net zero by 2050. And then SBTI has translated those high level principles into what that looks like for each sector: for example, financial institutions and banking within that. Then they have translated that into what that actually means for you as a company, as a bank, given your footprint, your emissions. And so we need banks to be committing to net zero by 2050, for sure. But even more importantly, we need them to be setting near-term or interim targets – milestones to reach by 2025 and 2030 and 2035. 2050 is too late.

And most people that work in banks and corporate departments right now, they're not gonna be in that role by 2050, right? So it's really easy to set a target that you're not actually going to be a part of implementing the strategy for that target, right? And so what we look for in the "gold standard" of targets is interim targets.

We'd ideally love to see them being validated by a third party such as SBTI, and they need to be grounded in science – scientific principles. And then they need to bear in mind things like equity and justice as well – so not forgetting the human aspect of it all. So I'd say these are the most critical components of a credible target.

How can banks be held accountable for honouring their targets?

Anoushka: And next up, I'd love to speak about the fact that it's much easier to create these targets than to actually follow through with them, but how are banks being held accountable for following through with these targets?

Katherine: That's a great question about accountability. So organisations such as Bank.Green and our partners in the sustainable finance ecosystem, they're the ones that hold these institutions accountable. Most banks now track their greenhouse gas emissions year on year, so we're able to see the overall trajectory and obviously see if they're not reducing emissions or they're not meeting their targets, that's that we look out for.

And then banks' investors are really interested in their progress as well. I'll give you an example. You probably have heard of BlackRock, the world's largest asset manager. They have thousands of different funds, but one of the funds they have is  1.5°C-aligned ESG fund, which comprises of stocks of companies that have set  1.5°C-aligned targets.

And so if a company ends up in a fund like this, it doesn't have to be this particular one – but you get the theme – and the condition for staying in that fund is that you're meeting your 1.5°C-aligned target, and then you fail to do so, you'll probably be excluded from that fund going forward, which obviously has implications on investment, and losing out on that investment, and reputationally, it doesn't look very good either. So there's activists, there's investors, and of course there's the media and society at large. Another way that in some circumstances this gets monitored and corrected for is through executive compensation.

So many companies now have linked executive compensation to sustainability goals. So not meeting those targets in theory means reduced compensation for executives. Although I'm sure there are many holes and you have to really look at the design of the particular system which a company has in place. But that's another avenue!

How can we spot greenwashing?

Anoushka: Lastly, a bit of a spicier one. How can we look out for greenwashing as consumers ourselves and as people that use banks? How can we make sure that a bank or another institution is not greenwashing? What are the things that we should keep an eye out for?

Katherine: Excellent question. How do we spot greenwashing?

Timeframe

Katherine: I touched on most of these themes already, but, so first of all, we look at the timeframe: is it just net zero 2050? If it is, that's insufficient. Easy to set a target for 25 years away. So we really look at evidence of interim targets – short term targets.

Claims

Katherine: We also look at what claims companies or banks are making. So for example, when they're making carbon neutrality claims, what is that claim actually based on? And 99% of time it's based on buying carbon credits. We look at the quality of those carbon credit projects that are generating these credits, and we look at how much companies and banks are paying for carbon credits. If it's $5 per credit it's probably not high quality, right? So the project is probably not delivering. And therefore, not living up to the expectations that we would have. Then we also look at evidence of the scopes of emission, right? So banks have emissions that are coming off their own operations, and that's a relatively small category. And then they have what are called financed emissions. So that's essentially all emissions enabled by their funding.

Now, if they only set a target over their operational emissions, which is typically 1%, that's greenwashing because they are making a claim that "I've set a target. I'm gonna reduce my emissions by 60% by 2030". But if it's 1%, 60% of 1% is a really small number, right? We want that to be 60% of the hundred percent.

Commitments with little impact

Katherine: Another thing that keeps coming up time and time again is: banks that have done nothing else on sustainability – so say they've not measured emissions, they've not set any targets, but the one and only thing that they're really proud of is that they've helped their customers go paperless. And obviously that just pales in comparison to what they could be doing or the much more impactful strategies and targets that they could be setting. So that's another example. So yeah, so targets that are bordering on greenwashing are too far away in the future, do not cover the majority of banks' emissions, are focused on immaterial things, and are not externally validated by third parties like the Science-Based Targets initiative.

Until July – more reads in the meantime!

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