South-east Asian banks must keep up decarbonisation efforts despite lower climate targets
[SINGAPORE] The Net-Zero Banking Alliance (NZBA) recently lowered its climate ambition requirements for member banks, but South-east Asian banks in the alliance should not interpret this as a green light to slow down their pace of decarbonisation.
In fact, given that changes to NZBA’s guidance have attracted criticisms from climate groups and raised concerns over financial institutions’ climate commitments, the onus is on these banks to show that the less-ambitious climate targets can still result in meaningful real-world decarbonisation.
NZBA announced about a month ago that it was dropping its requirements for member banks’ net-zero targets to be aligned with a decarbonisation pathway that limits global warming to 1.5 degrees Celsius above the pre-industrial level.
This was the aspirational target under the Paris Agreement that became the gold standard in the global quest to address the climate crisis.
But banks are realising that the 1.5 deg C target is increasingly hard to reach.
Over the last six months or so, several Wall Street and Japanese banks have exited the group one after another.
To maintain its relevance, NZBA lowered its guidance – requiring member banks to align their climate goals to keep global warming to “well below 2 deg C”.
Member banks are also no longer required to aim for net-zero emissions by 2050. The new guidance does not mandate a timeframe.
Giant leap backwards
As expected, criticism came swiftly.
Several climate groups denounced the decision by NZBA as a giant leap backwards.
While a 1.5 deg C target is widely seen as the ideal and safest target, keeping the rise in global temperature to “well below 2 degrees” is still well within the core objective of the Paris Agreement.
The actual text of the Paris Agreement states that countries should “hold the increase in the global average temperature to ‘well below 2 deg C’ above pre-industrial levels and pursue efforts to limit the temperature increase to 1.5 deg C above pre-industrial levels”.
In addition, the revised requirements are a more accurate reflection of the reality of South-east Asian banks, whose lending portfolios have large exposures to regional companies that are still highly reliant on fossil fuels.
Their ability to reduce their financed emissions and meet their net-zero targets is somewhat dependent on the ability of their clients to decarbonise.
This, in turn, is affected by the regulatory landscape as well as the technological advancements of clean-energy alternatives.
It is no wonder that only five banks from South-east Asia are members of the alliance: Singapore banks OCBC, UOB and DBS, as well as Malaysian banks CIMB and Maybank.
At least two of them – UOB and CIMB – supported the changes by the NZBA when it was earlier under review.
The previous requirement under which member banks had to set a target for net-zero financed emissions by 2050 would have naturally excluded many South-east Asian banks, which operate in markets where governments have either not set a net-zero target or have done so, but with a deadline beyond 2050, such as Indonesia.
Greater flexibility
The updates therefore provide greater flexibility for South-east Asian banks already in the alliance in achieving their net-zero targets, and also opens doors for others to join the alliance.
There is no reason one of the foundational principles of the Paris Agreement, known as the Common but Differentiated Responsibilities and Respective Capabilities principle, should not be applied to banks and their net-zero ambitions.
The principle underscores how countries’ levels of responsibility and capacity to address climate change should differ, based on their historical emissions and economic development, even though they share the obligation to address climate change.
Its underlying principle of equity should also apply to financial institutions and their net-zero ambitions.
It doesn’t make sense for those with a high exposure to emerging markets to decarbonise their lending portfolio and be net-zero by 2050, at the same pace as other banks operating in markets with more mature green-economy sectors.
That being said, this is not carte blanche for South-east Asian banks to be doing business as usual. Giving more latitude to banks that are more exposed to emerging economies so that they are able to participate fairly does not mean they should avoid action.
Banks that have lowered their net-zero targets to align with “well below 2 deg C” can still avoid going down a slippery slope by taking clear, transparent and science-based actions that demonstrate they are serious about climate alignment – even within a slightly less ambitious framework.
This includes unveiling detailed climate action plans that say why the shift to “well below 2 deg C” was made and how this new target will be achieved; the plans should also include the safeguards in place to prevent another lowering of their climate commitments.
Being transparent on their lending to fossil-fuel clients and their strategies to transition these companies in hard-to-abate sectors, as well as ramping up their financing towards transition economic activities are also crucial.
If banks do not want their stakeholders to perceive their less-stringent net-zero targets as weaker climate action, they need to be more rigorous about how they plan, execute and disclose their decarbonisation strategies.
