Report Review by Muhammad Hammad

This report review provides an update on NZBA member banks’ progress on climate target setting and transition planning in the context of the NZBA commitment.

When joining the Alliance, each member bank voluntarily commits to independently setting, disclosing, and reporting on their progress towards science-based de-carbonization targets, as data and methodologies allow. These individual targets aim to align portfolios to pathways that limit global warming to 1.5°C above the pre-industrial global average temperature, in line with the goals of the Paris Agreement.

Sectoral Decarbonisation Targets

The Guidelines for Climate Target Setting for Banks outline eight key sectors: power generation, oil and gas, coal, transport, iron and steel, cement, commercial and residential real estate, and agriculture.

Power Generation

Power generation both accounts for the largest share of CO₂ emissions globally and it is also the most advanced sector in transitioning towards net zero emissions. The costs of utility-scale solar, onshore wind and offshore wind fell by 58-74% over the decade until 2023.

In many cases, clean energy technologies are already cheaper than those reliant on fossil fuels. Solar photovoltaic and wind are the cheapest options for new generations in most markets worldwide and are experiencing rapid growth in many developed and emerging markets.

Oil and Gas

Greenhouse gas emissions from the end-use combustion of oil and gas are referred to as Scope 3 emissions for oil and gas companies, according to the Greenhouse Gas Protocol. Scope 3 emissions for the oil and gas sector accounted for just under 40% of total energy-related GHG emissions in 2022.

Coal

In 2022, coal combustion was responsible for 15.22 billion metric tons of global CO₂ emissions, a 1.6% increase from 2021 (IEA 2022). This was an all-time high for coal.

Emissions are driven by countries switching from gas to coal during the global energy crisis, and a substantial increase in use by specific regions. To align with the IEA’s NetZero Scenario, a global annual reduction of approximately 10% in emissions from coal-fired power plants is required by 2030.

Transport

The transport sector annually adds 8.7 Gt CO₂ emissions, accounting for 23% of global energy-related emissions. Of these emissions, a sizeable portion (about 75%) stems from road vehicles for both passenger and freight transport, aviation accounts for 12% and shipping 11% (rail and other making up the remainder). All three sub-sectors remain primarily dependent on internal combustion engines that run on fossil fuels.

Less carbon-intensive travel options, such as walking, cycling, and public transport, and more efficient technologies, like electric cars and trucks can help the sector to transition towards net zero.

Iron and Steel

The steel sector accounts for about 7% of total global energy-related CO₂ emissions (IEA 2023). Steel demand is projected to rise by 30% by 2050 due to its essential role in many sectors including automotive, aviation, construction, and shipping (Word Economic Forum 2022), while the CO₂ emissions intensity for steel has remained at a fairly consistent level over the past decade. The sector’s emissions are linked to fuel consumption and the iron reduction processes.

The IEA considers that the CO₂ emissions reduction potential of conventional processes and the potential for increased recycling of scrap are limited, emphasizing that innovation will be crucial to introduce new near-zero-emissions steel production methods.

Cement

The cement industry is responsible for six percent of global greenhouse gas emissions, with potential demand growth of 45% by 2050 in a business-as-usual scenario (Word Economic Forum 2022, 2023). Cement is a primary component of concrete which is used in construction and infrastructure.

Approximately 60% of the emissions stem from the chemical reactions inherent in cement production, while the remaining 40% result from the energy required to achieve the high temperatures necessary for the manufacturing process (Word Resources Institute, 2022).

Commercial and Residential Real Estate

Buildings and their construction account for approximately 21% of global greenhouse gas emissions and more than 34% of energy demand in 2021 (UNEP 2022). About 28% of global emissions from this sector are emitted from buildings’ operations and related energy usage.

Agriculture

Agriculture is an important sector for climate mitigation efforts. 23% of total global greenhouse gas emissions from human activity come from agriculture, forestry, and other land use rises to over a third when accounting for the food system emissions.

The largest contributor to agri-food system emissions is agricultural production (39%), including fertilizer production, followed by land use changes (32%) and supply chain activities (29%) (UNEP 2022). While farm-gate activities and supply chains drive greenhouse gas emissions in countries like the United States of America, China, and India, land use change, particularly deforestation, is the primary source of emissions in countries such as Brazil and Indonesia.

Transition Planning

It is important to note that setting targets for the provision of green finance is not a the requirement under the NZBA framework, and while many “green finance” activities naturally contribute to emissions reductions (e.g., renewable and other low-carbon energy), this is not necessarily the case for all activities which a bank may consider as “green” under their eligibility criteria (e.g. circular economy, biodiversity management). While green financing targets are not directly linked to decarbonization targets, green financing is nevertheless an important way for banks to support the transition of the economy and meet their decarbonization targets.

Lending policies are a set of guidelines and criteria developed by a bank for its employees to determine whether a loan application should be granted or refused. They are another tool used by banks to manage risks in their portfolio and to help meet strategic business objectives. The sector for which the greatest percentage of NZBA banks had a policy was coal, followed by oil and gas. Land use and deforestation policies were held by around one-third of respondents.

Governance describes how decisions are made within a bank and who is empowered, incentivized, and held accountable for implementing those decisions. Governance of climate targets and transition plans was strong. Ninety-three percent of banks reported that their targets and transition plans were approved by the highest executive level in the bank, and 89% indicated they were reviewed by the board or the highest-level governance body that normally oversees and approves the strategic plan.