Banks have made big promises about the climate. A new study doubts whether they work.

Two and a half years ago, bankers and investors attended the United Nations climate summit in Glasgow, an annual event normally dominated by activists and politicians. It was considered a milestone as the financial sector agreed to commit to the fight against climate change.

Hundreds of banks, insurers and asset managers have pledged to invest $130 trillion of capital to reduce carbon emissions and finance the energy transition by introducing the Glasgow Financial Alliance for Net Zero. But a recent study, published by the European Central Bank, has cast doubt on the effectiveness of such promises.

“Our findings cast doubt on the effectiveness of voluntary climate commitments to reduce financed emissions, whether through divestment or commitment,” wrote economists from the central bank, the Massachusetts Institute of Technology and Columbia Business School who they analyzed the loans of the European banks that had signed the agreement. to the Net-Zero Banking Alliance, the banking group of the Glasgow initiative.

The researchers found that since 2018, banks had reduced lending by 20% to sectors they had targeted in their climate goals, such as oil, gas and transport. This seems like progress, but researchers say it's not enough because the decline was the same for banks that didn't make the same commitment.

“It's no good for a net-zero bank to act exactly like a net-zero bank, because we need that to increase financing,” said Parinitha Sastry, assistant professor of finance at Columbia Business School and one of the paper's editors . authors. “We want there to be behavioral change.”

Politicians and climate activists have high expectations of banks. According to the International Energy Agency, trillions of dollars must be invested in clean energy every year if the world is to achieve net-zero carbon emissions by 2050. Most of these costs will have to be financed privately and banks are the main facilitators in such arrangements.

Many banks have been clamoring to commit to net zero emissions at the Glasgow summit, known as COP26. But as pressure grows to reduce emissions, climate activists are concerned about declining commitments from banks due to growing political pressure, demand for cheap energy and changing geopolitical alliances.

The researchers used data from the European Central Bank on loans from more than 300 European banks. Of these, approximately 10% have joined the Net-Zero Banking Alliance. They tended to be larger and lend more to high-carbon sectors such as mining, particularly outside the eurozone.

Economists found that banks in the alliance did not change interest rates on loans to high-emitting businesses, and that companies that received the loans were not more likely to set decarbonization goals. Indeed, all banks acted the same way, regardless of the methods available to them to reduce emissions, including divesting from large emitters, increasing investment in green assets and engaging with companies to reduce their emissions, Sastry said.

“It's hard to really say, based on this data, that net zero commitments are leading to changes in bank behavior,” he said.

The United Nations-backed Net-Zero Banking Alliance is among the toughest voluntary climate groups that banks can join. Members have committed to setting emissions targets for 2030, with interim targets for 2050, as well as promising to publish emissions data annually.

In response to the report, the alliance said it was too early to judge their effectiveness. Members have just begun submitting transition plans and other progress reports, Sarah Kemmitt, the alliance's head of secretariat, said in a statement.

“We believe it is premature to draw conclusions about whether the commitments that NZBA member banks choose to make have led to funded emissions reductions,” he said.

The banking group and other similar financial coalitions face a number of challenges, especially in the face of growing backlash against environmental and other socially responsible initiatives in the United States. The Net-Zero Banking Alliance has been accused of watering down commitments to please Wall Street banks, its largest members. The Alliance for Insurers lost about half its members last year, and Climate Action 100+, an investors group, has suffered the departure of prominent members this year.

But for some, the groups aren't rigorous enough.

GLS, a German bank, withdrew as a founding member of the Net-Zero Banking Alliance last year after a report by European nonprofit groups said the alliance's largest banks had funneled $270 billion into expanding fossil fuels since they joined.

“What's the point of being in an alliance like that?” said Antje Tönnis, spokesperson for GLS. “Plus, it's a lot of work. The complaint is there but it has no consequences.”

Another founding member, Triodos Bank in the Netherlands, said it hoped to strengthen commitments.

The alliance's “updated guidelines are not strict enough and provide banks with too much leeway,” Jacco Minnaar, the bank's chief commercial officer, said in a statement. But he acknowledged that they had improved. “We believe we will have the greatest impact in this global effort,” he said.

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