Driven in part by pressure from customers and shareholders, more financial institutions have made voluntary climate commitments in recent years to help stall accelerating climate change. Banks, for example, that join the Net Zero Banking Alliance (NZBA) initiative, pledge to help limit global temperature increases by aligning their lending and investment portfolios with net-zero emissions by 2050, in addition to setting earlier targets.
Some applaud these climate-committed financial institutions for seemingly moving faster than policymakers to transition the economy away from carbon-intensive activities. But are voluntary commitments making a real difference? In the study Business as usual: bank net zero commitments, lending, and engagement, MIT Sloan School of Management associate professor of finance Emil Verner and colleagues discovered they aren’t having much impact.
Climate-aligned banks don’t charge higher interest rates to high-emissions firms – or lower rates to “green” firms – while their borrowers, in turn, aren’t more likely to set their own decarbonization targets. “These voluntary commitments, on their own, seem to not be having the effects that perhaps people are hoping they might have,” Verner said. “There’s been more talk than action.”
To arrive at their findings, the researchers used bank lending data from the European Central Bank from more than 300 banks. Around 10% of the banks had joined the NZBA, the largest and most stringent climate-related banking initiative. The NZBA includes 138 member banks from across 44 countries, representing over 40% of global banking assets. NZBA-aligned banks are required to set net-zero emissions-related targets for credit and investment portfolios within 18 months of joining the alliance.
The researchers investigated two key ways in which institutions can meet their NZBA climate commitments. For one, banks can divest from polluting firms and then reallocate that capital to less emission-intensive firms. They can also meet targets by influencing high-polluting borrowers to reduce emissions.
Verner and his colleagues found no evidence that the climate-aligned banks divested from sectors they pledged to focus their emission-reducing efforts on, including power generation, transportation and oil and gas. In fact, NZBA financial institutions were 3% more likely to enter into new relationships with firms in high-emissions targeted sectors than non-NZBA ones.
“Overall, it seems like there have been substantial commitments that have not really translated into meaningful changes in these banks’ business models,” Verner said. Still, with initial targets currently several years away, there is time for banks to reverse course and make true progress. “We know from other circumstances that banks can change their lending very quickly,” he said.
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Source: NBER | MIT Sloan
