When RMI launched the Center for Climate Aligned Finance in 2020, the concept of climate aligned finance was in its infancy. In 2021, it has matured rapidly as net zero liabilities have become the new norm in the financial industry, especially in the West.
As we enter 2022, we anticipate some major themes likely to emerge this year.
1. Financial institutions will justify their climate alignment commitments
In 2021, many financial institutions have made net zero commitments, and we expect companies to provide more detail and ambition this year. Those who have not already done so will face pressure to set interim targets for 2025 and 2030 on the road to net zero emissions by 2050.
We also expect many companies to expand the coverage of their goal setting; many banks in the Net-Zero Banking Alliance are to set intermediate targets (2030 or earlier) for their most emissions-intensive sectors this year.
There is plenty of room for growth on portfolio coverage in particular. For example, signatories to the Net Zero Asset Managers initiative have reported that only 35% of their total assets under management are currently covered by net zero targets.
2. Transition plans will be published and evaluated
From shareholders to governments to civil society, stakeholders will expect to see more detail in 2022 on how companies plan to meet their net zero commitments. It means going beyond goal setting. Ambitious transition plans, for both financial institutions and industrial companies, will become an essential condition of climate credibility and will be crucial in combating accusations of greenwashing. Such pressure could lead to an increase in the number of shareholder resolutions asking for transition plans and voting on their credibility.
Ambitious transition plans, for both financial institutions and industrial companies, will become an essential condition of climate credibility and will be crucial in combating accusations of greenwashing.
The Centre, along with public and private sector groups, is working hard in 2022 to define what “credible” transition plans look like. Keep an eye out for the UK Government’s Transition Plan Task Force, GFANZ Financial and Real Economy Transition Plan Task Forces, and verification methodologies such as the ACT initiative and the CTP accreditation.
3. Financial institutions will be held accountable for targets related to the impact on the “real economy”
As the “decisive decade” continues, financial institutions will need to proactively fund real-world transformation, rather than achieving paper-only portfolio alignment. We expect a record year for the launch of new green investment products, such as green bonds, sustainability-linked loans and green ETFs, as well as increased corporate engagement.
Demonstration of action, however, should not come at the expense of impact. Portfolio alignment actions will not always lead to emission reductions in the real economy; divesting itself of a steelmaker may not lead him to build less polluting steelworks. Supporting adaptation and sustainable development in emerging and developing markets will be another key piece of the decarbonization puzzle.
Businesses will need to adopt strategies that have the highest likelihood of having a high impact, doing the things that matter most first and avoiding greenwashing. To achieve this, the Center will soon launch a set of impact-focused Climate Alignment Principles to guide financial institutions in implementing their commitments.
4. Better forward-looking data, more forward-looking measures
Investors need quantitative asset-level data and metrics that can support company or industry transition plans and can be integrated into existing investment models. Much of the data that financial institutions use today focuses on what happened in the past (climate impacts, business performance or consumer demand), but that is no longer a good indicator of what is happening. will happen in an unprecedented environment – or what needs to happen to avoid one.
Investors need quantitative asset-level data and metrics that can support company or industry transition plans and can be integrated into existing investment models.
Forward-looking metrics can help assess investment risks and opportunities throughout the transition to net zero, for example by assessing how companies or individual assets are likely to fare during the transition. The Centre’s Climate AIR Toolkit explains which data and measurement tools are forward-looking. For example, investors in U.S. regulated utilities can use forward-looking emissions scenarios in RMI’s Utility Transition Hub to make investment decisions today. Similar metrics should also be available in other geographies and industries. Identified laggards should be targeted and prioritized by committed financial institutions, which can offer both incentives and penalties to encourage action.
Expect exciting efforts to improve data availability and quality, such as upcoming SEC regulation and tools like OS-Climate. In the meantime, however, lack of data is no excuse for inaction: companies don’t need perfect data or international standards to start using their levers of customer influence.
5. The focus on high-emitting sectors will broaden and deepen
To implement their net zero commitments in 2050, major private financial institutions (along with their heavy industry and transportation clients) are developing and implementing climate-aligned sector finance agreements. The first such agreement was the Poseidon Principles for Shipping, launched in 2019 for lenders and expanded in December to include insurers.
In the first quarter of 2022, we will see a similar deal launched for the global steel sector. Bank-led working groups will also begin collating agreements for sectors such as aviation, aluminum, cement and concrete, and real estate. Keep up to date with progress in these hard-to-reduce sectors with our Sector Alignment Calendar.
From financial institutions that have already laid the groundwork for climate alignment within their businesses and through industry-wide initiatives, we look forward to swift and bold action to help keep warming below 1.5 degrees Celsius. Reaction to financial sector announcements at COP26 in Glasgow was mixed; the initiatives and commitments announced were necessary but insufficient. For the financial sector to succeed at COP27 in Egypt in November, it needs to start delivering on its promises and show tangible impact in driving the decarbonization of the real economy. 2022 is the year of the way forward.
