Banks Made Big Climate Promises. A New Study Doubts They Work.

Two and half years ago, bankers and investors attended the United Nations climate summit in Glasgow, an annual event normally dominated by activists and policymakers. It was considered a milestone as the financial sector agreed to put its might into tackling climate change.

Hundreds of banks, insurers and asset managers vowed to plow $130 trillion in capital into reducing carbon emissions and financing the energy transition as they introduced the Glasgow Financial Alliance for Net Zero. But a recent study, published by the European Central Bank, disputed the effectiveness of those promises.

“Our results cast doubt on the efficacy of voluntary climate commitments for reducing financed emissions, whether through divestment or engagement,” wrote economists from the central bank, the Massachusetts Institute of Technology and Columbia Business School who analyzed lending by European banks that had signed on to the Net-Zero Banking Alliance, the banking group of the Glasgow initiative.

The researchers found that since 2018 the banks had reduced lending 20 percent to sectors they had targeted in their climate goals, such as oil and gas and transport. That seems like progress, but the researchers argued it was not sufficient because the decline was the same for banks that had not made the same commitment.

“It’s not OK for the net-zero bank to act exactly like the non-net-zero bank, because we need that to scale up financing,” said Parinitha Sastry, an assistant professor of finance at Columbia Business School and one of the paper’s authors. “We want there to be a behavioral change.”

Expectations for banks from policymakers and climate activists are high. Every year trillions of dollars need to be invested in clean energy if the world is to reach net-zero carbon emissions by 2050, according to the International Energy Agency. Most of that cost will need to be financed privately, and banks are the key facilitators in those deals.

Many banks clamored to make net-zero pledges around the summit in Glasgow, known as COP26. But as pressure builds to lower emissions, climate activists are concerned about waning commitments from banks because of mounting political pressure, demand for cheap energy and shifting geopolitical alliances.

The researchers used data from the European Central Bank on lending from more than 300 European banks. Of those, about 10 percent had joined the Net-Zero Banking Alliance. They tended to be larger and lend more to high-carbon sectors like mining, particularly outside the eurozone.

The economists found that banks in the alliance did not change the interest rates on loans to firms with high emissions and that the companies that received the loans were not more likely to set decarbonization targets. In fact, all banks acted the same regardless of the methods available to them to reduce emissions, including divesting from high emitters, increasing investment to green activities and engaging with firms to cut their own emissions, Ms. Sastry said

“It’s hard to really say from this evidence that the net-zero commitments are leading to changes in behavior by banks,” she said.

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

In response to the report, the alliance said it was too early to judge their effectiveness. Members have only just begun to deliver transition plans and other progress reports, Sarah Kemmitt, the secretariat lead for the alliance, said in a statement.

“We believe it is premature to draw conclusions on whether the commitments N.Z.B.A. members banks choose to make have resulted in reductions in their financed emissions,” she said.

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

But for some, the groups are not stringent enough.

GLS, a German bank, pulled out as a founding member of the Net-Zero Banking Alliance last year after a report by European nonprofit groups said the largest banks in the alliance had funneled $270 billion into fossil fuel expansions since they joined.

“What sense does it make to be in an alliance like that?” said Antje Tönnis, a spokeswoman for GLS. “Plus, it is a fair bit of work. Reporting is involved but doesn’t have any consequences.”

Another founding member, Triodos Bank in the Netherlands, said it hoped to strengthen the 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 are convinced we will have the most impact within this global commitment,” he said.