GFANZ transition finance measurement ‘fatally flawed’ NGOs claim

Nine groups say EER risks being used to justify high levels of finance for fossil fuel companies

Nine NGOs, including Reclaim Finance and Sierra Club, have warned that a proposed new method for financial institutions to measure their decarbonisation impact is “opaque, highly complex, easy to manipulate, and likely counter-productive”, in response to a consultation paper published by the Glasgow Financial Alliance for Net Zero (GFANZ).

Launched to coincide with the UN-partnered New York Climate Week in September 2023, GFANZ’s paper argues that the current approach of setting targets for financed emissions incentivises financial institutions to deprive companies of the finance needed to transition to cleaner practices.

The Alliance proposed a new ‘expected emissions reduction’ (EER) methodology that would reward financial institutions based on the estimated volume of emissions that would be avoided due to their investees and clients’ transition plans.

Consultation around the EER is the first step in exploring emerging decarbonisation contribution methodologies and to propose their potential application across each of GFANZ’s four key financing strategies.

At launch, GFANZ co-chair and UN special envoy on climate action and finance, Mark Carney, said: “We need to be able to track impact by measuring the expected decarbonisation contribution of financing. The consultation links decarbonisation contribution methodologies to the GFANZ financing strategies as a proposed approach to measuring the impact of transition finance over time.”

However, the NGOs have cautioned that while the current approaches to decarbonisation promoted by GFANZ and its member alliances need to be greatly improved, the EER approach is fatally flawed, and risks being used to justify continued high levels of finance for fossil fuel companies without putting any meaningful pressure on them to change. They note the risk that EER could become a core ‘transition’ metric for financial institutions and could be taken up by financial regulators.

“The fatal flaw of the EER approach is that it is based on calculating the gap between a counterfactual baseline of supposed “business-as-usual” emissions for a company or sector which fails to transition, and the projected emissions pathway in a future where its transition plan is successfully implemented,” the consultation response said.

“Increasing the allocation of capital to accelerate the energy transition should be a part of financial institution transition plans and is already included within many institutions’ ‘clean’ finance targets; it should not require the creation of an opaque, highly complex, easy to manipulate, and likely counter-productive new metric.”

Patrick McCully, senior energy analyst at Reclaim Finance, added: “Oil and gas companies are currently awash with cash, and only a pitiful proportion of that money is going to developing sustainable energy supplies. It is nonsensical to believe that shovelling even more money in the direction of fossil fuel companies is the key to reducing their emissions.

“The proposed ‘expected emissions reductions’ approach is based on subjective, counterfactual guesstimates that will be easily gamed by companies and their funders. This is in fact the same approach used to generate carbon offsets and is the main reason why the offsetting market is suffering from a crisis of legitimacy, something GFANZ should pay careful heed to.”

According to the NGO’s, the answer to the flaws and lack of ambition of finance sector decarbonisation targets it to improve their design, level of ambition and implementation, with targets forming just one part of financial institution net-zero plans. Key elements of credible transition plans, as outlined by the UN High-Level Expert Group on net zero, include effective engagement, exclusion and voting criteria, and an end to finance for fossil fuel expansion.

GFANZ had not responded to ESG Clarity’s requests for comment by the time of publication.