Time for asset managers to hold banks accountable for inconsistency in net-zero targets

Comes as HSBC publishes targets covering only 33% of facilitated emissions

Despite efforts from the banking sector to communicate their decarbonisation strategies in recent years, banks are facing further scrutiny for skewing their net-zero targets in favour of the lower emitting areas of their business.

HSBC’s 2023 annual report published targets covering ‘facilitated emissions’, calculated with a weighting of only 33%. But, in a separate ESG datapack, the bank reported on emissions resulting from these kinds of transactions using a 100% weighting. Likewise, Barclays’ most recent annual report shows that it also included only a portion of its facilitated emissions.

Comparing the two banks, one of the major differences is that HSBC includes only the oil and gas, and power and utilities sectors in its reported emissions, whereas Barclays includes all sectors, even though investors have been engaging with HSBC on the topic for the last three years, according to Jeanne Martin, head of banking programme at ShareAction. Many had expected the bank to take action to include more sectors.

For Martin, this is “a missed opportunity” for the bank to show it is serious about its green credentials and meeting its own net-zero goal.

“While I welcome HSBC’s decision to report on all of the emissions, there is disappointment the bank only included a third of these emissions in their decarbonisation targets. Banks need to set ambitious targets and stick to them to prevent catastrophic global warming that puts people and the planet at risk.”

Including all emissions in decarbonisation targets

According to Martin, banks have been reluctant to disclose their climate impacts and include all of their emissions to help facilitate their decarbonisation targets because they say that adopting a higher weighting would expose them to excessive volatility that would be hard for them to manage. Last year, however, ShareAction tested the assumption, and found adopting a higher weighting has no bearings on the volatility a bank is exposed to.

“What influences whether a bank is exposed to higher volatility is whether they adopt a flow or stock approach. So, in the case of a stock approach, you tend to report emissions throughout the lifetime of the capital market instruments you’ve been involved in. Whereas in the case of a flow approach, you will report on those emissions in the first year of the instrument, for example.”

Not including all of their emissions in their decarbonisation targets could mean that they end up reducing emissions linked to the lending that they provide to companies but pay less attention to the emissions embedded in the financing that they helped facilitate through capital markets. For ShareAction, that’s problematic, because the majority of banks’ financing to large oil and gas companies with expansion plans is through capital markets.

In fact, Martin accuses banks of adopting a “double standard” when it comes to integrating capital markets, activities and their targets. Many of them are “very comfortable taking full responsibility for their green transactions”, but when it comes to high-carbon transactions, there’s a question of whether the banks should be held fully responsible for those emissions.

“In the case of Barclays and HSBC, both banks only include a third of their facilitated emissions in their decarbonisation targets but take full responsibility for the green transactions they help facilitate through capital markets,” asserted Martin.

“We think that approach is inconsistent and cannot be justified.”

Holding banks accountable

Asset management firms have a variety of different tools at their disposal to hold the banks they own shares in accountable, from using their voice in private meetings, utilising their important voting rights and attending annual general meetings (AGMs) to make their voices heard. But, according to Martin, not many institutional investors go to those AGMs or hold their company holdings accountable on ESG issues.

“Another thing they can do is to vote on routine resolutions, such as the re-election of a director that might be critical to the company’s sustainability strategy, or vote for a shareholder resolution. In the past year, there has been a drop in support for environmental risk resolutions, with some investors saying that these resolutions were ‘poorly worded’. But there’s an easy way to address this – if you’re dissatisfied with the wording, file the resolution yourselves!”

Shareholders such as wealth management firms, therefore, have a crucial role to play in ensuring banks honour their commitments. When PA Future approached Lazard – of which its UK Omega and UK Multicap Income funds have large holdings in HSBC – they declined to comment. Likewise, M&G has a significant holding in HSBC via their M&G Recovery fund but failed to respond to PA Future‘s questions before the publication of this article.

Updated guidelines for climate target setting

But perhaps things are beginning to move in the right direction. Recently, members of the bank-led, UN-convened Net-Zero Banking Alliance (NZBA) chose to update and reinforce their climate commitments by voting to adopt a new version of the Guidelines for Climate Target Setting for Banks.

For the first time, the scope of targets will extend to include banks’ capital markets activities. For some banks, capital markets arranging and underwriting services provided to clients in the issuance of new debt and equity instruments are their largest source of attributable greenhouse gas emissions.

The new guidelines also add, update and clarify technical language to reflect the evolution of practices, methodologies and data availability in the last three years, including around policy engagement and transition planning.

NZBA is made up of more than 140 member banks of different sizes and business models operating in various jurisdictions and economies, and the threefold increase in our membership since we were established in 2021 demonstrates the significance of climate change to banks operating all over the world,” said Tracey McDermott, chair of the NZBA steering group, and member of Standard Chartered’s management team.

“The updated guidelines will support our member banks as they manage climate-related risks and opportunities and support the transition of the real economy.”

This story first appeared in our sister publication, PA future.