Net-Zero Targets: Why Financial Institutions Lag Behind in Climate Commitments

Climate change has become an urgent issue, one that companies around the world are increasingly compelled to address. One crucial way they are doing so is by setting “net-zero” targets—a commitment to balance the amount of greenhouse gases they emit with an equivalent amount removed from the atmosphere. This sounds promising, doesn’t it? But a recent survey by S&P Global reveals that while many sectors are adopting net-zero goals, some, especially financial institutions, are lagging behind.

Let’s dive into why this discrepancy exists, why it matters, and what it means for the future of sustainability.

A Mixed Picture Across Regions and Sectors

In examining net-zero targets across regions and sectors, a clear divide emerges. Europe, known for its strong environmental policies, shows a high commitment across various sectors. Utilities and real estate, for example, have a notable number of companies with net-zero targets. But North America and the Asia-Pacific region aren’t far behind, with the utilities sector in particular standing out in all regions except Latin America.

One thing that’s clear is that some industries are more proactive than others. Utilities, real estate, and energy are leading the charge in setting net-zero targets, while sectors like consumer discretionary, communication services, and, most noticeably, financial institutions, are dragging their feet.

Why Aren’t Financial Institutions Leading the Way?

At first glance, it might seem odd that financial institutions are lagging in net-zero commitments. After all, finance plays a crucial role in the economy and has significant leverage over other sectors through investments. So, what’s holding them back?

1. Indirect Emissions are Harder to Control: Unlike energy or manufacturing companies, financial institutions do not produce large amounts of direct emissions. Instead, their environmental impact is indirect—largely through the companies they fund and invest in. This category of emissions, known as “Scope 3,” is tricky to manage because it depends on the actions of other companies. Imagine a bank financing a company that builds coal plants. The bank is technically responsible for emissions tied to that investment, but it doesn’t have direct control over the plant’s emissions. This complexity makes it challenging for financial institutions to set and achieve clear net-zero targets.

2. Risk of Reduced Returns: Committing to net-zero often means avoiding investments in high-emission industries like oil, gas, and mining. For financial institutions, particularly those seeking high returns, such exclusions can mean giving up lucrative opportunities. There’s a trade-off between profitability and sustainability, and not all financial companies are willing to sacrifice returns, especially when there’s pressure from investors looking for growth.

3. Lack of Standardized Reporting: Another barrier is the lack of a standardized way to report and measure indirect emissions. While regulations are improving, many financial institutions still struggle to accurately quantify their indirect emissions. Without a clear and standardized method, setting a net-zero target becomes a challenge.

Why Does It Matter if Financial Institutions Lag?

Financial institutions play a unique and influential role in the global economy. They decide where capital flows, which projects get funded, and which sectors grow. Imagine a financial institution that decides to invest heavily in renewable energy projects or sustainable technology. That influx of capital can accelerate the growth of sustainable industries. On the other hand, if banks continue to fund high-emission projects, these projects can persist and expand, making it harder to tackle climate change.

Moreover, financial institutions have the power to set conditions for the companies they finance. Some banks, for example, require clients to follow specific environmental guidelines as a condition of financing. This means that when financial institutions embrace net-zero, their influence can ripple across multiple sectors.

The Broader Economic Impact

From an economic perspective, there’s also a potential risk if financial institutions delay adopting net-zero targets. Increasingly, governments and regulators are pushing for stricter climate policies. In the future, companies that have not adapted to low-carbon operations might face fines, legal challenges, or even restrictions on their activities. Financial institutions that are heavily invested in such companies might see those assets lose value, leading to a phenomenon known as “stranded assets.”

Imagine if, due to regulatory changes, a coal mining company funded by a bank becomes unprofitable overnight. The bank would be left with a “stranded” investment, impacting its profitability. In this sense, not adopting net-zero targets isn’t just a moral or social risk—it’s also a financial one.

What Needs to Change?

To address these challenges, financial institutions can take a few critical steps:

1. Increase Transparency and Reporting: Financial institutions can improve transparency by adopting standardized methods for reporting indirect emissions. Organizations like the Science Based Targets initiative (SBTi) provide frameworks for calculating and reducing emissions in line with climate science, which could help banks set realistic net-zero targets.

2. Reframe Investment Strategies: While high-emission sectors have been profitable, the world is shifting towards renewable energy and sustainable technology. Financial institutions could start focusing more on these sectors, which not only aligns with net-zero goals but also taps into the growing demand for sustainable investment.

3. Partner with High-Emission Clients for Transition: Instead of simply divesting from high-emission industries, banks could support these companies in transitioning to greener practices. This way, financial institutions remain profitable while helping clients reduce their environmental impact.

Final Thoughts

Setting net-zero targets isn’t easy, especially for financial institutions dealing with complex indirect emissions. But as the urgency of climate change continues to grow, so does the need for financial players to step up. By adopting net-zero commitments, financial institutions not only protect the environment but also safeguard their own financial futures.

Ultimately, the shift to net-zero will require effort, innovation, and collaboration across all sectors. Financial institutions have the unique ability to drive this change, influencing industries far beyond their own. The question remains: will they rise to the challenge?

A Critical Crossroads: Energy, Climate, and Biodiversity on the Global Stage

The world today stands at a critical juncture, where decisions on climate, biodiversity, and energy are intertwined in a high-stakes game that will define the planet’s future. Recent headlines—from Qatar’s rivalry in liquefied natural gas (LNG) sales to COP16’s biodiversity goals, and the urgency in UNEP’s latest climate pledges report—highlight the global race against time to protect natural resources and curb climate change. These issues reveal a complex web of economic, environmental, and political challenges that require bold, transformative actions.

Let’s dive deeper into how each of these areas impacts one another and why only a “quantum leap” in ambition will suffice to address the cascading climate and ecological crises.

1. The Global LNG Competition: Power and Influence Beyond Profits

The recent competition among Qatar, the U.S., and the UAE for LNG markets in Asia exemplifies the global scramble for energy dominance. Natural gas, often positioned as a “cleaner” fossil fuel, has gained popularity as countries seek to transition from coal and oil to relatively lower-emission options. Japan and South Korea, among the world’s largest importers of LNG, represent valuable contracts, promising stable revenue streams for years to come.

However, this energy race is more than just about economic gains; it’s also about geopolitical influence. By controlling energy supplies, countries can forge strategic alliances and gain leverage in global politics. Economically, this rivalry reflects an oligopolistic market where a few major players compete to control supply, influence prices, and dictate terms to energy-dependent nations.

The Environmental Catch: Relying on LNG as a bridge fuel has its downsides. While it emits less carbon than coal, natural gas is far from carbon-neutral, and heavy investments in LNG infrastructure could delay the shift to truly sustainable energy sources like wind, solar, and hydrogen. As nations strive to meet their energy needs and boost economic growth, they risk locking in carbon-intensive pathways that conflict with global climate goals.

2. COP16: A Biodiversity “Paris Agreement” for Nature

Simultaneously, the UN’s COP16 summit in Cali, Colombia, underscores the urgency of protecting biodiversity. The Kunming-Montreal Global Biodiversity Framework, often described as the “Paris Agreement for nature,” aims to safeguard ecosystems and biodiversity, which provide essential services like pollination, water purification, and carbon storage. Countries are grappling with financing mechanisms for conservation, especially for developing nations, and how to equitably share the benefits of genetic resources.

Biodiversity can be seen as natural capital—a critical asset for long-term economic and ecological resilience. However, like financial capital, natural capital is often underappreciated until it’s nearly depleted. For example, deforestation, a major driver of biodiversity loss, contributes to climate change while destabilizing local economies and ecosystems. In the Amazon, recent studies show that a mere 1% increase in deforestation correlates with a 6.3% rise in malaria cases, highlighting the direct link between ecosystem health and public welfare.

3. The Cost of Climate Inaction: UNEP’s Quantum Leap in Ambition

Perhaps the most urgent call comes from the UNEP’s recent report on climate pledges. The report warns that even with existing Nationally Determined Contributions (NDCs)—pledges made by countries to reduce emissions under the Paris Agreement—the world is on track for 2.4°C to 2.9°C of warming by 2100. This far exceeds the 1.5°C target that scientists consider the threshold for avoiding the worst impacts of climate change. The gap between current policies and the 1.5°C pathway is massive, amounting to 11-14 gigatonnes of CO2 equivalent emissions.

This report emphasizes the need for a “quantum leap” in ambition. Without significant increases in the scale and pace of emissions reductions, the impacts of climate change will grow more severe and costly. Economically, delaying ambitious action means shouldering higher costs later, as governments will need to address climate-related disasters, public health crises, and infrastructure losses. Essentially, it’s a question of paying now or paying more later.

Why 1.5°C Matters: While a difference of half a degree may seem small, it has huge implications. At 1.5°C, coral reefs face severe threats but may survive in some areas; at 2°C, they’re almost entirely lost. Similarly, the frequency of deadly heatwaves, floods, and droughts increases sharply between 1.5°C and 2°C. The economic costs of these events add up quickly, burdening economies and devastating communities.

4. Political Influence and the Lobbying Challenge

As countries set their climate goals, the influence of political lobbying remains a significant obstacle. In the U.S., influential oil and gas lobbies are preparing to dismantle climate policies based on the outcome of the upcoming presidential election. This represents a principal-agent problem, where private interests (agents) act contrary to the public’s (principal’s) welfare by advocating for policies that benefit their profits at the expense of broader societal interests.

This lobbying has real-world consequences. If climate policies are weakened or reversed, the U.S. may fall short of its climate commitments, undermining international efforts. Inconsistent policies from major economies also lead to a “race to the bottom,” where countries compete to attract investments by relaxing environmental standards instead of advancing toward shared climate goals.

5. Scientific Reality Check: The Urgency of Research on Climate and Ecosystems

New climate research highlights the accelerating impact of global warming on ecosystems. From extreme flooding in Sudan, intensified by climate change, to the polar bear populations increasingly exposed to pathogens due to Arctic warming, science paints a dire picture of the future. These studies reveal the negative externalities of environmental degradation—costs borne by society rather than by the polluters, such as increased health risks and habitat loss.

The precautionary principle in economics suggests that when facing uncertain but potentially severe risks, the best approach is to err on the side of caution. However, in practice, economic decisions often favor short-term profits over long-term sustainability. For example, deforestation in the Amazon may yield immediate financial returns, but it comes at the cost of biodiversity, climate stability, and public health, especially in vulnerable communities.

Moving Forward: An Interconnected Solution

These global challenges are not isolated; they’re interwoven in a complex system where actions in one area impact another. Solving these issues will require:

• Increased Ambition: Countries need to enhance their climate pledges, aligning them with a 1.5°C or, at minimum, a 2°C pathway. This includes expanding renewable energy, enforcing carbon pricing, and phasing out fossil fuel subsidies.

• Global Cooperation and Fairness: Wealthier nations should assist developing countries by financing biodiversity conservation and climate resilience efforts, recognizing the disproportionate impact of climate change on poorer nations.

• Addressing Lobbying Power: Political systems must confront the influence of powerful lobbies that hinder climate progress, ensuring that policies reflect the broader public interest rather than narrow corporate gains.

• Integrating Science into Policy: Policymakers should prioritize scientific findings on biodiversity and climate impacts, committing to preventive actions that avert long-term costs.

The time for half-measures has passed. Only a bold, coordinated, and ambitious approach can close the emissions gap, protect biodiversity, and create a sustainable future. Humanity is at a crossroads, and the decisions made now will determine whether we pass on a livable planet to future generations—or a legacy of missed opportunities and irreversible damage.