When RMI launched the Center for Climate-Aligned Finance in 2020, the concept of climate-aligned finance was in its infancy. In 2021, it matured rapidly as net-zero pledges became the new norm in the financial sector, particularly in the West.
As we begin 2022, we look ahead to some major themes likely to emerge this year.
1. Financial institutions will substantiate their climate alignment commitments
In 2021, many financial institutions made net-zero commitments, and we expect firms to provide further detail and ambition this year. Those who have not done so already will face pressure to set interim 2025 and 2030 targets on the journey to net-zero emissions by 2050.
We also expect many firms will expand coverage of their target setting; many banks in the Net-Zero Banking Alliance must set interim (2030 or sooner) targets for their most emissions-intensive sectors this year.
There is much room for growth on portfolio coverage especially. For example, signatories to the Net Zero Asset Managers initiative said that only 35 percent of their total assets under management are currently covered by net-zero targets.
2. Transition plans will be published and assessed
From shareholders to governments to civil society, stakeholders will expect to see more details in 2022 on how firms plan to meet their net-zero commitments. This means going beyond target setting. Ambitious transition plans, for both financial institutions and industrial companies, will become a core requirement for climate credibility and will be crucial in fighting off accusations of greenwashing. Such pressure could result in increasing numbers of shareholder resolutions requesting transition plans and voting on their credibility.
Ambitious transition plans, for both financial institutions and industrial companies, will become a core requirement for climate credibility and will be crucial in fighting off accusations of greenwashing.
The Center, along with public- and private-sector groups, is working hard in 2022 to define what "credible" transition plans look like. Keep an eye on the UK Government Transition Plan Taskforce, the GFANZ working groups on financial and real economy transition plans, and methodologies for verification such as the ACT initiative and the CTP accreditation.
3. Financial institutions will be held accountable for targets linked to 'real economy' impact
As the "decisive decade" continues, financial institutions will need to proactively finance real-world transformation, rather than achieving portfolio alignment on paper only. We expect to see a record-breaking year for the launch of new green investment products, such as green bonds, sustainability-linked loans, and green ETFs, as well as increasing corporate engagement.
Demonstrating action, though, should not come at the expense of impact. Actions to align portfolios will not always lead to emissions reductions in the real economy; divesting from a steelmaker may not cause it to build less polluting steel plants. Supporting adaptation and sustainable development in emerging and developing markets will be another key piece of the decarbonization puzzle.
Firms will need to adopt strategies that have the greatest probability of high impact, doing the things that matter most first and avoiding greenwashing. To aid this, the Center will soon launch a set of impact-oriented climate alignment principles to guide financial institutions as they implement their commitments.
4. Better forward-looking data, more forward-looking metrics
Investors need asset-level, quantitative data and metrics that can support company or sectoral transition plans and that can be integrated into existing investment models. Much of the data financial institutions use today focuses on what happened in the past (climate impacts, company performance or consumer demand), but these are no longer a good indicator of what will happen in an unprecedented environment—or what needs to happen to avoid one.
Investors need asset-level, quantitative data and metrics that can support company or sectoral transition plans and that can be integrated into existing investment models.
Forward-looking metrics can help assess investment risks and opportunities through the net-zero transition, such as assessing how companies or individual assets are likely to fare in the transition. The Center’s Climate AIR Toolbox explains which data and metrics tools are forward-looking. For example, investors in US regulated utilities can use forward-looking emissions scenarios in RMI’s Utility Transition Hub to make investment decisions today. Similar metrics must be made available across other geographies and sectors too. 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 the availability and quality of data, such as upcoming SEC rulemaking and tools such as OS-Climate. In the meantime, however, a lack of data is not an excuse for inaction: Firms do not need perfect data or international standards to begin using their levers of influence over clients.
5. The focus on high-emitting sectors will widen and deepen
To implement their 2050 net-zero commitments, large private financial institutions (along with their clients in heavy industry and transport) are drafting and implementing sectoral climate-aligned 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 agreement launched for the global steel sector. Bank-led working groups will also begin piecing together agreements for sectors such as aviation, aluminum, cement and concrete, and real estate. Stay up to date on progress across these hard-to-abate sectors via our sectoral alignment calendar.
From those financial institutions that have already laid the foundations for climate alignment within their firms and through industry-wide initiatives, we look forward to swift, bold action to help keep warming below 1.5 degrees Celsius. The reaction to the financial sector’s 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 this November, it must begin delivering on its promises and showing tangible impact in driving real economy decarbonization. 2022 is the year to walk the walk.