Net zero targets for financed emissions at commercial and development banks are a blunt tool for helping countries and corporations to achieve meaningful climate change goals, according to the European Bank for Reconstruction and Development’s head of climate strategy, with such targets potentially lessening lenders’ impact on sectors where decarbonisation remains challenging.
“Our role is helping our countries of operations and our clients reduce their emissions to net zero as fast as possible,” Harry Boyd-Carpenter tells The Banker on the sidelines of the EBRD’s annual meeting in Yerevan, Armenia.
”Does that mean we should target the reduction of our financed emissions as fast as possible? Not necessarily.”
Under voluntary industry initiatives such as the Net Zero Banking Alliance, which is part of the Glasgow Financial Alliance for Net Zero network spearheaded by former Bank of England governor Mark Carney, commercial banks have committed to not only achieving net zero by 2050, but to setting interim (2030) and 2050 financed emission-reduction targets for carbon intensive sectors such as power and energy.
Boyd-Carpenter says that while the EBRD’s financed emissions will fall as it helps clients and countries reduce their emissions, he doesn’t feel that the Gfanz model is appropriate for a multilateral development bank’s mandate, casting doubt on the efficacy of such an approach.
“Whether it works for a commercial bank is genuinely an interesting question,” he says.
A recent study by the European Central Bank, the Massachusetts Institute of Technology and Columbia School of Business concluded that net zero commitments by commercial banks have had no significant impact on decarbonisation, and have failed to either reduce credit supply to the sectors targeted for decarbonisation or increase financing for renewables projects.
An EBRD spokesperson clarified that while the bank had never adopted any commitment or target that uses “net zero”, it had committed to aligning all of its activities with the goals of the Paris climate agreement from January 1 2023, which it says it has already achieved. At least 50 per cent of its investments of the past three years have been “green” investments, they said.
Boyd-Carpenter says that it was appropriate that all banks, including the EBRD, should disclose both their financed emissions and their facilitated emissions from capital markets activities, with many banks so far failing to disclose the latter.
Yet targeting financed emissions may even prove counter-productive, he added, leading to banks stepping away from hard-to-abate industries, and therefore having less impact on initiatives to reduce emissions within said industries.
Even without a net zero target for financed emissions, Boyd-Carpenter says in the long run the MDB expects to get to the same end. “If we do our job perfectly, EBRD countries will be net zero and therefore EBRD investments will be [net] zero.”
Hard-to-abate investments
The bank’s continued engagement with hard-to-abate industries such as fossil fuels has attracted criticism from non-profits. Last month the EBRD approved a €98.6mn loan for a fossil gas pipeline, the Greece-North Macedonia gas interconnector project, which non-profit organisations claim would allow North Macedonia to increase its gas consumption by three to six times compared with 2021, its highest-consuming year to date.
Critics claim that neither the EBRD nor the North Macedonia authorities properly assessed the pipeline’s most significant impact — the greenhouse gas emissions from burning the transported gas — nor disclosed why so much gas is needed or what it will be used for.
“This pipeline will help North Macedonia move away from coal, but it’s too late to replace one fossil fuel with another,” Ana Colovic Lesoska from Eko-svest said in a statement at the time the loan was approved by the bank. Pippa Gallop from CEE Bankwatch said the pipeline will lead to a major increase in gas consumption or become a “costly stranded asset”.
Boyd-Carpenter says that the bank looked at the project carefully, assessing whether it would become a stranded asset and lock in carbon-intensive infrastructure.
“At the end of the day it was not an easy decision,” he says, noting that North Macedonia relies heavily on coal and heavy fuel oil and other polluting fuels not just for electricity generation, but for heating and industry.
“Those fuels are not only very carbon intensive, but produce appalling air pollution. The benefits [of the gas pipeline] in terms of air quality improvements and also reduction in carbon emissions were so dramatic and significant, the fact that you have gas infrastructure for another couple of decades is still an improvement,” he says.
He says the bank does very few projects of that nature, and insists the pipeline had thousands of pages of studies and due diligence behind it, with methane leakage all the way down the value chain looked at closely.
“What we established is that there is no plausible scenario in which you can go greener faster, because the green options for heating and industry in terms of affordability and technical viability on that scale are still some time away,” he says.
At the 2023 UN climate conference, COP28, in Dubai, North Macedonia launched an “in-country platform” with the support of international financial institutions, which commits the country to exit coal by 2030, and to invest in and deploy renewable energy and associated grid investments. “We wouldn’t support a fossil fuel project where we didn’t think the regulatory environment was committed to decarbonisation,” says Boyd-Carpenter.
Under the EBRD’s new energy sector strategy approved by the bank’s board in December, investments in new fossil fuel projects are limited to “increasingly rare instances”.
Boyd-Carpenter says the bank had always taken the view that it is important for the EBRD to be in the “difficult, hard-to-abate sectors” such as heating, industry, and further down the line, aviation and shipping.
But at a panel on MDBs working together as a system at the EBRD’s annual meeting, Thomas Östros, vice-president of the European Investment Bank, said its focus is to be a climate bank, which meant no financing of gas, coal and oil, and focusing fully on renewables. “That will be the line going forward,” he said. CEE Bankwatch has called on other MDBs to do the same.
Speaking to The Banker during the EBRD meeting, Axel van Trotsenburg, senior managing director at the World Bank, says that his institution had not financed coal for many years and that it had “substantially reduced” its financing of gas.
“In exceptional cases, there may be gas as a transition fuel,” he says, adding that the bank’s financing is now heavily dominated by renewables. Climate financing increased to more than $30bn last year, he says, representing more than 40 per cent of the bank’s total financing.
“For the next fiscal year, we are going to target 45 per cent of our total financing,” van Trotsenburg says.
