How can banks achieve their net-zero target?

An overview, featuring expert insights from RiskMinds International 2022

Industry-led and UN-convened, the Net-Zero Banking Alliance (NZBA) brings together a global group of banks, representing over 40% of global banking assets, who are committed to aligning their lending and investment portfolios with net-zero emissions by 2050. But how? In this article, we speak to the experts about the top concerns risk managers may have in relation to climate risk, and explore the avenues banks could take in order to achieve their net-zero commitments.

For banks, the macroeconomic landscape remains challenging but climate risk will continue to be the top of the agenda, according to Philipp Mettenheimer, Partner at Oliver Wyman.

The strategic environment in which our continental European banks are moving remains unchanged. If you look at what clients demand, they are now confronted with materially higher energy prices, which is creating pressure for them, and also increasing risk in many sectors. The supervisors continue to remain highly focused on climate and environmental risk, which is an important topic. And competitors are looking at it. You don't want to be caught out onboarding assets, which others are avoiding.

Philipp Mettenheimer, Partner, Oliver Wyman

Committing to net-zero, although a huge organisational challenge, Mark Batten, Banking & Capital Markets Leader at PwC UK & Global Relationship Partner, considers it as an opportunity.

When we look at other industries like mobility, manufacturing, food production, all of those industries have to go through this huge transformation that needs financing huge amounts of capital to fund those transformations that are required. And there's a huge opportunity for financial services to play an amazing role there.

Mark Batten, Banking & Capital Markets Leader, PwC UK & Global Relationship Partner

Even traditionally polluting industries like oil and gas will need financial support in their transitions. Sadig Hajiyev, Group Risk Coordinator at SOCAR Türkiye, explores what the energy transition would mean for them:

Energy companies have to build resilience regarding their economic and reputational risks. Moreover, they have to arrange whether and how to reposition themselves to take the advantage of the accelerating low carbon winds of change. A number of oil and gas companies already sets their net-zero targets. Despite the on-going economic challenges, many of them are sustaining their effort to decarbonising their operations and supply chain. Now oil and gas companies must have a response, like a first response, to build a resilient portfolio to be able to manage low commodity prices and high carbon prices.

Sadig Hajiyev, Group Risk Coordinator, SOCAR Türkiye

Disengaging with whole sectors can have a “chaotic and disorderly outcome” according to Daniel Mikkelsen, Senior Partner at McKinsey & Company.

We want banks to engage with customers to help them transition to lower greenhouse gas intensity. That's gonna be absolutely critical for the world to get to net-zero.

Daniel Mikkelsen, Senior Partner, McKinsey & Company

Furthermore, Philipp Mettenheimer predicts competition for green assets to be “fierce”, giving banks one more reason to engage with existing customers better.

If we sum up all the net-zero commitments we have across the market and the number of assets which are actually aligned with net-zero, you will find that there's a huge overhang of commitments and very few assets to satisfy that. So what we're already seeing now is a very strong competition, a fierce competition I should say, for those specific assets and a potentially less interesting reward situation.

Philipp Mettenheimer, Partner, Oliver Wyman

Adding to the complexity of the net-zero commitments is the changing regulatory and supervisory requirements on climate risk reporting.

“The standards that banks need to follow in order to set the targets are still being developed… So banks are navigating a minefield of determining what sort of requirements to follow and how to” - Daniel Mikkelsen said.

According to Jo Paisley, President at GARP Risk Institute, regulatory uncertainty is one of the top challenges cited by banks.

Regulators all around the world are focused on climate, but they're all doing it in slightly different ways. That's a big issue, particularly for the global firms.

Jo Paisley, President, GARP Risk Institute

However, the most commonly cited challenge that risk managers face is the lack of data.

Banks are having to stitch together different internal data sources with a bunch of external data as well. And it's often a really big challenge… It really is true, it takes so much time and effort.

Daniel Mikkelsen, Senior Partner, McKinsey & Company

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