As the world turns its attention to COP28 in Dubai, governments, private-sector companies and civil society organisations will once again formulate their hopes and ambitions for addressing gaps in climate action. Rightly so.
Based on current national commitments, we are on track for global warming of 3-4°C by mid-century – a scenario well above what we committed to in the Paris Agreement, and which comes with major and irreversible climatic changes that will severely impact human welfare. Global emissions are still on the rise.
All parts of society and the economy will have to transform rapidly. The financial sector is no exception. As the backbone of the real economy, the financial sector can be an important agent of change and gain considerable leverage by being green and climate friendly.
However, banks and the banking system need to become greener themselves to support the transformation of the real economy. After an initial wave of public net-zero pledges by financial institutions, a quieter but more concrete trend is taking hold in the industry: banks are aligning with the goals of the Paris Agreement and a “transition plan” is emerging as the central tool for doing so.
The European Bank for Reconstruction and Development (EBRD) is actively supporting this plan. When done right, transition planning has four advantages:
- It sets out concrete actions and targets, laying the pathway to – and not just the ultimate goal of – a net-zero economy by 2050.
- It adapts to the specific circumstances of each financial institution, be it the legislative environment, or the lending or investment strategy of the bank in question. A bank in Morocco that focuses on agribusiness lending, for example, might include climate adaptation measures more actively than a bank in Western Europe that lends to the oil and gas sector, which might focus on emission reductions. This way, the specific needs and challenges of emerging markets can be taken into account.
- It integrates climate and environmental, social and governance (ESG) issues comprehensively into all bank areas. Targets can be set for the improvement of climate corporate governance, for green finance allocation and for ESG risk management, including fossil-fuel policies. Equally, it can be used to improve the environmental performance of the bank’s own operations, as well as its financed emissions.
- Transition plans are adaptable: there is an expectation that a transition plan will be updated regularly to take into account emerging priorities, for example, nature-related goals.
Under its Paris Alignment approach and linked to its green business strategy, the EBRD is liaising with financial institution clients on transition planning. A few pioneering banks are already engaging in transition planning, supported by the EBRD. For example, in December 2022, Jordan’s Bank al-Etihad became the first EBRD partner bank to sign up to incorporating the EBRD’s Paris alignment methodology, alongside a US$ 35 million loan to strengthen its lending capacity for businesses and individuals, as well as women-led micro, small and medium-sized enterprises.
The EBRD is also working to build the capacity of all of our partner financial intermediaries in Armenia through a pilot capacity-building programme on transition planning. Through this pilot programme, in collaboration with the Armenian Central Bank, participants develop a range of competencies in climate risk identification and management, strategy, governance, metrics and targets, and disclosures. Participants also build the knowledge and practical skills necessary for transition planning, which will enable them to deliver a credible transition plan for their own institutions. The programme in Armenia prioritises an in-depth understanding of the challenges and opportunities that climate change brings to financial institutions. The EBRD will roll out similar initiatives in other countries in the coming months.
With this hands-on approach, the EBRD is supporting its partner financial institutions in becoming the sustainable force needed to transform our existing economic system. If we are to limit global warming to tolerable levels, we need all hands on deck. The financial sector can and must play its part.