The net-zero nudge

How net-zero investments come into play

For financial institutions, it can feel impossible to manage and mitigate greenhouse gas emissions when less than 1% of emissions are within your direct control. However, new methods of comparison and, therefore, a more strategic approach have given the financial industry a whole new lever to pull. Banks, insurers, investment advisers, and private equity and pension funds are all providers of capital, giving them crucial leverage in the financial ecosystem. By attaching restrictions or incentives to the financial support they provide, they can effectively connect access to capital with both sustainability goals and socioeconomic progress.

Thanks to an increasing array of tools available to help quantify climate risk data, financial institutions have it in their power to develop climate transition plans that match the ambition of their net-zero pledges and other climate commitments. More than 3,000 institutions worldwide have used the Paris Agreement Capital Transition Assessment (PACTA), which offers the ability to calculate and compare what needs to happen in climate-relevant sectors to minimize global temperature rise. Plus, the Science Based Targets initiative (SBTi) has introduced new methods for businesses in sectors that are particularly heavy on greenhouse gas emissions to better understand their decarbonization potential. 

Emerging practices

Deloitte has studied and compared transition assessment approaches – including recommendations made by academic and professional institutions and methods already being utilized by our industry clients – and we have identified eight leading emerging practices that financial institutions should consider adopting in the near term to assess their corporates’ transition plans.

1. Set temperature goals and interim targets: Financial institutions need to define a method to not only evaluate the long-term targets but also to assess their interim targets.
2. Measure performance and progress: Firms may be able to gather data from Scope 1 and Scope 2 emissions disclosures from annual sustainability reports, but it would need to be done manually or sourced from commercial vendor databases. 
3. Define the implementation strategy: Using policies, processes, products, services, and relationships, financial institutions need to develop and define how they want to go about assessing the credibility of a company’s plan to deliver on its climate commitments. 
4. Strengthen organizational alignment: To keep climate transition plans on track and heading in the right direction, a financial institution needs to review how its approach encompasses the entire corporation, including budgeting and investments plans. 
5. Consider impacts beyond climate: Financial firms need to ensure they fully understand the likely impact of net-zero pledges and related investments on workers, suppliers, local communities, and consumers—and then use this information to develop specific sustainability targets.
6. Update climate transition plans over time: Financial institutions need to define a process for regularly reviewing and revising the climate transition plans, including the methods they intend to use, as well as produce periodic updates on the progress made toward stated targets. 
7. Review procedures for disclosures: When evaluating corporate climate transition plans, financial institutions need to consider whether or not there is a process in place for meeting ESRS, TCFD, and ISSB requirements for transition plan disclosures at each company. 
8. Analyze policy advocacy: Firms should regularly review each corporate client’s or portfolio company’s policy positions to ensure they support their stated climate objectives and ambitions.

What’s Next?

Financial institutions will likely need to invest in people and technology, and training their existing staff accordingly, to better assess climate transition plans. The good news is that, with so much attention on the credibility of net-zero plans, the requisite talent and technology is starting to proliferate along with supporting regulations and guidance. Deloitte, for example, has developed GreenLight, a set of technology-enabled accelerators that can help clients establish an emissions baseline for individual companies, set net-zero goals, evaluate tax incentives and other forms of government support, develops a prioritized roadmap with budget constraints in mind, and deliver streamlined, auditable reporting for internal stakeholders.

As the market continues to evolve, and scrutiny of climate transition plans intensifies further, the market is likely to yield more helpful solutions in the years ahead. But there’s little argument for waiting it out – the march to net-zero is afoot. Steps financial institutions take now will likely cement their place and reputations as sustainable problem-solvers. It’s time for all companies to step up and outline how they plan to fulfill their climate pledges – and the financial services industry is in a prime position to provide the nudge.

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