Sustainable Investment Awards 2024

Banking on the green transition

The Transition Pathway Initiative Centre (TPI Centre), based at the London School of Economics and Political Science, is an independent source of research and data into the progress being made by corporates and sovereigns in the transition to a low-carbon economy. Today, the investor initiative counts over 150 asset owners and managers collectively managing more than $60 trillion. Valentin Jahn, principal research project manager at the TPI Centre, tells Environmental Finance how the Centre's new assessment framework enables investors to get better transition assessments now also for banks.

Environmental Finance: What is the purpose of TPI and what makes it unique?

Valentin Jahn: The TPI was established in 2017 as a collaboration between investors - including leading asset owners such as the Church of England Pensions Board, Brunel Pension Partnership, the Environmental Agency's pension fund - and the London School of Economics (LSE) as the academic partner.

Valentin JahnWith corporate climate targets coming forward and companies making initial commitments, it was very difficult to understand and compare them. What did they mean? Were they sufficient to meet climate goals, and temperature thresholds set by the Paris Agreement?

So, the idea was to create a framework to assess and compare such commitments. There wasn't a desire to create a new disclosure framework. We focused instead on making our analysis easy to use and transparent by relying solely on publicly disclosed information and making the methodologies open access.

After having started assessing corporates in high-emitting sectors, we added sovereigns and banks last year - the banking tool being the reason for us talking today.

EF: Why the recent focus on banks? Are they lagging in the green energy transition?

VJ: Investors with significant exposure to banks needed to understand banks' individual transition risks but the tools to understand that were not available. While I don't want to claim that banks themselves were lagging behind in the low carbon transition, our understanding of what the transition would look like for banks and how to measure it certainly was behind a lot of real-economy sectors.

The final impetus to the project came after COP26 in Glasgow but given banks' crucial role in the financial system and their broad range of activities, it was clear we needed a more detailed approach to capture that complexity.

Combining our experience in the corporate sector with insights from investors, we developed the Net Zero Banking Assessment Framework in consultation with the Institutional Investors Group on Climate Change (IIGCC) and Ceres. The Assessment Framework builds on IIGCC's and Ceres' Net Zero Standard for Banks which clearly set out investor expectations ensuring that our Framework meets investors' needs.

EF: So how does TPI assess entities?

VJ: Our analysis is broken down into two main components. The first examines the Carbon Performance of different entities that we research, asking questions such as: how much are entities emitting relative to their output? How do their targets compare with each other and against low carbon benchmarks? Are they actually sufficient to align with international climate goals?

The second component evaluates how well entities manage their greenhouse gas emissions and other challenges that come with the low carbon transition. For example, do they undertake scenario planning or do they link executive pay to climate change performance.

In some ways, the management aspect can be understood as a measure of organisational input or effort the entity is investing in managing the low carbon transition, and the Carbon Performance aspect can be seen as an output of that process. In the case of the banking tool, we measure the first aspect using the Net Zero Banking Assessment Framework and the latter using our Carbon Performance Alignment Matrix.

EF: How does the Net Zero Banking Assessment Framework work?

VJ: The Net Zero Banking Assessment Framework is made up of 10 areas. The areas cover crucial aspects of banks in transition starting with targets and moving on to target implementation, a crucial part of transition plans, where we assess the decarbonisation strategy as well as banks' efforts to scale up climate solutions. Furthermore, we focus on internal and external management practices such as executive remuneration, policy engagement and the just transition. Lastly, we look at important aspects of reporting, such as whether banks mention climate change in their financial statements.

The Carbon Performance Alignment Matrix compares bank's sectoral greenhouse gas targets against low-carbon benchmarks allowing users to determine their alignment with international climate goals. The matrix covers banks' targets by sector, for example in the power sector, and bank activity, say for the loan book.

EF: What impact do you hope the TPI and the wider banking framework to have?

VJ: We're a research centre, so our frameworks are not designed to be prescriptive. Instead, we provide a set of indicators that offer a useful and accurate picture of how banks are managing the low-carbon transition. This is why we aim to provide information on a granular level giving users freedom to use it in the way that best meets their needs.

At present we assess 26 of the world's largest banks, expanding to 38 later this year. Since our main objective is to enable investors and other market participants, not to mention the banks themselves, address the issue of climate change in their businesses a key measure of success is the extent to which the framework is used. This is also why all our data is open-access and available online.

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