Washington Watch

More banks should join climate pledge, Treasury’s Yellen says in issuing new guidance

Secretary of the Treasury Janet Yellen speaks during the Clinton Global Initiative (CGI) meeting this week in New York. The event focused on ways to help address climate change, healthcare, gender-based violence, the war in Ukraine and other issues.

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The?Treasury Department on Tuesday issued a new set of guidelines for banks and other financial institutions as they move to reduce their carbon footprint, mostly under voluntary action.

The principles, according to Treasury, are intended to mobilize more private-sector capital to mitigate the effects of man-made climate change, which is intensifying storms and warming the oceans to dangerous levels. The biggest contributor to global warming remains greenhouse gas emissions put off when fossil fuels are combusted to power vehicles, homes and businesses.

Many financial firms have made individual voluntary net-zero commitments for the coming decades, which means they’ll reduce burning fossil fuels, promote carbon-capturing technology or will buy carbon credits from companies with a smaller impact on the environment.

The principles seek to help provide guidance and best practices.

“There is extensive evidence showing that the changing climate has significant financial impacts,” Treasury Secretary Janet Yellen said in Tuesday remarks to announce the new guidelines.

“Without considering these factors, financial institutions risk being left behind with stranded assets, outdated business models and missed opportunities to invest in the growing clean energy economy,” she said.

Yellen is addressing the U.S. economy and the impact of climate change on U.S. growth at events in New York around the United Nations General Assembly (UNGA)?meeting there this week and a heavily attended event known as Climate Week NY.

This action from the?Treasury?comes on the heels of an International Energy Agency?declaration?that the fossil-fuel era will peak in under a decade, which could mean stranded assets for banks and other concerns.

Financial institutions have come under fire from some climate-policy groups because even if the sector works to reduce the impact at headquarters, for instance, large portfolios of global investments might still be funding expansion of coal, oil CL00, -5.12% and natural gas NG00, +1.56% buildouts.

The largest global organization of financial interests and climate change is the Glasgow Financial Alliance for Net Zero. It also announced Tuesday?a consultation to refine energy-transition finance definitions and methodologies to help quantify investments’ impact on emissions.

GFANZ said in a release that frameworks like its own and Treasury’s must cover the whole economy and bring real-world decarbonization, not just decarbonization on paper via reducing financed emissions and divesting from high-emitting assets that need transition finance. While we are seeing investment flowing to clean energy and renewables ICLN, such as solar, wind and green hydrogen, other hard-to-abate sectors, including construction, steel and shipping, lag. The global economy needs more investment flowing into those industries and to the managed phaseout of coal assets, the group said.

“By encouraging financial institutions to consider climate solutions, the decarbonization of existing businesses, and the early retirement of emissions-intensive businesses in their transition strategies, they will help investment flow where it needs to get the entire economy to net zero,” said Mark Carney, GFANZ co-chair and former head of the Bank of England. “This will strengthen growth, create jobs, and reduce energy prices – all while lowering emissions.”

Climate-policy advocates watching Treasury action were hoping officials would directly address?potential loopholes in the?guidelines?around carbon offsets — a linchpin in many corporate transition blueprints.

This week, Public Citizen, Sierra Club, Americans for Financial Reform and others sent a joint letter to the Financial Stability Oversight Council (FSOC), which includes Yellen and was created in response to the 2008-2009 financial crisis. The letter wants FSOC to show more power to ward off what the advocates fear is a brewing climate-linked financial crisis.

Treasury officials stressed that the principles are voluntary and said that they were flexible given that a one-size-fits-all approach may not work for financial institutions of varying sizes.

The Treasury Department framework includes nine guiding principles for financial institutions adopting a net-zero commitment, the first being a push to limit the increase in the global average temperature to 1.5 degrees Celsius.

The release also called out a?$340 million?commitment by leading philanthropic organizations, the Bezos Earth Fund,?Bloomberg Philanthropies among them,?to support the continued development of research, data availability, and technical resources intended to help financial institutions develop and execute robust, voluntary net-zero commitments. This funding will also support work to facilitate the transition planning efforts of non-financial sectors of the economy.?Further, additional?organizations?announced plans?to generate?tools and technical work?needed to facilitate the execution of net-zero commitments.?