Most financial institutions still see fossil fuels as a key part of the investment mix

Despite progress on net-zero goals, three-quarters of financial institutions continue to express a strong intent to continue fossil fuel investments and have no real plan to reduce exposure within the next decade. That is according to a report from South Pole, which surveyed 350 institutions worldwide.

The report from the climate-focused consultancy firm found a clear trend among financial institutions to continue fossil fuel investments despite the general understanding that they will eventually be compelled to fully divest. Paradoxically, this trend persists even as these financial companies pursue net-zero goals.

In fact, around half (52%) of respondents see themselves as on track to meet their climate goals, while a much larger 86% said they are either on track or at least ‘partially on track’. Organizations in the Americas were generally the most on track with climate goals – more than those in Europe or Asia Pacific.

“The survey results demonstrate that financial institutions continue to back investments in green infrastructure and are willing to increase their exposure to climate-resilient assets and portfolio companies,” said Daniel Klier, CEO of South Pole.

“However, it is also clear that the sector is no longer taking an active role in shifting the balance and will continue to finance fossil fuels. Financial institutions want to have their cake and eat it too.”

When asked what they feel is holding financial institutions back, more than half (55%) pointed to a lack of clear industry-specific guidelines and 47% cited a lack of progress from organizations they provide financing to. Another 42% cited a lack of support from government policy.

Climate transition plans

Another important part of making progress on net-zero goals is having a climate transition plan. Exactly half of the financial institutions surveyed reported having an ‘extensive and credible’ climate transition plan in place already. The vast majority of respondents (88%) said they currently have at least some form of plan in place.

The report found that larger institutions have made more significant strides in their climate transition plans when compared with their smaller counterparts. That may come as no surprise, considering that the smaller organizations are far less likely to have extensive funding available for climate initiatives.

Financial institutions in major hubs like the UK, Singapore, and the US overwhelmingly favor investing in companies with climate transition plans, finding them more attractive. This preference stems from financial organizations seeking climate-prepared entities with ambitious net-zero goals, as many struggle to meet their own climate targets due to insufficient progress from their financed companies.

Carbon credits

Many financial institutions also have carbon credit strategies in place. Carbon credits serve two main purposes: To go beyond the immediate value chain in mitigating climate change and to neutralize remaining emissions on an institution’s path to achieving net zero.

Many investors see carbon markets and projects as a potential new asset class, recognizing the increasing demand for high-quality carbon removal credits. This has been driving investment in this sector.

Financial institutions have also been pushing their portfolio companies towards using carbon credits in their net-zero strategies. The growing significance of compliance carbon markets is expected to further increase demand and prices, presenting a notable opportunity for the financial sector.

Delaying climate action means more risk

Put simply, financial institutions are increasingly looking to reduce their exposure to risk, which is seen as a crucial part of future-proofing a business. Organizations that have ESG initiatives in place are seen as far less exposed to climate-related risks, which have clearly been on the rise in recent years around the world.

“While the financiers surveyed continue to drive climate-related engagement with their clients, it also becomes clear that financial institutions have to walk a tightrope, balancing the long-term resilience and efficiency of their business against returns for investors in the short term,” said Klier.

“It is important to embrace the positive tipping points created by new, cleaner, and more competitive technologies; but the sector is running major transition and physical risks when it delays its response to obvious climate tipping points.”