Why it's time for banks to follow through on climate action and set absolute emission targets

A historic and paralyzing heatwave has struck much of Europe once again this summer, underlining the need to cut emissions as such weather becomes the norm.

With extreme temperatures reported across the continent and beyond, banks and the wider financial sector urgently need to step up to be even more active players in enabling climate action at scale over the coming years.

In public panel discussions – and perhaps even more in closed-door sessions – at this year's London Climate Action Week, the eagerness to execute and generate more impact was palpable. There was widespread agreement that the increased fossil fuel prices and volatility over the past months have only pushed the transition further.

While we fully embrace the acceleration of transition finance, we at Nordea, ABN AMRO and Triodos banks want to further highlight the need for our sector to facilitate this financing towards the right end goal.

This means sustained absolute emission reductions over the long run and, more precisely, these reductions need to be consistent and steep enough to meet the key objectives of the Paris Agreement: that is, keeping global temperature increases well below 2°C, and if possible, 1.5°C, compared to pre-industrial levels.

Most banks have set individual emission intensity targets for the sectors they finance. On the surface, this can sound like enough. However, these targets offer no guarantee when it comes to the Paris goals.

Intensity targets divide emissions by some measure of output, such as product weight or revenue generated. This means that should output increase faster than the associated emissions, absolute emissions can still increase even as intensity targets may be met.

Absolute targets matter because climate stability is governed by physical limits: there is a finite carbon budget. The Paris Agreement has always been about absolute reductions, not about the efficiency of global production.

Over the past decade, many banks have been developing their capacity to assess, monitor, report and engage on climate. Indeed, most major European banks have a set of emission intensity targets to help steer their financing.

And while these targets have been and will remain helpful to guide towards greater efficiency, which is very much part of the solution, it is now time to consider an absolute emission reduction target to help ensure we can meet our long-run objectives.

European banks are particularly well positioned for this next step. EU public policy and banking supervision are firmly pushing in this direction as well, creating a level playing field for banks while supporting the clients we finance with a range of decarbonization incentives.

With 2030 around the corner, the time and necessity for systematic execution at scale is here.

Most European banks have detailed their climate strategy up to 2030, but not beyond. At the same time, virtually all these banks have committed to net zero by 2050. Our sector needs to consider its strategy for the two pivotal decades ahead of us.

Ultimately, the absolute emission reductions we need to sustain are generated by our clients. We provide the financing to enable decarbonization initiatives that fit their purpose, which can vary significantly among different sectors.

What works in real estate may not work in shipping. Therefore, we need to develop the propositions, products, and initiatives that our individual clients need to reduce their emissions. If the clients we finance decarbonize, then we, as banks, will see our financed emissions reduce too.

Moving forward on emission reductions is not optional as climate neutrality by 2050 is the law in Europe, and banks must understand their role in collectively reaching that obligation.

Recent geopolitical instability has only further proved the economic sense in doing so, both in the present and in the future. This truth, combined with public policy pressure, results in much of the business case. It is up to banks to financially unburden clients throughout the coming years to help ensure they can transition effectively.

And it is up to banks to use their collective scale to help markets for new and emerging decarbonization solutions grow faster. It is through these roles, and a combination of initiatives such as targeted client engagement, caps on fossil fuels and expanded financing of renewable energy and energy efficiency, that we achieve in real climate action.

There is no one-strategy-fits-all. Different banks have different geographic footprints, client bases and business aims. However, our ultimate objective remains uniform: absolute emission reductions on the way to achieving Paris and net zero.

Nordea and Triodos Bank have already proven that a business strategy that includes the necessary absolute reductions does work. ABN AMRO has also recently joined the club, committing to develop an absolute emissions backstop by 2030. Each of our banks is developing different long-term strategies that are fully in line with the Paris Agreement.

After moving on from Europe’s worst heatwave, we can now (temporarily) breathe a bit easier and think with clearer heads about the actions we must take to ensure that such events remain extraordinary.

For European banks, the pathway is clear: we all need to develop a clear strategy for 2030 onwards. We will collectively have two decades to take decisive action on climate and support the clients we engage with in accessing the financing they need to meet their own emission targets.

With only a few years until 2030, banks will soon have to answer the question: What’s your climate plan?