Financial institutions are preparing to take a series of important steps as they seek to tackle climate change while also protecting their returns. These include setting and meeting net zero commitments, mitigating potential losses from physical and climate risks, and capitalizing on new opportunities.
Yet despite the critical role of private finance in scaling clean technologies and phasing out harmful activities, building a comprehensive picture of private financial flows at a global scale remains extremely challenging.
The Net Zero Finance Tracker (NZFT), powered in part by Asset Impact’s asset-based data, is a groundbreaking tool for banks, policy makers, and civil society to monitor the progress made towards net zero of nearly 1,000 financial institutions, including 629 which have made climate commitments through global banking alliances.
Here are our three key takeaways for financial institutions:
1. The importance of actionable and measurable climate targets
When setting off on any journey, signposts along the way keep you on the right track to reach your destination. The journey to net zero is no different. Clear targets provide a roadmap for financial institutions, facilitating strategic planning and allocation of capital. They also ensure accountability and transparency, which are crucial for maintaining the trust of shareholders, creditors, and the public.
In 2023, institutions tracked by the NZFT that had established clear and measurable targets were up to eight times more likely to have taken concrete actions to implement them compared to those with vague or weak targets. Three-quarters of the tracked entities – covering more than 95% of managed and owned assets – had set mitigation targets by 2022-2023. This reflects a growing commitment across the financial sector to take action to address climate change.
Making measurable and verifiable progress on targets requires robust and transparent data on the activities of companies in financial portfolios. Significant challenges remain in the areas of data availability, transparency, and comparability, especially for estimating Scope 3 financed emissions (S&P 2023; ECB 2023).
2. Transforming climate finance commitments into strategic impact
The financial sector has also seen a significant surge in its commitments to provide ‘climate finance’. According to the NZFT, quantified climate finance commitments have grown cumulatively to at least USD 13 trillion.
Adhering to the guidelines set by the Taskforce for Climate-related Financial Disclosures (TCFD) and incoming rules from the International Sustainability Standards Board (ISSB) allows organizations to get ahead of regulation – particularly for those working across regions. It provides a guarantee that their strategies are comprehensive, are transparent, and meet evolving international best practices.
However, reporting against voluntary frameworks and committing funds is only the first step. To translate these commitments into tangible outcomes and to reliably track their own progress – especially with the expansion of regulatory requirements – financial institutions need robust, detailed data and corresponding analytical tools.
3. Embedding climate risks management into financial strategies
Effectively managing climate risk is essential for financial institutions aiming to align with global sustainability standards and regulatory requirements. As climate-related risks become more pronounced, at least 38% of tracked entities – representing 81% of owned and managed assets – are advancing towards comprehensive climate risk management, strategy, and disclosure systems, driven by frameworks like the TCFD and increasing regulatory pressure.
Driven by a detailed understanding of the underlying assets and liabilities within a given portfolio, a solid climate risk strategy enhances resilience and long-term financial performance. Key elements include:
- Identifying and assessing climate-related risks and opportunities associated with investee companies.
- Developing strategies to mitigate these risks and capitalize on opportunities to invest profitably in the transition.
With increasing pressure from both voluntary and mandatory reporting frameworks, forward-looking firm-level climate data is coming to the fore as a means for financial institution to measure their own financed emissions and to manage their exposures to transition-relevant sectors and technologies in the years to come.
The role of asset-based data
Asset Impact’s asset-based data, which the NZFT taps for information on energy investment, is designed to provide a comprehensive, consistent, and inherently comparable assessment of the environmental consequences of financial decisions – especially compared to reliance on opaque and incomplete corporate reported data, or high-level sector averages.
Asset-based data involves gathering historical and forward-looking activity, emissions, and emission intensity data from underlying physical assets in a given sector. These could be any objects that are sources of emissions. By linking these individual assets to their direct and indirect corporate owners, Asset Impact’s data forms a granular, detailed picture of the environmental footprint of a financial portfolio. Asset Impact’s data currently covers over 360,000+ assets linked to 66,000+ listed and unlisted companies in 11 climate-critical sectors across transport, energy, and materials and metals. This level of specificity provides financial institutions with the detail needed to set realistic and measurable climate targets at the portfolio-, company-, and sector-level as well as meeting various mandatory and voluntary reporting requirements.
By leveraging Asset Impact’s forward-looking asset-based climate data and analytics – which are based on actual capex and asset retirement plans rather than stated targets – financial institutions can also better understand their risk landscape and make informed decisions. It is also a valuable tool when engaging with investee companies; our data can be used to independently crosscheck whether a company is likely to meet their climate commitment.
The Net Zero Finance Tracker underscores the significant progress made by financial institutions committed to climate action yet highlights ongoing challenges with data availability, resourcing of engagement strategies, and development of robust internal processes.