November 3 was ‘Finance Day’ at COP26. Appropriately, much of the media spotlight that day was taken up by the Glasgow Financial Alliance for Net Zero (GFANZ), an umbrella group of six sectoral climate alliances and initiatives covering around 300 banks, insurers, asset managers, and asset owners.
Set up in April this year by Mark Carney, the UN Special Envoy for Climate Action and Finance, GFANZ and its constituent groups look to tackle climate change by pushing member institutions to decarbonize their portfolios and mobilize private capital in aid of a low-emissions future. At COP26, GFANZ made a splash with a series of announcements that could have major implications for both its member institutions and for the non-financial companies they fund.
The $130 trillion question
The headlines on ‘Finance Day’ were dominated by the GFANZ claim that over USD$130trn of private capital is “committed to transforming the economy for net-zero” through the alliance’s members — an amount it says is sufficient to build a global economy that limits global warming to 1.5°C above pre-industrial levels.
Civil society groups and media organizations questioned the credibility of the figure and how the commitment would play out in terms of actual investments in climate projects. Their concerns are valid, but the big picture is clear — the momentum behind GFANZ has become irresistible. The reputations of hundreds of institutions, including all of Wall Street’s biggest names, are now tied to Mark Carney’s vision, all but guaranteeing a huge increase in private investment in low-carbon projects and technologies.
Businesses that want to harness the coming wave of capital should pay attention to what GFANZ asks of its members and align their own strategies to those asks. GFANZ institutions commit to transitioning their portfolios to net-zero using science-based targets and “delivering their fair share of 50% emission reductions this decade”. Therefore, businesses that want to attract, or maintain access to, capital from these firms should be ready to describe their own science-based emissions trajectories to net zero through clear, credible, and quantified transition plans.
Identifying opportunities in sector pathways
This may sound daunting to many businesses, especially those at the beginning of their climate journey. However, GFANZ members do not intend to leave non-financial companies rudderless. One of the alliance’s workstreams is focused on forging agreements with several major industries on sector-specific net-zero pathways, starting with aviation and steel. If adopted, financial institutions and many of their investees will share common blueprints as to what constitutes a credible emissions-reduction trajectory.
These blueprints could, in turn, lead to rapid consensus on the steps that businesses need to take to keep private capital flowing in their direction.
For example, most aviation net-zero pathways envision a huge scaling up of the use of sustainable aviation fuels. Those companies working in, or adjacent to, the production of such fuels are likely to attract very significant investment if these pathways are followed.
Similar patterns could play out in other sectors. Firms in the steel sector, for instance, may find themselves at a competitive advantage when it comes to raising capital if they commit to building electric arc furnaces. By extension, construction companies downstream of steelmakers may find banks and other investors increasingly willing to extend credit if they commit to using ‘green steel’ — made using low-carbon techniques — for their projects.
What’s interesting is how the GFANZ focus on sectors mirrors that taken by The High Ambition Coalition (HAC), which last week released a statement singling out certain industries for increased climate action. This suggests that sector-specific climate finance policies from both private and public institutions are the wave of the future. Put another way, there will be no cookie-cutter approach to decarbonization. Instead, businesses will have to learn in detail how their specific sector is expected to transition to net zero.
The demand for data
Going forward, businesses should expect GFANZ institutions to ask for more climate-related data on their operations and for information on how they intend to deploy the capital funnelled their way. Why? Because in order for GFANZ members to align their portfolios to net zero, they need insights into their own customers’ and investees’ Scope 1, 2, and 3 emissions.
In some cases, they may need businesses’ forward-looking estimates of their emissions, too. For example, GFANZ member banks are encouraged to use portfolio alignment methodologies to monitor their consistency with the goals of the UN’s Race to Zero campaign. These methodologies rely on both point-in-time and projected emissions data to function. Businesses should take care to estimate the impact of planned investments and/or expansions on their carbon footprint, as not only is this information likely to be requested of them when they search for financing amongst GFANZ institutions, but it could also determine their cost of capital. Projects with a low or negative effect on their overall emissions may be eligible for lower-cost financing from GFANZ banks and investors.
In the words of Mark Carney: “Finance is a service, a means to an end”. That means the conditions that bind GFANZ institutions will necessarily impact the services they provide to the broader economy. Businesses should therefore be aware of how the GFANZ commitments could alter lender-borrower relationships, not just now, but also over time as the alliance evolves and grows.