The U.S. Department of the Treasury has recently set out the principles for net-zero financing and investment. These principles represent a set of voluntary guidelines that outline best practices for financial institutions committed to achieving net-zero emissions. The principles are applicable to financial institutions and the broad ecosystem of stakeholders that shape how voluntary net-zero commitments by financial institutions are developed, implemented, assessed, and communicated, particularly in the U.S.
The principles focus on financial institutions' scope 3 financed and facilitated greenhouse gas emissions. The principles are designed to be adaptable to the strategy, business model, size, client base, products and services, and fiduciary, regulatory, and legal obligations of a financial institution. The principles are expected to evolve over time as climate science and climate-related strategy and risk management improve. The principles outline that financial institutions should:
- declare intent to work toward the reduction of greenhouse gas emissions in line with limiting the global average temperature increase to 1.5°C; this commitment should be accompanied by the development and execution of a net-zero transition plan.
- consider transition finance, managed phase-out, and climate solutions practices when deciding how to realize their commitments.
- establish credible metrics and targets for all relevant financing, investment, and advisory services.
- assess client and portfolio company alignment to their targets and to limiting the global average temperature increase to 1.5°C.
- align engagement practices—with clients, portfolio companies, and other stakeholders—to their commitments.
- develop and execute an implementation strategy that integrates the goals of their commitments into relevant aspects of their businesses and operating procedures.
- establish robust governance processes to provide oversight of the implementation of their commitments.
- account for environmental justice and environmental impacts in the context of activities associated with their net-zero transition plans.
- be transparent about their commitments and progress toward them.
Finally, financial institutions should determine in what format to publish information about their commitments in light of evolving practices. Regardless of format, such information should be made easily accessible to stakeholders, such as in a regular publication or periodic filings. In addition, to improve accountability, enable system-wide assessment, and improve comparison with peers, financial institutions should consider reporting relevant information to resources that aggregate and disseminate this information.
Visit Moody's Analytics Climate and ESG Risk Microsite to learn how you can proactively incorporate climate and ESG insights into your risk assessment process.
Related Link: Principles for Net-Zero Financing
Keywords: Americas, US, Banking, ESG, Climate Change Risk, Net-Zero Transition, GHG Emissions, Scope 3 Emissions, Climate Risk, US Treasury
Hasan leads Moody’s Analytics ESG methodology development. He is expert on carbon transition, nature related risks and is a guest lecturer at ESSEC Business school on sustainable finance.
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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