Building a sustainable future, in which people and nature thrive and climate change is held in check, is possible. The rewards will be vast, but getting there will require massive investments.

The International Energy Agency (IEA) estimates that the world needs to invest about $4 trillion annually by 2030 for clean energy alone. Add to this the cost of restructuring transportation, food systems, industry, shipping and much more. All must transform, and quickly, to slash greenhouse gas emissions this decade.

Banks will play a key role in this transition. To finance the shift toward sustainable business models and practices, companies will often rely on banks' lending and financial services. Recognizing this, banks are increasingly committing to support their clients and the broader low-carbon transition by aligning their financial flows with reaching "net-zero emissions" by 2050.

However, while the number of banks with net-zero commitments has grown, a closer look reveals that they are not on track to achieve their goals.

WRI built an online tracker to analyze how a sample of 25 banks, comprised of some of the largest banks by total assets and smaller firms playing a prominent role on net zero, are progressing on implementing their commitments. We found that, not only are banks off-track to meet net-zero targets, but many of their pledges are less ambitious than they seem at face value.

We also found that banks want to and can improve - if they follow leading practices in the industry.

Why Do Banks' Net-zero Commitments Matter?

Banks themselves don't produce a lot of direct greenhouse gas (GHG) emissions. But they do wield the power of financing. By prioritizing lending toward climate solutions and phasing out harmful financing, such as for fossil fuel expansion and businesses driving deforestation, banks can play a critical role in reducing emissions in just about every sector of the economy.

This is particularly true when it comes to financing green solutions. The world needs to rapidly raise capital for things like renewable energy, clean transportation, low-carbon buildings and more, and banks have a special capability to generate credit "out of thin air" thanks to their public backing. There are constraints on how much money banks can create, but they have enormous potential lending capacity which doesn't hinge on previously savedprivate capital.

Solar panels cover the roof of a large shopping mall in San Fernando, Philippines. Banks can leverage their extensive lending power to support investments in clean energy and other low-carbon technologies needed to meet the world's climate goals. Photo by MDV Edwards/iStock

In addition, banks can help companies access capital markets and raise debt and equity from investors who are increasingly focused on sustainability. And large commercial banks have relationships with companies across all sectors and industries, allowing them to influence clients across entire value chains to align with net zero. They can advise and push their clients on setting climate transition plans that will shift their business models and reduce carbon emissions.

Pressure on banks to fulfill this potential and drive positive social change is mounting. A broad range of stakeholders, including policymakers, shareholders and civil society, have called on banks to enable the net-zero transition and allocate capital in ways that benefit people, nature and the climate. But while major banks have committed to do so, their policies on the whole are not as strong as they need to be.

Where Do Banks' Current Commitments Fall Short?

To be effective, banks' net-zero commitments need to have both breadth and depth, covering a range of topics in detail. Alongside emissions reduction targets, they need to holistically integrate climate action into a bank's business model - from incentivizing senior leadership to pursue action on net zero, to leveraging influence with corporate clients and public policy. They must also account for broader societal and environmental impacts, such as nature-related risks, reducing deforestation, and protecting workers and communities who depend on carbon-intensive industries or are disproportionately affected by climate change (known as a "just transition").

Building on WRI's Green Targets Tool, our new Net Zero Tracker looks at 17 different indicators for a comprehensive view of banks' current climate commitments. Overall, our analysis showed that while banks have taken a range of approaches to net zero, many leave out key elements that should be part of an effective strategy.

At the same time, the devil is in the details. Rather than taking banks' headline numbers or announcements at face value, it's important to look "under the hood" to assess the true quality of policies and actions. Key details, such as the timeline of fossil fuel phaseout policies and whether capital markets activities are included in them, need to be addressed for a commitment to be considered high quality and credible.

Consider coal. According to the IEA, unabated coal power needs to be phased out in advanced economies by 2030 and globally by 2040. Banks can enable this by engaging with power companies and supporting their transition away from coal, including by financing its managed phaseout. Additionally, by withholding lending and capital market access, banks can increase funding costs and contribute to the early retirement of coal power plants.

Most banks in our sample have committed to a timeline to phase out coal financing, reflecting public policy goals. A few are moving faster than the IEA's timeline, having already divested or targeting global phaseout by as early as 2025. But despite this progress, the majority still omit certain forms of financing (such as corporate finance and advisory services) from their coal phaseout policies, or they set their revenue thresholds too high. As a result, many companies and activities which profit from coal aren't affected.

Our tracker aims to provide enough detail and examples of leading practices for stakeholders, including banks themselves, to assess progress on implementation and push for greater quality in net-zero commitments.

Here are three key takeaways:

1) Despite Progress, Many Banks Have No or Weak Targets in High-emitting Sectors

Greenhouse gas emissions are mostly driven by energy, industry, agriculture, transportation and buildings. Decarbonizing these high-emitting sectors will be essential to curbing climate change and must be a fundamental component of banks' net-zero commitments.

Many banks started with general, vague commitments, but have now set specific emissions reduction targets for critical sectors. Most of these target oil and gas and power, and a few leading banks include additional carbon-intensive sectors like automotive, aviation, cement, steel and real estate.

Still, most banks have not yet set targets for the majority of these "hard-to-abate" sectors.

Where banks do include them, targets are often set on a "physical emissions intensity" basis. That means they measure emissions to a unit of physical output such as tons of CO2 emitted per megawatt-hour. These can be useful when comparing banks' progress against broader industry benchmarks for decarbonization. "Absolute emissions targets," which aim to reduce the total amount of emissions by a specified amount, are more common for the oil and gas sector. Each method has benefits and limitations, so banks should disclose emissions on both an absolute and physical intensity basis to provide a fuller picture of how real-world emissions are being reduced.

A few banks have chosen less credible approaches. For example, "economic emissions intensity" targets calculate emissions per dollar of financing and are more susceptible to market volatility than physical or absolute emissions targets. Some banks have opted to set targets for asset classes or based on a portfolio alignment score.

2) Banks' Existing Targets Are Not Aligned with Limiting Warming to 1.5 Degrees C

We tracked the "portfolio emissions" banks reported from their activities in six key sectors - oil and gas, power, automotive, aviation, cement and steel - between 2019 and 2022, as well as their 2030 emissions reduction targets. Then we compared their progress to emissions-reduction pathways which would limit global warming to 1.5 degrees C (2.7 degrees F), the threshold scientists say is necessary to avoid the worst effects of climate change. (Pathways were calculated by the Transition Pathway Initiative based on the IEA's Net Zero Scenario.)

We found that, for most sectors, banks on average have not aligned their emissions reduction efforts to 1.5-degrees-C pathways and do not expect to do so by 2030. In other words, banks do not even plan to reduce their emissions as much as necessary - not to speak of actual implementation or follow-through.

In the auto sector, for example, banks' reported portfolio emissions in 2022 were on average 28% higher than where they should have been to align with reaching 1.5 degrees C. By 2030, they are projected to be 3 times as large as the benchmark.

Banks often provide little explanation on how they plan to address these emissions gaps and achieve net zero on time. What they must avoid is pursuing "paper decarbonization," where emissions are reduced only "on paper" through portfolio reshuffling or market volatility without tangible, real-world decarbonization efforts. Rather, banks must balance the shift in their lending allocation with their engagement efforts to continually support their clients in transforming their business practices.

One key challenge banks point out is the need for public policies that can enable decarbonization in high-emitting sectors, including the development of zero-carbon solutions. It can sometimes be forgotten, but major technological innovations have historically been heavily reliant on public policy and support. Some public sector support is already available for innovative zero-emissions technologies like advanced geothermal and hydrogen, financed through initiatives like the U.S. Department of Energy's Loan Programs Office. But more is needed.

On the part of banks, it is inconsistent to ask for climate-friendly public policies while at the same time supporting trade associations that oppose them - which some banks, particularly in the U.S., have done. We found that banks have started reviewing the alignment of their trade groups with net zero, but more work is needed to ensure full alignment.

3) Banks' Green Financing Isn't Enough, Either

Massive investments will be required to replace the current environmentally destructive economy and build a new sustainable one. For the energy sector alone, the IEA projects that investments in clean energy and fossil fuels need to reach a 10-to-1 ratio by 2030.

As part of their net-zero commitments, banks have made headlines for committing to mobilize billions to trillions of dollars towards green and social goals. We find that clean energy has been the largest category of green finance, with banks providing or facilitating finance toward, for example, renewable energy (such as solar and wind), clean transportation (such as auto loans for electric vehicles) and energy efficiency (such as green buildings).

But despite their headline-grabbing goals and reported progress, the banks we analyzed have averaged a 1.3-to-1 ratio of green to fossil fuel finance since they began reporting their green finance numbers. Other studies have found similarly low ratios. This scale is still far below the 10-to-1 ratio needed.

Making such comparisons can be challenging due to the nature of the data; our model may overestimate the proportion of green finance, as we use banks' own reported green finance numbers. These are shared on a voluntary basis, can be inconsistent, and generally include more financial instruments and mechanisms than what is calculated for fossil fuel finance (which banks are still reluctant to provide disclosures on). But, even under this overstated scenario, it is clear that green finance is not growing at the pace and scale needed to reach net zero.

A higher-level question also emerges: Is banks' green finance driving competition and creating more favorable lending conditions? Studies have shown that higher levels of banking competition can result in larger credit volume, lower interest rates for borrowers, and looser underwriting standards and lending terms - all of which could help speed the scale-up of green solutions. However, recent research suggests banks' commitments haven't translated to lower interest rates for green companies.

Based on these findings, it is unclear whether banks' green finance targets have been fully integrated into their lending and business development activities, including in the incentive structures for relationship managers and investment bankers. We found that about 70% of analyzed banks have introduced relevant sustainable finance metrics in the compensation packages of senior leadership, but similar incentives are needed throughout the organization to effect change.

Banks Want to Improve and Can Learn from One Another

When we talk with banks and their sustainability teams, two of their most common questions are: "What are our peers doing?" and "Are our practices ahead of or behind our competitors?" These questions demonstrate banks' willingness to keep improving and show how competitive pressure can fuel progress.

Peer pressure encouraging a "race to the top" is more important now than ever. Backlash from special interests and politicalforces in the United States that oppose sustainability efforts has led some banks to retreat, at least publicly, from some of their climate commitments. Further walk-backs could damage the rising ambition seen over the last few years and stall the progress needed to achieve a low-carbon, sustainable future.

Banks need to reverse course and double down on their net-zero commitments - not only to meet their own climate goals, but also to profit from the new business opportunities tied to the climate transition. Leaning into sustainable finance can also help protect banks against growing climate-related financial risks.

As our tracker shows in detail, banks have taken different approaches to align their businesses with net zero. Some have developed pioneering methods that all banks can adopt to improve their own business models and the banking industry as a whole. As our collective understanding of the needs for net zero continues to evolve, so, too, will these leading practices.

Banks cannot single-handedly align our economies to net zero. But on what they can do, they must give their all.

This blog post solely reflects the views of the authors. The Financial Institutions Net Zero tracker was partially funded by a grant from Bank of America.