Insetting and mandatory disclosure: Triodos Bank on how the finance sector can reach net-zero
Last week, Triodos Bank UK unveiled a net-zero emissions target for its loans and fund investments for 2035. To mark Net-Zero November, the bank's chief executive Bevis Watts discusses how mandatory planning and disclosure can drive the sector to invest in low-carbon and nature-based solutions.
During the first week of COP26, Triodos Bank UK set a net-zero emissions target set for 2035. The goal will see the bank reduce emissions across loans and fund investments using a science-based approach that is in alignment with the 1.5C target of the Paris Agreement.
The bank will strive to reduce the carbon intensity of all its investments – including listed, private debt and equity – in order to reach net-zero by 2035. Triodos Bank has already analysed its loan portfolio to understand where and how decarbonisation can be achieved.
To mark edie’s Net-Zero November, the organisation’s chief executive Bevis Watts outlined the steps the coming would take, not only to decarbonise its own investment, but to “challenge the sector” in order to funnel investments into markets, businesses and solutions that can combat the climate crisis.
“The target we’ve set is 1.5C aligned,” Watts told edie. “We’ll get the Science Based Targets initiative (SBTi) to verify it and we’ll report on it and build it into our annual audit.
“We’re not saying we’ve got the answers on how to reach net-zero, but the challenge we’ve made to the sector in our announcement is that we need to be thinking how we can support a shift to a climate-positive economy and one that is nature connected.”
Net-zero for finance is different compared to other sectors like retail and manufacturing. It has to account for investments in the same way a business will try to get businesses in the value chain to decarbonise.
Currently, the SBTi is working to develop metrics around net-zero for financial institutions and is launching its Net-Zero Foundations for Financial Institutions: Draft for Public Consultation on this week.
Additionally, ahead of the G20 Summit in Rome earlier this month, the UN Environment Programme Finance Initiative (UNEP FI) published a set of recommendations for financial institutions to reach net-zero, while a net-zero transition plan has also been published for pension providers.
The UNEP FI is calling on financial institutions to align with science-based targets and the 1.5C transition pathway while also establishing near-term decarbonisation targets. On the financing front, the paper calls for a cease of new fossil fuel developments and for institutions to transparently report on emissions and their allocation to real economy inventories. The paper also suggests that Scope 3 emissions should be accounted for and that organisations should highlight which emerging technologies can help accelerate the low-carbon transition.
Insetting and nature
For Watts, the finance sector has a key role to play in outlining what net-zero truly means.
Whereas many businesses have relied on offsets – projects and initiatives outside of their value chain and scope of influence – Triodios believes that “insets” can be used to help reach net-zero.
Insetting for Triodos means investing “considerably” in nature projects that remove greenhouse gases from the air. A substantial amount of the future portfolio of Triodos Bank will consist of new natural capital, nature-focused finance and regenerative organic agriculture, sequestering carbon and supporting biodiversity.
Investing in nature has its own set of challenges. Firstly, nature-based solutions have been historically underfunded.
The Stat of Finance for Nature report from the UN Environment Programme highlights the massive financial gap facing Nature-based solutions, which can assist in combatting climate change if sufficiently supported.
The report found that current investment into NbS sits at $133bn – 0.10% of global GDP – the most of which comes from public sources. However, up to $4.1trn is required by 2030, which rises to $8.1trn 2050, a four-fold increase.
There are also concerns about assigning value to nature and whether that truly reflects the role it has in protecting society and the planet. Watts shares this concern.
“I think we have to be careful about putting a value on nature,” Watts said. “We need to remember the value it has for us and our wellbeing as well. But we need to look at the stakeholders who benefit from restoration. Some of the value comes from avoided costs.
“Then you have other areas where you need sensible metrics and pricing, like soil carbon and nutrient removal from watercourses. But there is always going to be another element of alchemy about this. There will always be a difference in the value and the stakeholder based on region.”
Triodos has turned to “pathfinder” projects and pilot investments to try and prove the finance case for nature-based solutions.
After a successful development phase funded by Esmée Fairbairn Foundation, Defra and Environment Agency, the Wyre Natural Flood Management project has been backed by £1.5m to implement Natural Flood Management measures to help at-risk communities in Lancashire. Triodos
While Triodos has been championing practices like regenerative agriculture for some time, there are other areas of its investment portfolio where the concept of decarbonisation is well established.
With residential mortgages forming 21% of its portfolio, Triodos wants to support mortgage customers to make their homes more energy-efficient and net-zero, while also helping housebuilders use more sustainable products for constructions and renovations.
For Watts, the Bank’s net-zero target will lead to a lot of exploration as to how far along other sectors are on respective carbon-reduction projects and the role that banks can play in supporting them.
“In sectors that are well established, the degree in which net-zero has already permeated people’s thinking of future plans varies hugely,” Watts added.
“We’ve not gone in totally draconian on new investments and only targeting net-zero, because we want, in all of our discussions, to understand where we can get to in 5-10 years.”
One such area is retrofitting. The UK’s retrofitting industry needs to grow by ten times its current size if the UK is to decarbonise its housing stock at a pace suitable for the wider net-zero emissions target, according to research from the Green Finance Institute.
Watts is of the belief that the finance sector and the sectors it supports will need policy measures introduced to really drive change.
The announcement from Chancellor Rishi Sunak at COP6 that climate transition plans will be mandated for large UK firms in high-emitting sectors is welcome and Watts is keen to create a collective voice from the sector to engage with policymakers.
Triodos Bank is part of Bankers for Net-Zero, for example. Joining the likes of Barclays, Handelsbanken and the Ecology Building society, the UKGBC and Grantham Research Institute on Climate Change. Bodies including CDP, WWF, the UN’s Principles for Responsible Investment, the Institutional Investors Group on Climate Change and Make My Money Matter, Watts believes that, collectively, action can speed up in the sector. However, Watts also notes that if the action doesn’t pick up around COP26, then the dial may not shift as much as it needs to.
“I’m hoping we can get to another level of granularity on decarbonisation strategies and internally we’ll be focusing on more tangible strategic action,” Watts added. “Ultimately we need to go way beyond net-zero and look at the Sustainable Development Goals….That might get some large banks to act very quickly
“In the sector, more widely, I’m not sure if we’ll see dramatic shifts though. If it’s not happening now around COP26 then I don’t think we’ll be in a dramatically different place in a years’ time.”
Net-Zero November: Join the conversation during edie’s mega month of content and events
As critical negotiations at COP26 formally start, the award-winning edie content has launched Net-Zero November – a return to an entire month’s worth of digital content and live events, all dedicated to accelerating the race to a more resilient, zero-carbon economy.
Brought to you in association with edie’s headline partner EDF, Net-Zero November will offer edie readers an array of net-zero-themed exclusive interviews, downloadable guides, reader blogs, virtual events and podcasts throughout the month.