U.S. Treasury Publishes Principles for Net-Zero Financing and Investment by Financial Institutions
The September 2023 publication by the U.S. Treasury Department of its Principles for Net-Zero Financing and Investment ("Principles") marks the first time a major U.S. government agency has provided guidance to the financial sector regarding the development and implementation of net-zero transition plans.
By their terms, and because Treasury has no direct supervisory or regulatory authority over banks or other financial institutions, the Principles are voluntary. The Principles generally focus on financial institutions' Scope 3-financed and facilitated greenhouse gas emissions (that is, indirect emissions included in the value chain of the institution, and not merely emissions directly attributable to owned or controlled emissions sources or to purchased energy). The document features nine high-level Principles that aim to promote consistency, credibility, and transparency across net-zero pledges by financial institutions. For example, Principle 1 includes a recommendation that net-zero financing commitments from banks and asset managers should align with goals to limit the average global temperature increase to 1.5 degrees Celsius.
While the Principles state that financing commitments should be backed by "credible" metrics and targets, the Principles do not provide detailed recommendations concerning best practices for the development of targets and metrics related to net-zero transition plans. However, the Principles are clear that, to be credible, a commitment by a financial institution should be backed by a net-zero transition plan that "should generally include" the following:
- The firm's overall commitment and priority practices;
- Metrics and targets;
- Implementation processes and structures (i.e., the ways in which internal business and operating procedures, products, services, and policies reflect the firm's commitment);
- Engagement strategy (i.e., the ways in which engagement with external stakeholders—such as clients, portfolio companies, and other stakeholders—is prioritized and made consistent with the financial institution's commitment); and
- Governance (i.e., the oversight structures and processes put in place to build an environment of trust, transparency, and accountability necessary for successful execution of the financial institution's net-zero transition plan).
How should financial institutions view the Principles? On the one hand, Treasury's statement has no legal effect on banks, and the independent federal banking agencies are not compelled to take any action as a result. Even so, the agencies are likely to take generally consistent approaches where it is feasible and appropriate. Thus, financial institutions that have adopted or that are considering adopting a voluntary net-zero commitment can use the Principles to inform the net-zero plans they adopt in order to meet such a commitment.
Additionally, Treasury's adoption of the Principles spurred the banking agencies to finalize their proposed guidance on climate-related financial risk management for large banks (which they did on October 24, 2023) and might also reinvigorate efforts to move forward with other climate-related initiatives under way at the agencies, such as the Federal Reserve's climate stress testing pilot.
However, despite the fact that the Principles are nonbinding in a formal sense, they can also be read to be directionally consistent with a narrative that the administration is pushing for "alignment" of financial institutions to boycott fossil fuels. Indeed, Principle 2 describes a "managed and accelerated transition from high-emitting to zero- or near-zero-emissions assets"—i.e., a transition away from fossil fuels. In this regard, the Principles are likely to generate pushback both from some state attorneys general as well as in Congress.