Yellen, Treasury roll out net-zero principles, warn of stranded assets

Fed Chair Janet Yellen
Treasury Secretary Janet Yellen said in a speech Tuesday that “financial institutions risk being left behind with stranded assets, outdated business models, and missed opportunities to invest in the growing clean energy economy.” The Treasury Department released a voluntary guidance document laying out carbon-neutral investment principles late Monday.

Bloomberg News

The Treasury Department rolled out a set of principles for financial institutions interested in pursuing carbon-neutral business plans on Monday afternoon.

Adherence to the nine-part guidance is voluntary, but principles aim to establish some level of uniformity in the financial industry’s climate pursuits while minimizing opportunities for greenwashing

In a speech at the Bloomberg Transition Finance Action Forum in New York City, Treasury Secretary Janet Yellen called climate change both a threat to the U.S.’s economic strength and an opportunity for growth, citing researcher estimates that the transition to a carbon-neutral economy will create $3 trillion of annual global investment opportunities between now and 2050.

“In the U.S., this means hundreds of billions in investment opportunities to enhance power generation and the electrical grid, retrofit buildings, and make advancements in agriculture, manufacturing, and transportation,” Yellen said.

She also warned that financial firms that fail to create policies around climate change do so at their own peril.

“There is extensive evidence showing that the changing climate has significant financial impacts,” Yellen said. “Without considering these factors, financial institutions risk being left behind with stranded assets, outdated business models, and missed opportunities to invest in the growing clean energy economy.”

The principles call for institutions, including banks and nonbanks alike, to incorporate so-called “transition finance” into their strategies. This includes lending to, investing in and advising clients or portfolio companies that are implementing emissions-reducing policies and practices. This can also include “managed phaseout” plans, in which companies move from high-emissions assets to ones that are emissions-free or emissions-neutral.

Transition finance can also include investing in or financing climate solutions that foster the adoption of “zero- or near-zero-emissions technologies, services, or products that will contribute to the elimination, removal, or reduction of real economy emissions.”

Former Securities and Exchange Commission Chair Mary Schapiro — who now serves as vice chair of the Glasgow Financial Alliance of Net Zero, or GFANZ, group — said the principles were an essential step for bringing standardization to the transition finance space.

“Scaling transition finance requires common global approaches from global regulators and policymakers,” Schapiro said in a statement. “We welcome the U.S. Treasury’s principles which recommend that financial institutions develop and publish credible and comprehensive transition plans including the same components that GFANZ recommends in its guidance.”

GFANZ is a coalition of financial institutions focused on addressing challenges related to the transition to a low-carbon economy.

“The Treasury’s principles and the GFANZ global framework for transition planning will support consistency and help financial institutions develop the effective climate strategies needed to drive progress on net zero,” Schapiro said.

The principles also note that net-zero commitments should strive to reach carbon neutrality by 2050 and include “credible short- and medium-term targets” for preventing the average global temperature from rising more than 1.5 degrees Celsius above preindustrial levels — a tipping point at which some research suggests the impact of climate change could become severe and potentially irreversible.

The principles aim to create standards for carbon neutrality policies, which have proliferated in the financial sector as well as other consumer-facing industries in recent years. Along with the rise of such policies and a broader focus on environmental, social and governance, or ESG, centered investing, is a concern that such strategies have become mere marketing ploys. 

“Our goal is to affirm the importance of credible net-zero commitments and to encourage financial institutions that make them to take consistent approaches to implementation,” Yellen said. “Our work will also help institutions that have not yet made commitments see what doing so might entail.”

Other principles call for the creation of “credible” metrics and targets; the implementation of climate goals into relevant businesses and operations; the establishment of “robust” governance policies; consideration of “environmental justice” and an overall commitment to transparency.

The Treasury Department’s announcement was made in conjunction with the annual Climate Week NYC event, which is organized by The Climate Group, a London-based nonprofit with offices in the U.S., China and India. The Bloomberg forum at which Yellen spoke was hosted by the organization’s charitable arm, Bloomberg Philanthropies. 

Several philanthropies, including Bezos Earth Fund, Bloomberg Philanthropies, Climate Arc, ClimateWorks, Hewlett Foundation and Sequoia Climate Foundation, announced a commitment of $340 million over the next three years to fund research and the creation of technical resources to help the financial sector’s transition to carbon neutrality.

Former Bank of England and Bank of Canada Governor Mark Carney, who now chairs GFANZ, said the Treasury’s principles will play a key role in lowering carbon emissions in the U.S.

“By encouraging financial institutions to consider climate solutions, the decarbonisation of existing businesses, and the early retirement of emissions-intensive businesses in their transition strategies, they will help investment flow where it needs to get the entire economy to net zero,” Carney said in a statement. “This will strengthen growth, create jobs, and reduce energy prices — all while lowering emissions.”

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