Treasury Offers Guidance to Financial Institutions that Make "Net-Zero" Commitments

Treasury recommended best practices for financial institutions that have made "net-zero" financing and investment commitments.

In Principles for Net-Zero Financing & Investment, Treasury highlighted the importance and value of these institutional commitments by "asset managers, asset owners, banks, insurers, and venture capital companies" and encouraged "greater adoption of emerging best practices." In the guidance, Treasury asserted that "successful execution of such commitments can help firms mitigate exposure to climate-related risk and unlock economic opportunities as the United States builds the clean energy economy of the future."

Treasury stated that the use of the principles is voluntary and that a financial institution's strategy, business model, size and regulatory obligations, among other things, will impact its approach to a net-zero transition. Under the principles, Treasury said that financial institutions may choose to:

• implement a plan of execution that "reflects measurable milestones" towards achieving net-zero commitments;
• include "transition finance, managed phaseout, and climate solutions practices";
• establish metrics and targets consistent with their respective fiduciary, regulatory and legal requirements, that generally (i) set interim targets for 2030 or sooner with intervals of no more than five years leading up to the "end-state target" of 2050 or sooner and (ii) tailor targets to portfolios and asset classes;
• assess the alignment of their stakeholders by (i) evaluating the extent to which an activity or company can be considered a "climate solution," (ii) utilizing benchmarks based on carbon budgets aimed at containing the global warming temperature increase and (iii) creating client and portfolio company net-zero transition plans;
• ensure stakeholder engagement practices are consistent with financial institutions' net-zero commitments;
• integrate their net-zero commitment into all relevant aspects of their business and operations, such as leveraging existing or creating new "green financial instruments and tools";
• "fully integrate" the implementation of net-zero transition plans into their governance and enterprise risk management systems;
• account for how the net-zero transition planning activities may impact issues such as "employment, quality of life, affordability, rights" and access to resources for disadvantaged communities; and
• provide transparency to allow for stakeholders to understand how the net-zero commitment will affect financial institutions' respective lending, investing, advisory and operational practices.