2022 sustainable investing trends

MARCELO GORRINI

In August 2021, the UN issued a report based on more than 14,000 studies and approved by 195 governments stating that the Earth’s climate is changing more rapidly than previously predicted – with some unavoidable dire consequences for the future – and unequivocally linking climate change to human activity.

The report warns that “many changes in the climate system become larger in direct relation to increasing global warming. They include increases in the frequency and intensity of hot extremes, marine heatwaves, heavy precipitation, agricultural and ecological droughts in some regions, and proportion of intense tropical cyclones, as well as reductions in Arctic Sea ice, snow cover, and permafrost.”

In addition to facing external threats produced by climate change such as rising sea levels, more

extreme weather, and market instability, companies are also dealing with shifts in consumer demands and expectations.

In response, many industries, including the financial sector, are taking concrete action. Such activities are not purely altruistic, as they are linked to environmental, social, and governance (ESG) priorities driven by economic factors. These efforts include investing in global carbon markets, pursuing internal net-zero carbon goals, and assisting clients with their carbon transitions.

Global carbon markets

Standards outlining how a global carbon market would operate were established as part of the

2021 Paris Climate Agreement. This market allows carbon-producing companies (energy, mining, manufacturing, etc.) to purchase credits from other economic actors to offset their emissions. This places a global price on carbon and monetarily incentivises carbon-capturing activities such as replanting rainforests, restoring soil integrity, and preserving sensitive environments from development.

The voluntary international carbon market traded a record US$1 billion in November 2021, reflecting growing corporate demand to meet decarbonisation targets. Furthermore, according to a McKinsey and Co report, the global carbon market could grow exponentially in the coming years, totalling US$50 billion by 2030.

Internal net-zero carbon goals

As of July 2021, approximately 20 per cent of the world’s 2,000 largest public companies made net-zero carbon pledges designed to offset the totality of their carbon emissions. A significant incentive for these initiatives is growing consumer scrutiny of companies’ contributions to climate change. Customers no longer strictly associate brands with their products and services, but also their values and actions. Companies that do not respond to this shift in expectations risk losing both credibility and profitability.

Citi is one example of a financial institution taking proactive steps to achieve meaningful climate

commitments. On her first day as Citi’s CEO in March 2021, Jane Fraser announced that the bank would commit to a goal of net-zero greenhouse-gas (GHG) emissions by 2030.

Citi’s approach follows a credible, science-based methodology aligned with its pledge to the Net Zero Banking Alliance (NZBA), which is a member of the broader Glasgow Financial Alliance for Net Zero (GFANZ). Following transparency best practices, Citi will report its emissions and other relevant metrics annually, including its Taskforce on Climate-Related Financial Disclosures (TCFD) reports.

Engaging clients

Financial institutions face unique pressure not only to eliminate their internal carbon emissions but also to encourage and assist their customers to do the same. Citi provides another good case study of how to manage this transition well.

In March 2021, Citi committed to achieving net-zero GHG emissions associated with its financing by 2050. The key to this is collaborating with clients to meet achievable, measurable midterm goals.

Citi’s plan includes assessing its baseline financed emissions, 2030 targets, and initial transition plans in its energy and power loan portfolios. By 2030, Citi aims to reduce its energy portfolio-financed emissions by 29 per cent, or approximately 41.7 million mt CO2e (metric tons of CO2 equivalent).

On an absolute basis, this is equivalent to shifting approximately one million gasoline-powered vehicles to electric. Likewise, Citi aims to reduce its power portfolio financed emissions intensity by 63 per cent from 313.5 kg CO2e/MWh to 115 kg CO2e/MWh, or approximately 198.5 kg CO2e/MWh (CO2 equivalent per megawatt-hour). This intensity-reduction target will require a shift to lower emissions-intensity fuel sources such as solar power and wind.

This is a significant target given the size and breadth of Citi’s portfolios and businesses, which is why it requires both rethinking its business and helping clients rethink theirs. To reach net-zero by 2050, Citi is actively engaging with its clients across all sectors to support their transitions. It must meet them where they are in their sustainability journeys and help them accelerate their progress towards net zero.

The future of sustainable finance

The status quo is simply unsustainable for financial institutions – both for their business models and the world at large. Banks can meet the demands of the moment by entering carbon markets, setting internal net-zero targets, and assisting their clients in doing the same.

Nowadays, environmental, social and governance (ESG) are issues that companies are required to address as part of their financial objectives. To this end, adopting a more holistic approach to business development, planning and and is critical and requires greater commitment from everyone.

Marcelo Gorrini is the CEO for Citi Central America & Caribbean.

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