EY's lofty net zero pledge is getting a rethink

welcome back.

We all support ambitious climate plans. But what happens if an eye-catching undertaking is left adrift by high standards?

This is the topic of our first item. Also in today's edition, our FT colleague Zahra Mounir looks at the central banks that set the pace for green finance. Enjoy. -Simon Mundy

Corporate climate goals

The EY climate plan hits with a dose of reality

As companies rush to roll out long-term green goals in the run-up to the COP26 climate summit, Big Four accounting firm EY has decided it wants to go big.

While other companies have pledged to reduce their carbon emissions to net zero by 2030 or 2050, EY made headlines in 2021 by saying it would achieve the feat in just four years.

Now, a year after its 2025 deadline, EY is reconsidering its climate plan — a move that reflects rising standards and scrutiny around such green corporate pledges.

When I asked EY if it could confirm its commitment to achieving net zero next year, it declined to do so. Instead, it issued the following statement:

EY remains committed to the net zero goal. We are currently working on the next phase of our science-based decarbonization plan, incorporating new and emerging standards. At this time, we cannot confirm the timeline for this plan, but we will provide a substantive update later in the year.

If EY ends up dropping its 2025 net zero target in this year's strategy update, this may actually show a more serious approach to climate action, rather than lowering ambition.

Part of EY's net zero strategy has included reducing carbon emissions across its business. EY says it has more than achieved its targets on this front, cutting emissions by 43 percent since 2019.

But its strategy also included extensive use of carbon offsets linked to projects that reduce or avoid emissions, for example by preventing deforestation. Controversy has roiled the market for such compensation over the past three years, with claims that many avoidance-based compensation providers have grossly overstated the impact of their projects. Media investigations raised specific concerns about South Pole, EY's main offset supplier, as well as the Kariba project in Zimbabwe, one of the offset schemes used by EY.

Meanwhile, the Science Based Targets Initiative — the nonprofit that is the main standard-setter for corporate climate plans — has issued new guidance that appears to poke a hole in EY's strategy.

To claim net zero, says SBTi, companies must make significant reductions in their operational emissions, as well as those from their supply chains and the use of their products. It is crucial, she says, that remaining emissions are neutralized through active removal of carbon dioxide from the atmosphere – not through the emissions avoidance projects that EY has been relying on.

So EY's rethink, which it says is due in part to evolving standards for corporate climate plans, reflects some welcome progress. Back in 2021, these criteria were less clear, and some companies approached this area largely as a marketing opportunity. Today, companies that hastily adopt net-zero strategies risk looking ridiculous.

This does not mean taking EY's talk of “new and emerging standards” seriously. No other major company, before or since, has been as carried away as EY did in October 2021 when it declared itself “carbon negative,” because it was essentially buying into avoidance-based offsets that were supposed to do more than eliminate Its emissions. (Confusingly, EY has said it has not yet reached “net zero”, because that – by the company's own definitions – would require significant reductions in emissions from its business, while the “carbon negative” claim is supposed to be made without such These discounts.)

Virtually any utility company with a few million dollars to spend on offsets could have made the same carbon-negative claim — and clearly none did. (Other companies, such as Microsoft, have promised to become carbon negative in the future, but using decarbonization, not the much cheaper route to avoidance-based offsets.) Best practices in space, and arguably counterproductive to efforts to reach net zero at the global level.

EY could do itself a favor by abandoning its boasts of carbon negativity as part of a much tougher climate strategy. Given EY's significant revenue stream from advising other companies on their sustainability plans, this should be a particularly pressing priority. (Simon Mundy)

Central banks

Green shoots of green interest rates

In December 2023, French President Emmanuel Macron wrote in a newspaper column that his country “needs a green interest rate and a brown interest rate.”

But what does this term actually mean?

The concept of a green interest rate, which has been circulating in think tank circles for a few years, is that the central bank sets a “green” interest rate, below the benchmark, for some loans to commercial banks. This money is made available on the condition that banks pass it on, along with low interest rates, in their own loans for green initiatives, thus providing an incentive for climate-friendly economic activity.

In theory, this means that no matter how high the benchmark interest rate rises, green projects are guaranteed to get an advantage in access to credit.

Macron is not the only one who has expressed interest in this policy. Less than two weeks after his comments, Isabel Schnabel, a policymaker at the European Central Bank, said on Program X that green interest rates “could be taken into account when monetary policy needs to expand again.”

Policymakers' interest in green interest rates has continued to grow in the past few months, says Lydia Prigg, head of economic research at the London-based New Economics Foundation. This is because the scheme has the potential to boost the green economy without spending government money, she said.

Central banks providing targeted green loans is an interesting idea – but so far, only a few countries have tried the policy.

In 2021, China's central bank said it would provide one-year financial loans “worth 60 percent of the principal at a rate of 1.75 percent” to banks that lend to companies that reduce their carbon emissions. For comparison, China's one-year key interest rate is currently 3.45 percent.

In the same year, the Hungarian Central Bank announced that it would offer cheap green loans to banks for the purpose of lending money to customers who buy or build highly energy-efficient homes.

Japan also introduced a green lending program in 2021, which has so far disbursed 8.2 trillion yen ($54 billion), according to a Bank of Japan official. Until the long-awaited benchmark interest rate hike last month, the bank was offering one-year loans at zero percent interest for many green investments undertaken by Japanese financial institutions. The record increase in March was accompanied by a rise in the green lending interest rate, to 0.1 percent.

The theory behind the program is that it encourages banks and their clients to make long-term green investments with the guarantee of a fixed interest rate. The one-year loans can be renewed every year until 2031.

According to Yuma Morisawa, credit strategist at Mitsubishi UFJ Morgan Stanley Securities, the majority of banks participating in the program are regional banks — which Morisawa says “implies a broad reach of green investing.”

However, there is a problem. Because Japan does not have a green rating, what is considered a green investment is left to the discretion of the banks themselves. However, the program recommends that banks check whether decisions comply with “international standards or Japanese government guidelines.”

A Bank of Japan official says the central bank “believes” the money tends to be used by banks to buy financial instruments, such as green bonds, rather than lending it to individuals. While banks are required to disclose the guidelines they follow to measure whether an investment or loan is green, details about where the money goes are scarce.

In Europe, the EU's green lending standards will be clearer given that the bloc already has a green rating. But there are other questions about a potential green interest rate mechanism.

One concern is whether such measures are mandated by central banks (yes, proponents say, because they would contribute to long-term economic stability). Relatedly, critics worry about its impact on inflation. But Bragg, who supports this idea, says that since the European Central Bank and the Bank of England “will be cutting interest rates in the not too distant future, this seems like a good time.” [to introduce a green rate]”.

Pressures for a revised rate are based on the fact that green infrastructure schemes, such as renewable energy and retrofit projects, require serious investment. In the past two years, for example, many European wind farm developers have cited increasing financing costs as one of the reasons they have had to cancel projects and contracts. Clearly a solution is needed. It remains to be seen whether the answer has to do with central banks. (Zahra Mounir)

Smart reading

Are some barrels of oil “better” than others, and should financiers treat them as such? Here's an interesting article from Nolan Lindquist of the Center for Active Stewardship, looking at the IEA's influential model of a net-zero global economy, and its implications for investors.