€4trn gap between ‘Paris-aligned’ bank lending, market

European companies must largely step up their efforts to achieve the goals set out in the Paris Climate Agreement, according to a CDP report released on Tuesday. The banks granting them loans must also better align their actions.

Despite the promises made to fight against climate change, European companies remain far removed from the Paris Climate Agreement principles.

Based on their declared emission targets, they are on a temperature increase trajectory of 2.7°C–that’s 1°C more than the targets set in Paris end-2015.

As the CDP report reveals, to limit the global warming increase to 1.5°C would require eight times the current level of ambition by European companies in terms of reducing greenhouse gas (GHG) emissions.

Accelerating the movement

A non-profit association funded by the EU, CDP published the report on the occasion of the CDP Europe Awards, organised on Tuesday with the European Investment Bank. The findings are based on the analysis of data sent to CDP by nearly 1,000 European companies in 2020, representing around 80% of European market capitalisation.

Even if there’s a growing ambition by such companies, the report reveals that the gap remaining to be filled in order to reach the cruising speed capable of achieving the Paris goals is more than substantial. And it’s a warning that applies as much to production companies as to the world of finance.

CDP has, in fact, calculated that banks continue to largely finance industrial players which aren’t performing well in terms of GHG reduction: “Banks representing 95% of all lending to European corporates have such an ambition, even as the necessary metrics, data, and processes are still being built,” the report authors note. “This contrasts with just 8% of European corporates having set targets in line with a well-below 2°C rise.”

Better selection of clients

The report refers to a “€4 trillion mismatch” in Europe between the total amount of bank loans granted in favour of the energy transition, aimed at aligning with the objectives of the Paris Agreement, and the necessary financing needs of companies to actually reach them.

Banks and investors therefore play a key role. Currently, only half of the institutions questioned by the CDP state that they take into account the fact that their clients or the beneficiaries of their funding do indeed have strategies aligned with the objectives of the Paris Agreement.

The report therefore estimates that in a “modest acceleration” scenario, banks may have to adjust their loan portfolios by 20-30% to meet Paris Agreement targets.

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