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February 24, 2022updated 25 Feb 2022 2:04pm

Citi sets climate pace among US banks, but questions remain

Citi has become one of a handful of big global lenders to commit to cutting the absolute emissions in its energy portfolio in line with the Paris Agreement. But it has not set out plans to pare lending to the sector.

By Virginia Furness

citi emissions
Valerie Smith, Citi’s chief sustainability officer, says the bank aims to double down on its ambition to be the lead bank in financing the transition. (Photo courtesy of Citi)
  • Citi has set a Paris Agreement-aligned emissions reduction target for its $49.5bn energy sector lending portfolio. 
  • Non-government organisations are pressing the US bank to tighten the net on oil and gas expansion. 
  • Citi plans to set targets for automotive, manufacturing, commercial real estate, steel and thermal coal mining this year and for aluminium, aviation, cement and agriculture by 2024.  

With pressure piling up on big lenders to cut back their financing of fossil fuels, New York-based Citi has become the latest to announce a major emissions-cutting pledge to help tackle climate change. Campaign groups welcome that the bank’s pledge goes further than those of most of its peers, particularly in the US, but – as so often with such commitments – there remain significant caveats. 

A member of the Net-Zero Banking Alliance, Citi has committed to reducing the absolute level of emissions in its energy client book using the International Energy Agency’s (IEA) Net Zero by 2050 roadmap. This is widely viewed as the most robust approach to aligning the global energy sector with a 1.5°C warning scenario. 

To that end, the lender has set targets for how it will reduce exposure to power and fossil fuels and says it will do the same for other high-emitting industries over the coming three years, as well as for capital market activities. In the meantime it will help high-carbon clients in financing their energy transition.  

“We are really going to double down on our ambition to be the lead bank in financing the transition,” Valerie Smith, Citi’s chief sustainability officer, tells Capital Monitor. “That’s the piece of work that is really getting under way in earnest as we begin to do deeper engagement with our clients on their plans.”

Headline numbers

Citi, which operates in 96 countries and generates 34% of its revenues from emerging markets, said on 19 January it would cut the financed emissions of its $49.5bn global energy portfolio by 29% by 2030 from a 2020 baseline. This amounts to a reduction of around 41.7 million tonnes of carbon dioxide equivalent (mtCO2e) to 102.1mtCO2e.  

That still leaves the group with a lot to do. European banks, for instance, are ahead of their US peers on emissions reduction, thanks to regulatory pressure, among other things. Barclays and Deutsche Bank, for instance, had $16.2bn and $7bn of exposure to oil and gas in 2020, respectively. HSBC’s on-balance sheet financed emissions in 2019 were 35.8mtCO2e, though the bank on 22 February set a target to reduce these by 34% by 2030.  

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A target to cut absolute emissions is necessary to achieve net zero “given that in the real economy we need to reduce absolute emissions associated with the energy sector in the near term”, says Smith.  

The move – from a bank estimated by the non-governmental organisation (NGO) Rainforest Action Network (RAN) to be the world’s second-biggest lender to fossil fuels – has been welcomed by activists and campaigners. 

“In a US context, Citi is ahead of its peers,” says Jason Disterhoft, senior campaigner on climate and energy at RAN, as other big American banks have not made a pledge to cut absolute emissions. Goldman Sachs and JP Morgan have both set targets for the sector based on reductions in carbon intensity, while Bank of America is yet to show its hand.  

However, Disterhoft adds, Citi’s policy does not tighten the net on financing fossil fuel expansion.  

If the goals of the 2015 Paris Agreement are to be met, new investments in oil and gas should have ended in 2021, the IEA says. Yet Citi’s largest oil and gas clients – which include Chevron, ExxonMobil and Saudi Aramco – have drawn up plans for some of the biggest oil and gas project expansion in the world, says last year’s 'Banking on Climate Chaos' report, authored by campaign groups including RAN, BankTrack and Reclaim Finance.  

“If you look at [Citi’s] roster of top fossil [fuel] clients, it is very striking and brings home the amount of inertia in the battleship they are trying to steer,” Disterhoft says. “Getting on a 1.5°C target means ending expansion. The big challenge is driving that home.” 

While Citi has thus far fallen short in this respect, it will continue to assess its policies and expects them “to evolve over time”, says Stephanie Hyon, a spokesman for the bank.  

The group has set an initial two-year review period, to the end of 2023, in which it will engage with clients to understand their greenhouse gas (GHG) emissions disclosures, plans for transition and how they will “responsibly” retire assets. Citi says partnering on transition strategies is its priority, but ending client relationships is a possible last resort.   

What’s more, Citi acknowledges the limitations of its data collection on clients’ emissions, as well as the fact that new sector pathways and science-based analysis will emerge. Its Task Force on Climate-related Financial Disclosures (TCFD) report sets out an ambition to update sector targets based on the latest science and data available. In 2020, only 30% of Citi’s energy and power sector clients reported data on Scope 1 and 2 emissions, while for Scope 3 that figure was 0.1%.  

Scope 1 emissions are those generated by the company itself, Scope 2 is related to its purchased or acquired electricity, steam, heat and cooling, and Scope 3 covers a company’s supply and customer chain. 

Calling time on coal?

Citi has set various red lines on its financing of coal, the most polluting fossil fuel, but there seem to be questions over its level of exposure to the sector. 

In 2020 the lender committed to reducing its credit exposure to companies in the coal mining industry by 50% by 2025 for companies that derive more than 25% of revenue from thermal coal mining. 

Citi says it will, by 2030, not be providing capital or financial services to clients in OECD countries where more than 5% of their revenues come from coal-fired power generation. In respect of non-OECD countries, the bank says it will no longer provide capital or financial services unless clients have a low-carbon transition strategy designed to reduce their share of power generation from coal-fired power plants to less than 5% by 2040.  

For thermal coal mining, the bank will cut to zero its exposure to all companies deriving more than 25% of their revenue from thermal coal mining. 

Disterhoft commends Citi's coal policy as “the best in the US context”. But the bank is still listed by German NGO Urgewald as one of its ‘dirty dozen’ global financiers of the coal industry, highlighting the challenge of unbundling long-standing relationships with the sector. 

Urgewald says Citi has loans worth $15bn to the coal sector and has underwritten $21.3bn in the period January 2019 to November 2021. It defines underwriting as raising debt or equity for an issuer.  

But the group’s 2021 TCFD report tells a very different story, saying its exposure to coal was $1.14bn in 2020. Citi declined to comment on the reason for the huge discrepancy in figures. 

Powering down

Citi has also set targets for its $27bn power portfolio, which incorporates clients across alternative energy, electric utilities, gas utilities and independent power producers and service operators. It plans to cut the emissions intensity of its power portfolio by 63% from a baseline of 313.5kg of carbon dioxide equivalent per megawatt hour (CO2e/MWh) to 115kg CO2e/MWh by 2030.  

The bank chose this target because “climate science tells us that to achieve a net-zero economy you have to electrify everything”, says Smith. The target allows the bank to “increase electrification, while at the same time decarbonising in the near term”.  

In short, more electric vehicles, electric heating systems and the like are needed, and less carbon should be used to power them. 

Embedding emissions targets

Embedding the bank’s targets into its global operations is the next challenge. Citi set up transition-focused teams in 2020 to facilitate that.  

More recently it has been building up resources to work with clients on their transition strategies in Asia, says spokesman James Griffiths. Last autumn the bank appointed William Pang to the newly created position of head of natural resources and clean energy transition and Rapheal Mun as its first Asia-Pacific head of sustainability and corporate transitions. 

Steps planned for this year include working out the bank’s carbon footprint and setting targets for the automotive, manufacturing, commercial real estate, steel and thermal coal mining sectors. Over 2023 and 2024 Citi plans to do the same for the aluminium, aviation, cement and agriculture sub-sectors. There had been little overall change in exposure to high-carbon sectors between 2018 and 2020 (see chart above), aside from in both industrials and transportation, where financing has gone up substantially, and in metals and mining, where it has dropped.

The bank is also helping the Partnership for Carbon Accounting Financials to develop a methodology for setting emissions targets covering capital markets activity, but no time line has been set for doing so yet. 

“We intend to incorporate capital markets into our net-zero target setting as the methodology is finalised and rolled out, and will be part of that process throughout,” says Smith.  

Emerging market impact

With all this in mind, Citi is working to assess how its financing decisions will affect lower-income communities and developing countries dependent on carbon-intensive sectors. As lenders such as Ecobank and Standard Bank have pointed out, poorer countries may not have the luxury of choosing their fuel; if they have certain materials in abundance, they are understandably bound to use them. 

Citi says in its TCFD report that it is “balancing the need for carbon reduction with the potential negative impacts on access to energy and economic dislocation”. 

Achieving this – and hitting the bank’s bold emissions-cutting targets – will doubtless be far easier said than done. Now the hard work really starts. 

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