Banks' carbon pledges: amazing or a maze?

This study documents new findings on euro-area banks' carbon pledges by exploiting a rich dataset that combines information on banks' climate targets, collected from several providers, with financial and credit data. Decarbonization goals are characterized by a considerable heterogeneity in time horizons, scope, ambition and metrics; the information is fragmented and often differs across sources. Larger banks provide most of the credit to the high-emitting sectors, charging them a relatively low interest rate spread, and they are more likely to set carbon pledges and join international initiatives. The effects of climate commitments on lending policies to firms in carbon-intensive sectors are weak, varied and only materialize a few years after the pledge. Providers disagree in their estimates of the implied temperature rise associated with banks' portfolios and commitments. Overall, such estimates reveal that the euro-area banking system is not well aligned with the Paris Agreement's goals, reflecting the still insufficient corporate decarbonization efforts. Banks committed to reducing their financed emissions are also paying close attention to broader nature-related and biodiversity issues.