The role of banking is fundamental as a financier of all productive sectors. The influence that can be exerted on the behavior of banking customers and their environmental performance, through such financing, is critical to achieving the objectives of the Paris Agreement.
As part of this focus on climate action, BBVA has announced targets for the decarbonization of its loan portfolio in 2030 for CO2 intensive industries. These are intermediate targets with a view to becoming carbon neutral by 2050.
In April 2021 BBVA announced the Net Zero 2050 commitment (zero net emissions in 2050), which considers both direct and indirect emissions, including among the latter those of customers who receive financing from the bank. BBVA wants to accompany its customers in their transition to a more sustainable future, with specific plans and objectives.
On March 5, 2021, BBVA published its commitment to reduce its exposure to coal-related activities to zero, stopping the financing of companies in these activities before 2030 in developed countries and before 2040 in the rest of the countries in which it is present. This decision is in line with the proposal of the Intergovernmental Panel on Climate Change's (IPCC), to limit the rise in temperatures to a maximum of 1.5ºC and with the aim of achieving a carbon neutral economy in 2050.
On November 3, 2021, a first exercise to align the bank's lending portfolio with the Paris Agreement was published. It publishes interim 2030 decarbonization targets for the power generation sector as well as for the automotive, steel and cement sectors, implementation timelines and a breakdown of the metrics used to shape this commitment.
On October 5, 2022, we added the oil and gas sector to the bank's portfolio alignment.
The alignment indicators were calculated in accordance with the methodologies available today in the market. It is worth noting that information availability remains limited on most sectors in terms of both volume and granularity.
The idea of aligning the loan book with the Paris Agreement has recently emerged as the new paradigm to get the financial industry to embrace and pursue climate action.
The idea draws from the fact that financial flows must be consistent with a low greenhouse gas emissions path and be geared toward a climate-resilient development to keep the global average temperature from rising above 2°C relative to pre-industrial levels, and as close to 1.5°C as possible.
Alignment methodologies help to understand how financial flows contribute to decarbonization, assigning an environmental performance indicator to the loan portfolio. This metric is compared against the benchmark offered by climate change scenarios, and in combination with these, it allows to define the targets that are applied to clients.
BBVA, in a joint effort with the group known as the Katowice banks (for making their commitment after the Climate Summit, held in that Polish city in 2018) and the 2dii think tank, has implemented the PACTA (Paris Agreement Capital Transition Assessment) methodology to measure the alignment of its loan book with the Paris objectives, covering the coal, power generation, automotive, steel and cement industries.
Furthermore, BBVA is cooperating in the development of the PCAF (Partnership for Carbon Accounting Financials) methodology, that will allow it to measure its emissions and set alignment objectives in compliance with the aforementioned principles for other sectors such as oil and gas, as published on October 5th, and real estate and agriculture.
Alignment methodologies need climate change scenarios to establish a reference of how the sectors and, consequently, portfolios and clients should behave.
In line with its commitments, BBVA has decided to adopt the 1.5ºC scenario by way of reference, and specifically the Net Zero by 2050 scenario defined by the International Energy Agency (IEA).
The IEA's new Net Zero scenario brings the net zero deadline forward to 2040 for the power generation sector and proposes a car fleet with 86% of electric cars by 2050.
Breakdown by sectors
The decarbonization trend in the power industry is clear. Boosting investments in renewable energies could lead to the decarbonization of the sector in advanced economies between 2030 and 2040 and in emerging markets after 2040. The sector’s largest groups are committing to increase their renewable generation capacity, mainly wind and solar, phasing out coal from their generation portfolios over the next decade and slightly curtailing the weight of gas in Europe, while in maintaining or slightly increasing it in emerging economies.
Electrification is leading to a profound overhaul of the automotive industry and its business models. Regulation to curb emissions from vehicle use has become the main driver behind this transformation. As a result, automakers have been announcing aggressive investments in technology and electric batteries in recent years, and pledged to phase out the production of internal combustion motor vehicles within the next 15 years. Globally, electric vehicle sales are expected to reach 10.7 million by 2025 and 28.2 million by 2030, with emissions at about 121 g CO2/km.
The decarbonization of the steel industry will require very relevant investments in the coming years for the development of appropriate technologies. Emission intensity is expected to reach 860 kg CO2 per ton of steel by 2030. After that, it should begin to decline more rapidly, with the advent of new renewable energy sources - especially green hydrogen - and carbon capture technologies. Through 2030, to meet their emission reduction targets, the industry’s largest players will focus on prioritizing lower-emission manufacturing routes or the use of scrap in the metal mix.
The cement industry will rely on traditional levers to curb emissions down to 482 g CO2/ton of cement by 2030. In other words, reducing the clinker factor, using alternative fuels instead of fossil fuels and replacing a portion of the limestone they use with alternative raw materials. Although the decarbonization scenarios consider carbon capture, use and storage (CCUS) technology as one of the levers in reducing CO2 emissions, the largest groups in the sector consider it will remain irrelevant over the next decade, given its current state of maturity. Consequently, the slope of the CO2 emission reduction curve should become steeper after 2030, once CCUS technology becomes available on a large scale.
Oil and gas
The oil and gas industry plays a key role in the transition of the energy sector. Emissions from oil and gas operations (Scope 1 and 2) are largely focused on oil and gas exploration, drilling and extraction activities, mainly due to methane leakage from the sector. There are currently strategic initiatives available to reduce emissions in these scopes, mainly related to the management of fugitive emissions.
However, the core of the sector's emissions are Scope 3 emissions, associated with the use of oil and gas by end users. These emissions correspond to ~80% of the sector's emissions and their reduction will necessarily entail a drop in oil and gas consumption in favor of other forms of low-carbon energy generation. Many industry groups are transitioning to multi-energy models to accommodate this transition.