Is Finance Quitting on Net Zero?

In November 2021, the Glasgow Financial Alliance for Net Zero (GFANZ) announced that finance companies managing $130 trillion of capital had committed to helping the globe achieve net zero emissions by 2050. An announcement that was met with a healthy dose of 'I’ll believe it when I see it' from those still seeing trillions of dollars flowing from finance towards high emitting companies.

Now, almost 12 months later as we approach the publication of member progress reports, it's time to find out if commitments have been backed by action.

A quick scan of the media suggests things are not looking good.

Are there just some to be expected teething problems or is finance quitting on the Race to Zero little under 12 months since committing to take a lead. Here is a short explainer...

What is GFANZ?

GFANZ was launched in April 2021 to bring together global financial institutions around a mission to support the transition to net zero and describes itself as “a global coalition of leading financial institutions committed to accelerating the decarbonization of the economy’.?

On 3rd November 2021, during COP26, it was announced that $130 trillion of non-state capital was now committed to transforming the global economy towards net zero. This commitment was backed by 450 firms - banks, asset managers, insurers, pension funds and more - across 45 countries.??

What have firms committed to exactly?

GFANZ works in partnership with the UN's Race to Zero campaign. Race to Zero sets minimum commitment criteria for the alliances they partner with, which in a nutshell can be described as “high ambition, science-based targets, including achieving net zero emissions by 2050 at the latest, delivering their fair share of 50% emission reductions this decade, and reviewing their targets towards this every five years. All firms will report their progress and financed emissions annually”.?

Update 28 October 2022: GFANZ dropped their partnership with Race To Zero .

How are they getting on?

Progress reports were due 12 months after joining the alliance and every year thereafter as part of Race to Zero requirements. Many were due this November 2022 so we’ll learn more overall if they come through.??It is unclear if they will since GFANZ dropped the partnership on 28 October.

Otherwise, GFANZ working groups still seem to be working out what credible net-zero transition plans look like and we've had no reports of real-world emission reductions.?

Worryingly, some large GFANZ members have received mostly negative media attention regarding their progress. Blackrock and Vanguard told a UK inquiry they will not quit fossil fuels while HSBC’s recent climate adverts were banned by the regulator for amounting to greenwash. On the upside, Lloyds Bank will no longer finance new oil and gas. ??

Who is quitting?

Aside from those members above failing to 'walk the talk', two pension funds, Cbus Super and Bundespensionskasse , have left the alliance entirely citing internal resourcing problems. I.e., they can’t or are unwilling to pay to do the work involved in tracking, reporting and reducing their exposure to greenhouse gas emissions.??

Others have threatened to quit.

Wall street banks including Bank of America, JPMorgan and Morgan Stanley threatened to quit due to a new Race to Zero requirement to end all new financing of fossil fuels or risk being kicked out of the alliance.??

GFANZ members have historically pushed back against rules to end new financing to fossil fuels and have handed $3.8 trillion over to fossil fuels since 2016 , the year of the Paris Agreement. This time they cite legal risk and anti-trust law as the reason.?

There is a legitimate risk that authorities use anti-trust or competition laws against GFANZ members. These laws prohibit cooperation agreements between companies which reduce competition. Other reasons were less convincing, such as this from a senior executive at an anonymous US bank who said. “What if we get it wrong, make a mistake or someone lies? Then the bank can be sued, that is an unacceptable risk.” Isn’t it always the case that banks should avoid these things??

What now?

Race to Zero updated wording to remove an explicit bar on support for new coal but this didn't stop GFANZ breaking away from the partnership on 28 October. Before the partnership dissolved, GFANZ called upon governments to support the initiatives by doing their bit to support financial firms wanting to transition away from fossil fuels.??

GFANZ didn’t state exactly what governments should do, but this might include embedding net zero into regulation or adding exemptions to laws where they act as a barrier to the transition, such as competition law.?Perhaps this is where GFANZ members should focus their government lobbying efforts instead of fighting against emerging sustainable finance policy , such as disclosure requirements in the EU and requirements to consider ESG as part of investment duties in the US.

They might also give up their membership of real-economy industry associations which have lobbied directly in line with fossil fuel interests, including the US Chamber of Commerce and the American Gas Association. This would put them up alongside companies such as Apple, Starbucks, and Unilever who have left the US Chamber of Commerce for this reason.??

What do others think?

Some quotes from digital and social media include:

• “The posturing from the banks reveals the difference between the say-ers and the do-ers when it comes to net zero,”

Rebecca Self, a climate consultant who previously ran HSBC Holdings Plc's sustainable finance business

• “If we are driving closer to the cliff edge on climate change, then we only need members that are dedicated to climate action. Removing those that are “a quarter-hearted at best on net zero” might serve to “unlock a little more enthusiasm and energy from those who do want to race to the top.” In the end, “rather than no one left behind, we might need to leave some behind,”

James Vaccaro, Volans Associate, former renewables banker, leader of the Climate Safe Lending Network and GFANZ advisory board member

• “[The threats to quit GFANZ are] Just another data point signalling that voluntary efforts to tackle climate change are insufficient, but that anything binding cannot be tolerated. Carney's quote spells out the aversion: 'What [the banks] can't have is legally binding strictures.' Why not? Are they serious about climate change, or not? What sort of commitment was it?... the sort of policy and regulatory changes that are evidently needed can only be achieved *through* government. The necessary levers simply don't exist in private sector HQs. Given that limitation, credible climate action now requires companies to communicate that the ABCR ("Anything but Costly Regulation") plan isn't working and to lobby governments for the universal, binding policies that might.”

Duncan Austin, Ex-Partner at Generation Investment Management and writer at Bothbrainsrequired.com

• “Race to Zero (R2Z) had set up a Financial Sector Expert Group (FSEG) to ensure criteria are fit for purpose. With the FSEG gone, the idiosyncracies of financial sector target-setting (e.g. emissions inventories & boundaries, engagement vs. divestment strategies, cross-asset engagement, financing state actors, etc.) risk getting lost in the shuffle. R2Z made a choice to disband the FSEG, keeping it going may have prevented some of this. Too much of the framing right now blames "Wall Street banks" for the R2Z / GFANZ split, not enough focus on role of R2Z in delivering criteria that are not just "ambitious" but actually fit for purpose (defined here as maximizing the financial sector impact on real world emissions reductions).”

Jakob Thom?, co-founder and principle, The 2° Investing Initiative (2DII)

• “It ... seems increasingly likely that GFANZ’s finance sub-sector alliances will eventually break with (or be ejected from) @UN ’s #RacetoZero . Though I suspect some compromise will ensure this doesn’t happen at or before @COP27P. This does not necessarily mean that GFANZ’s finance sub-sector alliances will be less effective. But that entirely depends on the dynamics within each alliance and what accountability mechanisms exist”

Ben Caldecott, Director, Oxford Sustainable Finance Group and Assoc Professor @UniofOxford @TheSmithSchool ; Director, UK Centre for Greening Finance & Investment @UKCGFI

What do you think? Volans would love to read your comments.

Written by Charlene Cranny CSIF Sustainable Finance Specialist, Volans .

Twitter: @volanshq @charlenecranny