The unravelling of a $130tn local weather alliance | USAEMALL.com

With five days to go until Donald Trump takes office, some of the US’s most powerful tech executives have been chipping in millions to help him make his second inauguration ceremony even bigger and better than his first. The bosses of Apple, Meta, Amazon, Google and OpenAI, or their companies, have each donated $1mn to fund the event.

Meanwhile, US financial sector leaders have been preparing for Trump’s return in a rather different way: by quitting climate-focused alliances en masse. But, as I explain below, these new developments have been a long time in the making.

CLIMATE FINANCE

What’s behind the US exodus from financial climate groups?

It’s hard to believe that barely three years have passed since COP26 in Glasgow. The UN climate summit in October 2021 marked the high-water mark of optimism around the private sector’s ability to galvanise global climate action.

Former Bank of England governor Mark Carney had gathered most of the western world’s biggest financial institutions under the new Glasgow Financial Alliance for Net Zero, which announced that more than $130tn of private capital was now “committed to transforming the economy for net zero”.

If that claim seemed too good to be true even at the time, the events of recent weeks have exploded it altogether. Amid an exodus of high-profile members, Gfanz and one of its key sectoral alliances have made radical moves that seem to mark a clear change of direction for financial sector climate collaboration.

On Monday, the Net Zero Asset Managers initiative — one of several industry groupings that had operated within the Gfanz network — abruptly announced that it was removing from its website its “commitment statement”, under which members pledged to “support investing aligned with net zero emissions by 2050 or sooner”. It also deleted the list of asset managers who had signed up to the initiative, and said it was suspending its work to track members’ adherence to their commitments. Meanwhile, it would undertake a review “to ensure NZAM remains fit for purpose in the new global context”.

The announcement came four days after BlackRock, the world’s biggest asset manager, informed clients that it was leaving NZAM. That followed a rush by major US banks to exit the Net Zero Banking Alliance: JPMorgan Chase, Morgan Stanley, Citibank, Wells Fargo and Goldman Sachs all announced their departure over the past month.

Gfanz itself revealed a major shift in a pair of announcements to kick off the new year. Previously, financial companies had participated in Gfanz through their membership of the sectoral alliances — which were run in partnership with the UN or (in the case of the asset managers’ alliance) sustainable investing-focused non-profit groups, and required members to commit to ambitious climate targets.

Now, Gfanz has cut that formal relationship with the sectoral alliances. It now says that any financial institution is welcome to participate in Gfanz, provided it’s “working to mobilize capital and lower the barriers to financing [the] energy transition”. Aside from working groups focused on specific issues, the main platform for Gfanz’s work will now be its “principals group”, consisting of 30 senior financial executives, who will focus on tackling obstacles to green energy investment.

What’s behind this bewildering flurry of announcements? And does it mean that financial sector interest in the energy transition is collapsing?

A major factor behind the upheaval was set out by Philipp Hildebrand, BlackRock’s vice-chair, in a message to institutional clients last Thursday. Membership of groups like NZAM had “caused confusion regarding BlackRock’s practices and subjected us to legal inquiries from various public officials”, Hildebrand wrote.

This was a reference to an onslaught of legal pressure from US Republican politicians and state officials, who’ve argued that financial climate alliance members have colluded against the fossil fuel sector and — by binding themselves to standards imposed by the alliances — allowed green concerns to get in the way of their fiduciary duty to clients.

This legal hazard looks set to become still more serious after Donald Trump returns to the White House. The climate alliance exodus has been widely seen as another example of craven backsliding by US executives keen to align themselves with Trump’s agenda.

Yet the tensions around these issues have been flaring since long before Trump’s re-election. BlackRock has been parrying legal attacks over its climate alliance membership since mid-2022. Around the same time, Gfanz ended its partnership with the UN Race to Zero initiative — which had previously set the criteria for membership in the alliances — after major financial institutions complained that its rules were too onerous.

A new purpose

Since its inception, Gfanz’s leaders have struggled to reconcile the ambition of imposing high standards with the desire to attract a wide group of major financial institutions. The second of those conflicting priorities has now clearly won out, with Gfanz’s decision to eliminate formal membership requirements.

This will have some benefits — notably by opening the door to greater participation by financial companies in developing countries. Because many of these nations — India, for example — have set net zero goals for the second half of this century, it has been hard for their financial institutions to achieve the 2050 net zero alignment that has been required by the Gfanz alliances.

Gfanz will now be, emphatically, a convening body for discussions and collaboration — not a standard-setter holding members to account. The sectoral alliances may be poised to move in a similar direction. NZAM’s sudden announcement suggests that a significant loosening of membership requirements could be in store. We’ll now watch to see whether the NZBA undertakes a similar rethink after the US exits, and considers diluting its rules in order to avoid further departures.

It’s worth noting that the Net Zero Asset Owners Alliance — the longest-running of these groupings, comprising mainly pension funds, insurers and endowments — has suffered far less disruption, and recently added a major new US member in the New York City Employees’ Retirement System. The asset owners’ long-term investment horizon means they’re less vulnerable to claims that a heavy focus on climate risk is in conflict with their fiduciary duty.

The continued emphasis of these major asset owners on climate concerns is one reason why, even as BlackRock and the US banks have quit the climate alliances, they’re all at pains to stress their continued focus on the energy transition. As Hildebrand said in his client letter, “two-thirds of our largest clients around the world, including 100% of our largest clients in Europe”, have their own net zero commitments.

About $2tn was invested in clean energy last year — a vast sum that needs to grow much larger still, especially in developing countries. If Gfanz and the net zero alliances are to evolve into networks closely focused on collaboration and discussion around mobilising this capital, that may not be such a bad thing.

These initiatives have already done valuable work around climate disclosures, target setting and transition plans. But it’s up to governments and regulators, not companies, to create the rules and incentives needed to help drive the shift to a lower-carbon economy.

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