An exodus from banking’s biggest climate target-setting group has provided an opportunity for US banks to ditch awkward commitments while still selling “green” products and services.
Citigroup, Bank of America and Morgan Stanley have quit the Net-Zero Banking Alliance (NZBA), following Wells Fargo and Goldman Sachs, in the final weeks of 2024, citing the need for more targeted strategies.
Big banks and asset managers have been caught for most of the past two years in a political war between “anti-woke” attacks from US politicians which are expected to escalate under US president-elect Trump, and pressure to meet tougher EU standards on disclosure of environmental risks.
At the same time, clients continue to seek green financing to meet their needs for the energy transition as climate change worsens and physical damage risks increase. Investors with longer time-frames, such as pension funds, are also pushing to limit climate-related risks to their investments.
Banks wanted to “keep everyone happy”, said Patrick McCully, a California-based analyst at campaign group Reclaim Finance. “They keep themselves out of Congress and off the right-wing media, and also keep their business with progressive asset owners.”
As Trump returns to the White House, anti-trust threats against institutions that have promoted so-called ESG investing have risen, as a result of legal action brought by red-state politicians. They allege boycotting of fossil fuel energy companies by the institutions, working in collusion to deprive the sector of capital.
The first sector to abandon its net zero industry group was the insurance alliance, which all but collapsed in 2023 when leaders including Axa and Allianz dumped their association after being accused of being anti-competitive by US attorneys-general.
Asset managers have also backed away from fossil fuel divestment policies. Some, such as Franklin Templeton, have quit one or more of the industry’s own climate action groups.
Joel Mitnick, a former Federal Trade Commission trial lawyer now in private practice, said the lawsuits were aimed at intimidating the institutions rather than winning. The message being sent, he said, was that any push by the finance sector to dump fossil fuels would lead to “very painful and expensive” consequences.
But the institutions also must contend with the conflicting signals being sent by politicians and regulators on either side of the Atlantic about the need to fund the energy transition.
The EU has begun to phase in stricter requirements for reporting on climate issues in annual corporate accounts. Lawyers say these will affect many large overseas companies with a footprint in the bloc, including the US banks.
“Industry will be in an unhelpful position whereby there are two conflicting regimes and they are breaching one set of laws one way or the other,” one senior US banker said.
US banks had complained in private that the NZBA alliance had increasingly pressed them to make data disclosures on carbon emissions and voluntary reduction pledges, plus detailed transition plans, even as the US Securities and Exchange Commission rowed back from plans to make them publish carbon accounts.
A key flash point emerged around a recommendation last March that members aim to cut CO₂ emissions related not only to lending but also to capital markets activity, for example those emissions linked to a bond issuance for an oil and gas company where the bank was underwriting the deal, an EU banker familiar with the discussions said.
The broader financial services umbrella group covering the various sub-sector alliances, called the Glasgow Financial Alliance for Net Zero, co-founded by former central banker Mark Carney, now Brookfield Asset Management chair, says it no longer requires this type of ambitious pledge for membership.
Reclaim Finance’s McCully said the political backlash had given some financial institutions an “excuse” to pull out from targets and commitments they “don’t really want to be dealing with.”
The NZBA declined to comment but has previously highlighted that more than 100 banks had joined the group since 2021. HSBC, BNP Paribas and Japan’s Sumitomo Mitsui, are among the top 15 fossil fuel financiers in the world which remain part of the group, but are more shielded from the political attacks faced by US financiers.
The group’s monitoring for accountability also became a thorn in the side of some members. A fifth of the banking alliance’s members had failed to set climate targets for polluting sectors as promised, and a third had failed to publish transition plans, an NZBA report in October showed.
Some banks argue that ditching the alliance means they can train their efforts on meeting arduous EU reporting rules. Goldman Sachs was among those concentrating on compliance with the bloc rules, a person close to the bank said. “It’s a big undertaking, an enormous amount.”
Even as they step away from the global industry-wide groups, banks and asset managers are continuing to develop products and services that are targeted towards green or energy transition activities. The banks which have left the NZBA say they remain committed to their existing climate targets.
On its exit from the alliance, Morgan Stanley said it aimed to “contribute to real-economy decarbonisation” by providing advice and capital to clients that wanted to cut emissions and transform their business models.
Bank of America, which quit the banking group on New Year’s eve, just weeks earlier had structured a $1bn deal to refinance Ecuador’s debt in a so-called “debt-for-nature swap” that channelled some funds to biodiversity protection.
Citi last month advised on a “blue bond” issuance for Dubai-based logistics company DP World, a debt instrument meant to fund projects such as marine conservation and less polluting fuels — a deal priced just two weeks before it quit the net zero alliance.
The asset manager T Rowe Price, which said some of its funds had invested in the deal, was among those accused by the Republican-led House judiciary committee of belonging to a “woke ESG cartel” last month.
On the other side of the political divide, the New York City Employees’ Retirement System, one of the largest US municipal public employee retirement schemes, joined the asset owners’ net zero group just nine days after Trump secured the presidency, and has pushed with other City pension funds for banks to set targets to cut both lending and underwriting emissions.
NY governor Kathy Hochul also signed a bill into law at the end of December that imposes fees on companies that are big fossil fuel polluters, to pay for projects that will help the state become more resilient to climate damage. It is the second state to do so, after Vermont set up a similar fund.
Meanwhile, asset management giants BlackRock and Vanguard in recent months have offered investors the ability to direct their voting wishes on environmental, social and governance matters — offering both pro-ESG and anti-ESG options.
“The bottom line is climate risk is financial risk, and investors consider it as part of their normal fiduciary duty and portfolio analysis,” said a representative for the Climate Action 100+ group, made up of major investors and asset owners.
Additional reporting by Stephen Gandel and Joshua Franklin
Climate Capital
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