NZBA open letter highlights risks from divergent responses of stakeholders to climate emergency.
The future stability of the Glasgow Financial Alliance for Net Zero (GFANZ) is under scrutiny after a member group appeared to distance itself from updated UN-endorsed rules for achieving net zero emissions by 2050.
The Net Zero Banking Alliance (NZBA), which has 119 members and US$70 trillion in assets, has asserted its right not to follow toughened guidance issued by Race to Zero (RtZ), a campaign established by the UN to ensure non-state actors are taking science-led and ambitious action against climate change.
NZBA Chair Tracey McDermott sent an open letter to members last week, noting that NZBA has “an autonomous governance structure and decision-making process” within GFANZ, meaning “RtZ does not have the ability to impose requirements either on the NZBA as a whole or on individual members”.
The NZBA said the letter, which comes amid rising political pressures on US banks, was only a “statement of fact” which reiterates existing governance and decision-making structures. But it has been interpreted elsewhere as paving the way for a loosening of the alliance’s net zero commitments.
“It is absolutely clear that NZBA is a partner of Race to Zero, and that its membership of Race to Zero is a condition of its membership of GFANZ, and that being a member of RtZ means that you are supposed to comply with its criteria,” said Paddy McCully, Senior Analyst at NGO Reclaim Finance.
The letter follows updated criteria issued by RtZ in June, which requires member organisations and alliances to phase out all unabated fossil fuels, thus restricting future development, financing and facilitation of fossil fuel assets, such as coal projects. It also asks for members to publish transition plans covering Scope 3 emissions.
The new guidelines come into effect from June 2023, with RtZ members required to demonstrate alignment if they wish to remain endorsed by the campaign and not be exposed as “trying to find loopholes”.
RtZ softened these expectations through published clarifications in September, noting that members can “independently find their own route”. It nonetheless re-emphasised that members are expected to align to 1.5°C temperature scenarios, such as that set out by the International Energy Agency, as well as phase down and out unabated fossil fuels, and that it is the responsibility of each RtZ partner to ensure individual members are aligned with the minimum criteria.
As well as GFANZ and its sub-alliances, RtZ partners in the finance sector include the Principles for Responsible Investment (PRI) and the Institutional Investors Group on Climate Change (IIGCC).
“The NZBA will independently consider RtZ’s updated criteria, together with any other relevant changes in the external environment and any lessons we have learned over the first years of implementing net zero commitments, and decide, through established NZBA governance, whether any changes should be made to our guidelines to reflect these,” said McDermott.
The letter also confirmed the alliance’s commitment to the banking sector “playing its part to achieve the 1.5°C pathway”.
According to GFANZ’s 2021 progress report, to ensure credibility and consistency across the alliance “all GFANZ members must align with the Race to Zero criteria”. This suggests that, to remain members of the umbrella body, NZBA signatories need to adopt all changes to RtZ criteria to ensure maximum alignment.
A GFANZ spokesperson said the NZBA letter outlined an existing criteria-setting process that was consistent with the 2021 progress report.
Co-chair Mark Carney’s announcement that GFANZ was backed by firms worth US$140 trillion at COP26 last November was seen as a key signal of the finance sector’s commitment to net zero, and the alliance is expected to want to demonstrate significant progress at COP27 in Egypt next month.
Carney recently said all GFANZ members would need to take “tough decisions” over which portfolio companies they would continue to work with in future.
Clarification of NZBA’s policy-making process may have become necessary following threats by US banks to leave the alliance due to the legal risk of having policies imposed by an external party, and intensifying political pressure on US banks to maintain their support for fossil fuel industries.
US state attorney generals from Arizona, Texas and elsewhere last week sent civil investigative demands for documents about the involvement in NZBA of JP Morgan, Goldman Sachs, Bank of America, Citigroup, Wells Fargo, and Morgan Stanley.
“The last thing Americans need right now are corporate activists helping the left bankrupt our fossil fuel industry,” Texas Attorney General Ken Paxton said.
“The big banks need to make clear that they believe in science and will stick by their climate commitments – and what is wanted by large numbers of their clients and shareholders,” said McCully.
“But it would be unreasonable to paint the entire finance sector with the same brush, as there has been and continues to be a huge gap between different financial institutions in terms of their understanding of climate science and willingness to take action.”
UK-based NZBA signatory Lloyds Banking Group last week announced it will no longer be directly financing the development of new oil and gas projects, unless it is for viable projects focused on renewable energy and transition technologies. It will also no longer finance coal liquefaction and shale fracking.
Credibility and public assurance
The NZBA statement, which raises the prospect both of a more distant relationship between GFANZ groupings and a lack of third-party verification of its policies should it be ejected from RtZ, has caused some sustainable finance experts to question the pace and scale of banks’ commitment to net zero transition.
“What gave the GFANZ sub-alliances like the NZBA credibility and public assurance was their link to Race to Zero,” said Peter Uhlenbruch, Director of Financial Sector Standards at UK NGO ShareAction, adding that any drift away from the campaign would present NZBA with the challenge of “reassuring the public that their own governance arrangement, member requirements and accountability mechanisms are in fact aligned with supporting a 1.5°C-aligned transition, and not slowing it down”.
The banking sector is already under intensifying scrutiny for a perceived reluctance to withdraw support from carbon-intensive businesses, with US banks being criticised for their ongoing financing of coal mines, plants and infrastructure.
Rory Sullivan, CEO of Chronos Sustainability, said banks need to work hard to demonstrate credible commitment to climate action, partly as their reputations have not yet been restored since the global financial crisis.
“Much of the challenge and criticism of the banking sector is because it is not clear what the sector is doing in practice or how much of a contribution it is actually making. Targets are inconsistent, commitments are obscure and the climate characteristics of loan books and project finance portfolios are generally very difficult if not impossible to analyse,” he said.
Reclaim Finance’s McCully said NZBA’s possible removal from RtZ could have wider consequences. “Given that adherence to the RtZ’s science-based criteria is essentially the glue that holds GFANZ together and gives it whatever strength it has, we would certainly hope that GFANZ leadership will make a clear statement explaining what banks and others have signed up to,” he said.
From voluntary to mandatory
Observers said the issue reflected the limits of collective voluntary action in the absence of science-based policy frameworks from government, a point also noted recently by GFANZ Co-Chair Carney with reference to the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
“Tracey McDermott’s statement is an admission of a larger dilemma; the need for policymakers to give banks more clarity and the requirement that science provides an anchor for action. Banks who want to aid the transition are now wrestling with this tension in broad daylight,” said Brian Hensley, Partner at Kaya Advisory.
The existing patchwork of voluntary initiatives can only propel banks so far along the path to net zero, experts said, although acknowledging that fractures between governments continued to slow the implementation and coordination of mandatory policy.
“The NZBA is correct to argue that the banking sector cannot deliver the transition to net zero on its own, and that whole-of-system change – including policy action, changes in societal behaviour, technology development – are also needed,” said Sullivan.
The shift from voluntary commitments by financial institutions and other private sector actors to mandatory requirements is beginning to accelerate. TCFD guidelines have been leveraged in the climate disclosure rules in several jurisdictions, as well as the climate reporting standard of the International Sustainability Standards Board (ISSB), which will be written into securities rules globally.
Transition planning frameworks for financial institutions, including those issued by GFANZ, are being supplemented by regulatory requirements in the UK and elsewhere in the G20, while prudential regulators, including the Federal Reserve, are more closely monitoring banks’ provisions.
In addition to RtZ’s science-led approach, other forms of non-regulatory, third-party scrutiny of banks’ climate performance are also being developed. These include an investor-led pilot framework of indicators, developed by the Transition Pathway Initiative (TPI) and the Institutional Investor Group on Climate Change (IIGCC), which assesses the preparedness of banks for the low-carbon transition.
“The sector’s reputation cannot be rehabilitated through effective policing alone. There is an opportunity for the sector to show its commitment to action through making serious, credible commitments and by allowing itself to be held to account,” said Sullivan.