The beginning of the end for net-zero financial alliances

At the height of the COVID-19 pandemic, many of the world’s premier financial institutions formed bold climate finance coalitions. The most notable of these was the Glasgow Financial Alliance for Net Zero (GFANZ) established in April 2021 to exploit the wildly popular environmental, social, governance (ESG) investing wave.

Led by Mark Carney, former Governor of the Bank of England and now Prime Minister of Canada, GFANZ spun off several major financial alliances dedicated to erasing carbon emissions from their clients’ financial portfolios. Among the biggest of these groups are the Net Zero Asset Managers Initiative (NZAM) and the Net Zero Banking Alliance (NZBA). Each of these global alliances is dedicated to mitigating perceived climate change threats in financial services. The ultimate aim is to trigger a global economic transition to net-zero emissions across every developed nation with representative signatories.

In the face of such lofty goals, these alliances have been hit with a crippling reality: achieving net zero while maintaining economic growth and returns is unattainable. Voters around the globe have become increasingly disenchanted with financing net-zero targets. Currently, nations like the United Kingdom have backtracked on many of their net-zero pledges, including the aim to shift to a 100 percent renewable energy grid. This comes as world leaders confront the steep costs of pursuing net-zero goals that are becoming increasingly out of reach.

A recent McKinsey study revealed that achieving global net zero would require nations to spend $9.2 trillion on physical assets annually. Such a target is unreachable given that countries only spend $5.7 trillion on physical assets today. Even with population growth and rising incomes, the projection still falls nearly $1 trillion short of financing net zero. Another estimate by the International Energy Agency finds it would cost $4 trillion a year over the next 30 years, equal to $120 trillion, to shift away from carbon emissions.

In NZAM, this has sparked some notable departures from some big-name signatories, including BlackRock, Vanguard, JP Morgan Asset Management, and Northern Trust. Each of these is consistently ranked among the top 25 asset managers in terms of the total valuation of their funds under management.

After BlackRock’s abrupt exit last January, NZAM suspended all activities. This included suspending its webpage of global signatories in January, citing the need to “review” this initiative in a new light following US regulatory changes.

Next to NZAM, there have been six recent US bank departures from NZBA. Within the transition period from Biden to Trump, we saw the exits of Citigroup, JP Morgan, Goldman Sachs, Morgan Stanley, and Wells Fargo. The most recent departure came in July, with HSBC Holdings, citing the need to backtrack its emissions goals due to the snail’s pace of global decarbonization.

Beyond the US, even mega-banks in Japan and Russia have left NZBA. While the remaining members of NZBA account for 40 percent of global financial assets, these departures represent a significant blow to the feasibility of achieving net zero today. Even the House Judiciary Committee recently branded NZAM’s decarbonization goals and net-zero commitments as collusive. In the Committee’s June 2024 report, NZAM was accused of mandating that its 315 members drive “output reductions and price increases for American consumers, including in the fossil fuel, aviation, and farming industries.”

“A few years ago, when climate change was at the front of the political agenda, the banks were keen to boast of their commitments to act on climate,” said Paddy McCully, a senior analyst at the campaign group Reclaim Finance, in January. “Now that the political pendulum has swung in the other direction, suddenly acting on climate does not seem so important for the Wall Street lenders.”

Alliances like NZBA and NZAM may be in deeper trouble today among US signatories. This stems from the Trump administration’s efforts to repeal the Environmental Protection Agency’s (EPA) 2009 Endangerment Finding. Under Administrator Lee Zeldin, EPA officials are quickly working to undo the Clean Air Act’s regulatory constraints on carbon emission standards. This includes the domestic automotive industry, which has burdened auto manufacturers and consumers to the tune of $1 trillion annually, according to Zeldin.

This effort coincides with the Department Energy’s (DOE) recent groundbreaking report on the effects of greenhouse gas emissions on the US climate. It provides scientific, peer-reviewed support for repealing the Endangerment Finding.

According to the DOE’s report, carbon emissions do not pose a cataclysmic effect on the earth’s atmosphere as previously assumed. Additionally, the global mitigation strategies to decarbonize industrial economies would invite severe economic consequences.

In light of the EPA and DOE’s revelations, global net-zero alliances are becoming increasingly unnecessary. Groups like NZAM and NZBA will likely continue to shed members in the wake of US regulators deconstructing the false narrative that carbon dioxide poses an existential threat to human health and welfare. Additionally, various cost estimates show that financing a net-zero energy transition is far too expensive even if every able nation chipped in.

It’s time for asset managers and banks to refocus their efforts on securing and growing their clients’ financial accounts. They should not use their clients’ money to fund an unattainable net-zero agenda.