Potholes on the path to decarbonisation

…reviewing the net-zero banking alliance in light of high profile exits

 Background

In December 2024 and early January 2025, a slew of global banks exited the UN-convened Net-Zero Banking Alliance (NZBA). Some issued statements explaining this decision and a few stayed quiet. So, what is the NZBA and how is it structured? What triggered this exodus? Is this the first time this is happening? And what is the future of the alliance and global efforts to decarbonise given this series of departures?

Find answers to these questions and more here.

Introduction

In 2021, the United Nations Environment Programme Finance Initiative (UNEP FI), a partnership between UNEP and the global financial sector to mobilise private sector finance for sustainable development – brought together 43 of the world’s leading banks to form the UN-convened Net-Zero Banking Alliance.

The UN-convened Net-Zero Asset Owner Alliance (a coalition of institutional investors) and the Net-Zero Banking Alliance are arguably the most prominent members of the Glasgow Financial Alliance for NetZero (GFANZ).

You may think of GFANZ itself as a packed suitcase or if you are feeling hungry, the famous Danish Butter Cookies filled with differently shaped snacks. GFANZ also includes the:

• Net-Zero Asset Managers Initiative (NZAM)

• Paris Aligned Asset Owners (PAAO)

• Net-Zero Insurance Alliance (NZIA)

• Net-Zero Financial Service Providers Alliance (NZFSPA)

• Net-Zero Investment Consultants Initiative (NZICI)

What is the NZBA

The Net-Zero Banking Alliance is a group of leading global banks committed to aligning their lending, investment and capital markets activities with Net-Zero greenhouse gas emissions by 2050.

NZBA’s framework, guidance and learning opportunities support members to design, set and achieve credible science-based Net-Zero targets for 2030 or sooner that deliver value for their investors and clients. NZBA is the climate accelerator for UNEP FI’s Principles for Responsible Banking (PRB).

It is open to all banks globally, including banks that are not UNEP FI members or Principles for Responsible Banking signatories.

NZBA focuses on the impact of banks’ financed emissions—emissions attributable to lending and investing and since the April 2024 update to the Guidelines for Climate Target Setting for Banks, their facilitated emissions arising from activities supporting clients to raise finance in the capital markets.

To join the alliance, a bank’s CEO signs the Commitment Statement and the bank will:

• Transition the operational and attributable greenhouse gas (GHG) emissions from their lending and investment portfolios to align with pathways to Net-Zero by 2050 or sooner.

• Within 18 months of joining, set targets for 2030 or sooner and a 2050 target, with intermediary targets to be set every 5 years from 2030 onward.

• Banks’ first 2030 targets will focus on priority sectors where the bank can have the most significant impact, ie. the most GHG-intensive sectors within their portfolios, with further sector targets to be set within 36 months.

• Annually publish absolute emissions and emissions intensity in line with best practice; and within a year of setting targets, disclose progress against a board-level reviewed transition strategy, setting out proposed actions and climate-related sectoral policies.

• Take a robust approach to the role of offsets in transition plans.

Exodus 12 Chapter 31 (The Exit)

In 2023, German lender GLS Bank, which prided itself as an ethical bank since its 1974 founding, exited the NZBA in no small part due to larger lenders still lending to the fossil fuel industry.

On Tuesday, 7^th January, 2025, JPMorgan Chase also departed the alliance, a bank spokesperson confirmed.

This follows Morgan Stanley’s exit and the December 2024 departure of Bank of America and Citigroup, the second and third largest US banks by consolidated assets.

This follows Wells Fargo (first reported by Bloomberg) and Goldman Sachs, which exited a month ago.

Citigroup indicated that it had made progress toward its own Net-Zero goals and decided to leave the alliance. Bank of America, in an email to Reuters, said: “We will continue to work with clients on this issue and meet their needs”.

Meanwhile, Goldman Sachs maintained that they had “the capabilities to achieve our goals and to support the sustainability objectives of our clients,” and are “very focused on the increasingly elevated sustainability standards and reporting requirements imposed by regulators around the world”.

Wells Fargo did not give a reason behind the move, however. The NZBA is prepared for more US exits, with Secretariat Lead Sarah Kemmitt citing the “political environment” to members in a letter seen by Bloomberg.

Is this the first time this has happened?

No. It is not just banks. In 2022, Vanguard, the world’s second largest investment manager, left the Net- Zero Asset Managers (NZAM) initiative. In a statement, Vanguard said: “We have decided to withdraw from NZAM so that we can provide the clarity our investors desire about the role of index funds and about how we think about material risks, including climate-related risks—and to make clear that Vanguard speaks independently on matters of importance to our investors”.

In 2023, Leslie Samuelrich, president of Green Century Capital Management — known for its fossil-free funds, announced it had withdrawn from NZAM. This exit was unusual because although it did not own any fossil fuel company stock, their continued membership made it harder for the firm to fulfil NZAM’s pledges.

After Green Century’s departure, a NZAM representative said it still has 307 members representing USD 60 trillion in assets under management.

Then just last year, Scottish asset manager Baillie Gifford upped the ante by leaving not one but two major green investing bodies. It said the Climate Action 100 and Net-Zero Asset Managers Initiative had “become contested” and risked “distracting from our core responsibilities”.

NZBA Progress Report 2024

Now with 144 banks and a wider geographical spread since the NZBA launch, 65 percent of banks are headquartered in developed markets and 35 percent in emerging and other markets.

The October 2024 Progress Report was full of interesting data points. For instance,

• Ninety-seven percent of the banks due to have set targets by this date had done so. Targets set covered banks’ corporate business across high emitting sectors, retail mortgages and auto loans.

• Around four-fifths of banks due to have set targets covering all or a substantial majority of carbonintensive sectors where they have material exposure had done so.

• Emerging market banks constituted one-fifth of the banks that had not met the milestone to set targets covering all or a substantial majority of carbon-intensive sectors, where they have material exposure and the most cited reasons for not yet setting a target for a sector include client emission data being of poor quality, unclear decarbonisation pathways in some markets and sectors and lack of a conducive policy environment.

• The number of banks setting targets for carbon-intensive industrial sectors, including cement, iron and steel and aluminium more than doubled since end-September 2023.

• For coal, thirty-six banks set targets or phase-out policies, and fifty-one reported that they do not have exposure to the coal sector; however, the fine print indicates: “The Alliance does not prescribe how members should define the perimeter of a coal target. Emissions arise from the mining of thermal and metallurgical coal, its transport and end-use combustion in industrial uses (e.g. cement and metal production) and power generation. The NZBA Guidelines state that “Any client with more than 5 percent of their revenues coming directly from thermal coal mining and coal-powered electricity generation activities shall be included in the scope of targets”.

There were feel good stories of banks funding electric vehicle adoption, investing in renewable energy projects and backing climate data companies, including a fascinating debt arrangement by Singaporean lender OCBC which provided its first 1.5°C sustainability-linked loan product to a real estate leader. It launched the 1.5°C loan product in 2023 to support corporates in their transition to Net-Zero by offering reduced interest rates to corporates that meet annual decarbonisation performance targets aligned with science-based decarbonisation pathways for achieving Net-Zero level greenhouse gas emissions by 2050.

Some criticism of the NZBA

• Mismatch between action and pledges

In an analysis reported by Bloomberg in 2023, Citigroup and Bank of America have since contributed at least US$53billion in combined lending and underwriting to oil, gas and coal firms.

• Lusting after ESG ratings

Morgan Stanley Capital International (MSCI) is a finance company that provides services and tools for the global investment community and they are known for their ESG ratings that are designed to look at the financial significance of ESG issues. Although they are not ‘climate ratings’, a European Central Bank study noted that “a concrete benefit for banks that join NZBA is they see an increase in their MSCI ESG rating of 0.6 points out of 10, a substantial upgrade. This suggests large banks with ESG ratings derive reputational and financial benefits from making climate commitments”.

Final word

Scrapping the NZBA. 

The exodus underscores the shaky foundations on which voluntary commitments are made.

When a bank joins NZBA, it voluntarily and independently makes a commitment to transition its financing activities to align with pathways to Net-Zero by 2050 at the latest and to set intermediate sectoral targets for 2030 or sooner to put it on a path toward this goal.

This is all well and good but there is no enforcement mechanism to ensure set targets are adhered to.

Indeed, a paper by the European Central Bank acknowledged that while it is in its infancy, the NZBA is one of the strictest, if not the strictest climate initiatives for banks; however, member banks had not divested from other high emission sectors like mining. Moreover, it also found that firms borrowing from NZBA banks are not more likely to themselves set a decarbonisation target, which cast doubt on the efficacy of voluntary climate commitments for reducing financed emissions, whether through divestment or engagement.

Perhaps, the time has come for the NZBA to be dissolved. “Quitting while you are ahead” is the appropriate idiom; otherwise, the NZBA risks becoming the less credible alternative as evidenced by some lenders quitting the Science-Based Targets Initiative (another United Nations-backed initiative to scrutinise climate targets set by corporations), but retaining membership in the NZBA.

The author is a lawyer with Ashong Benjamin & Associates, and the founder of S&C Asihene, a research and advisory firm.

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