Is a coalition of more than 500 financial firms fit to race against climate change? Willy Diddens looks at the form.
In April 2021, the UN Special Envoy on Climate Action and Finance, Mark Carney, and the UK presidency of the 2021 United Nations Climate Change Conference (COP26) launched the Glasgow Financial Alliance for Net Zero (GFANZ). Its goal is to help to adjust the financial system business models to support the decarbonisation of the economy. It happened in advance of the 26th global climate summit of the United Nations Framework Convention on Climate Change in November in Glasgow (COP 26) to contribute to one of its four main objectives: to mobilise financial means to achieve carbon neutrality by 2050. COP 26 appealed to private finance to cooperate in the effort.
The globalised financial world answered the call: GFANZ involves more than 550 firms in more than 50 countries (jurisdictions) representing total managed and owned assets of more than US$150tr, belonging to seven sector-specific alliances. GFANZ is part of the Race To Zero campaign of the UN involving 11,309 non-state actors, all committed to achieving net zero carbon emissions by 2050 at the latest.
The seven sector alliances are:
- Net-Zero Asset Owner Alliance (NZAOA),
- Net-Zero Asset Managers Initiative (NZAM),
- Paris Aligned Asset Owners (PAAO),
- Net-Zero Banking Alliance (NZBA),
- Net-Zero Insurance Alliance (NZIA),
- Net-Zero Financial Service Providers Alliance (NZFSPA)
- Net-Zero Investment Consultants Initiative (NZICI)
According to the GFANZ website, its members “have individually committed to meeting the Race to Zero’s strict criteria, pledging to transition the emissions of their financed portfolios to net zero by 2050, develop net-zero transition strategies, set interim targets, and report progress annually”.
GFANZ has defined three lines of action:
- “Financial Institution Net-Zero Transition Plans” to “support coalition efforts that translate net-zero pledges into actionable, near-term, science-based transition plans”.
- “Mobilising Capital for Emerging Markets and Developing Economies” striving “to accelerate capital allocation in support of net-zero transition in emerging markets and developing economies.”
- “Net-zero Public Policy” aiming at driving “ambitious and credible public policies that support, incentivise, and enable the net-zero transition”.
In its 2022 Progress Report GFANZ acknowledges that “while 2021 and 2022 were primarily focused on commitments and providing the pan-sector frameworks and guidance to operational these commitments, 2023 will be a year of action”. As GFANZ has no power to enforce decisions, apart from naming and shaming, the statement is more an appeal to its members than an action plan. In fact, GFANZ is facing a number of difficulties that feed the criticism of not putting the pledges into action.
The setting up of sector-specific guidances and criteria is burdened with the necessity of defining measurable and comparable benchmarks for a notoriously complex and opaque financial world.
First of all, the setting up of sector-specific guidances and criteria is burdened with the necessity of defining measurable and comparable benchmarks for a notoriously complex and opaque financial world. In addition compliance with these criteria cannot be enforced and depends on the good faith of its members. In part these problems emerge, because the financial institutions are not the primary sources of carbon emissions. They are only addressing the “financed emissions”, the emissions attributed to financial institutions from their lending and investments. So, short-term lending for long-term infrastructure, like liquefied natural gas terminals, will show only the short-term effects for the time it takes to pay the loans back. Furthermore, the financial institutions refer to the difficulties of getting accurate emissions data from their clients.
More general methodological problems are linked to inadequate timelines, coverage and targets. For example, only one sector set a target for 2025, necessary to assess whether its members meet the Return to Zero-requirement of a 50% reduction by 2030. We also find the case of the NZAM sector targets are based not on actual reductions to their financed emissions, but on the percentage of their assets under management (AUM) which is supposedly aligned to net zero.
The UN Race to Zero campaign has put GFANZ under pressure by issuing tougher criteria, following Secretary General Antonio Guterres’ statement that fossil-fuel companies and their financiers “have humanity by the throat”. It triggered a reaction of the chair of the banking sector NZBA, underlining its autonomy and stating that “Race to Zero does not have the ability to impose requirements either on the NZBA as a whole or on individual members”.
The statement of Texas’ attorney general, Ken Paxton: “The last thing Americans need right now are corporate activists helping the left bankrupt our fossil fuel industry,” illustrates the explosive character of the matter.
The NZBA position is mainly determined by US banks threatening to leave the alliance. They are facing a sharp political controversy in the USA. A group of US State Attorneys General, have filed civil investigation requests into the country’s six largest banks, alleging that their environmental, social and governance practices harm the American energy industry. The statement of Texas’ attorney general, Ken Paxton: “The last thing Americans need right now are corporate activists helping the left bankrupt our fossil fuel industry,” illustrates the explosive character of the matter. It is part of a campaign of Republican-led states issuing “anti-woke” laws targeting banks, but also asset managers such as BlackRock for allegedly harming the interests of the energy industry.
NZBA represents roughly half of the assets included under the GFANZ umbrella. So, in the latest Progress Report the Alliance had to loosen its ties with the Race to Zero initiative. Whereas in the 2021 Progress Report GFANZ insists that all members had to align with the Race to Zero requirements, in the 2022 report it merely asks to “take note of the advice and guidance” of Race to Zero, alongside other bodies. At the same time civil society criticism of FGANZ is rising. A number of NGOs submitted a report to the World Economic Forum 2023 in Davos claiming that 229 of the world’s largest fossil fuel developers received finance from the 161 GFANZ members covered in the report, which will support them to develop new coal power plants, gas fields, mines, ports and other infrastructure.
Paraphrasing what chairman and chief executive of BlackRock Larry Fink said about the company, you could say “the financial services industry cannot be the environmental police”.
Is GFANZ a mistaken concept? According to Nobel Prize winner William Nordhaus, international climate agreements have been based on a flawed model on how they should be structured: “the central flaw has been to overlook the incentive structure. Because countries do not realistically appreciate that the challenge of global warming presents a prisoner’s dilemma, they have negotiated agreements that are voluntary and promote free-riding — and are thus sure to fail.” Nordhaus’ position is very firm and radical. And of course, there is evidence of many GFANZ participants trying to adhere to the agreed principles and standards, and eventually developing successful business cases. But if, for reasons of political pressure, methodological loopholes, opportunistic free-riding and greenwashing and the absence of important players, you are not able to establish a level playing field, GFANZ could turn out to be not too big to fail, but too big to succeed.
The future of our planet should not be in the invisible hands of the market, but shaped by the international political community and its institutions.
But let’s not end the story here. Indeed, the future of our planet should not be in the invisible hands of the market, but shaped by the international political community and its institutions. However, the perspective of this happening is rather gloomy.
We have to be aware that GFANZ represents only part of the financial system. Notably absent from GFANZ membership are the world’s four largest banks; Chinese banks that are all major providers of financing for fossil fuel projects; all Russian and Indian banks; and eight of the largest US asset managers, as well as a number of private equity firms and the growing shadow banking system. The authority of the most universal and settled international framework, the United Nations, turns out to be very limited, given the counterproductive effects of the tougher Race to Zero policy. The geopolitical situation with the escalating tension between the main actors on the world political arena and the related instability of the energy markets mean that we are looking at a perfect storm unfolding, rather than at the dawn of a new era, as far as the generation of robust global environmental solutions are concerned.