The Net Zero Banking Alliance is worth saving

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Almost since their inception, financial sector climate alliances have grappled with the tension between maintaining high standards and keeping members on board.

Now the main banking sector climate group is looking to weaken its requirements, to stem a recent rush of departures. Read on for my take, and let us know yours at moralmoneyreply@ft.com.

net zero banking alliance

A question of ambition vs pragmatism

Mark Carney, the former central bank governor who oversaw a boom in financial sector climate collaboration back in 2021, has other things on his mind these days. Since being anointed on Sunday as Canada’s incoming prime minister, Carney is focused on rallying his compatriots against Donald Trump’s attempt to “destroy our way of life”.

Meanwhile, the climate alliances that Carney nurtured have been going through a rough time — notably the Net Zero Banking Alliance, which has suffered the departure of all its major US members following Trump’s election win.

Now the NZBA is proposing a strategic shift that will look to many like a serious lowering of ambition. But even if the change goes ahead, the body may still have a valuable role to play in global climate action.

Shifting the goalposts

Currently, NZBA members must pledge to reduce the carbon emissions attributable to their financing to align with a scenario of net zero global carbon emissions by 2050, and global warming this century no greater than 1.5C.

This is stronger language than governments agreed to in the 2015 Paris Agreement. That text contained a commitment to “holding the increase in the global average temperature to well below 2C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5C above pre-industrial levels.”

Under the proposal distributed to them yesterday ahead of a vote, NZBA members would be expected to align with the Paris Agreement goals, but the requirement to align with a 1.5C scenario would be removed.

This is a “dangerous” move, argued Lucie Pinson, the executive director of non-profit group Reclaim Finance. “We need to remain very strong on asserting that we need to avoid the worst impacts of climate change. And this means limiting global warming to 1.5C.”

Pinson’s argument has some merit. Even if the wider economy is far from a 1.5C trajectory — the world passed that level of warming last year amid an El Niño event, and scientists say a permanent breach may now be inevitable without very radical global action — a high-ambition group of banks aligning their work with this goal could serve as a useful benchmark and example for others.

The case for the defence

But there are also some decent arguments on the other side. The disappointing pace of government action since the NZBA’s formation — even before Trump’s return to power — has been making it progressively more difficult for major banks to keep their portfolios aligned with the 1.5C goal without retreating from many of the business sectors they serve.

“It’s impossible to avoid the reality that all of this has got way harder,” one member of the NZBA steering group told me. Sticking to the 1.5C rule could well lead to many more banks following the US giants towards the exit.

But perhaps the best argument for a more flexible approach is around the participation of banks from developing nations.

There’s been an increase in the number of NZBA members from those countries in recent years, but they still account for only a third of the total. And banks from developing countries have found it harder to comply with the NZBA’s membership requirements, according to its latest progress report. Of the banks that had not set emissions targets covering carbon-intensive sectors they lent to, nearly all were from those nations.

In part, that’s because it can be more difficult to obtain the relevant data in lower-income countries. But it’s also clearly related to the pace of the transition in those economies. Demanding the same central goal from a bank in India or Indonesia, which have a 2060 net zero target, as for one in Germany, with a 2045 net zero target, may prove counter-productive. The NZBA still doesn’t have a single Indian or Indonesian member.

Looking ahead

The NZBA’s proposed new strategy will include a renewed focus on constructive engagement with governments around climate policy — an area that arguably got too little emphasis from these alliances in their early days. Members would also do well to consider a closer focus on scaling up green finance, which has so far been overshadowed by the focus on reducing portfolio emissions.

In its progress report, the NZBA noted that “how banks classify ‘green,’ ‘transition,’ or ‘sustainable’ activities is complex and highly fragmented.”

It added:

Banks have a diverse range of approaches to setting green and sustainable financing targets using different target metrics, timelines, sectors and sub-sectors, client segments, and other classifications. This makes such targets difficult to meaningfully aggregate.

This was mentioned almost in passing — but addressing this confusion, and sharing best practice around the expansion of low-carbon financing, is precisely the kind of area where these alliances can add real value.

Meanwhile, academic studies have raised questions about the impact of bank pledges to reduce their financed emissions, which has so far been the NZBA’s main focus. One recent study found that European banks with climate commitments made no significant change in their lending practices relative to peers with no green pledges. Another found that even when banks did reduce lending to high-emitting companies, this did not cause a reduction in those businesses’ emissions.

The efficacy of constraining finance to high-emitting sectors is a topic of debate that will run for a long time yet. But as clean tech companies around the world struggle to gain access to finance, it’s hard to deny that banks could meaningfully strengthen their climate credentials by lending them more support — a subject that deserves more concerted attention from the NZBA.

The exit of the big US banks (along with two banks from Japan and Australia) has clearly dealt the NZBA a blow, reducing the total assets of its members by 22 per cent, according to analysis by ABN Amro. But it still retains over 130 members with more than $50tn in assets, from nearly every region of the world. As a forum for climate-focused collaboration and development of best practice around green finance, its most useful days may yet lie ahead.

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