should I stay, or should I go? UBS’s Net-Zero Banking Alliance dilemma

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The author is Professor of Sustainable Finance at Vlerick Business School in Brussels

Sergio Ermotti, chief executive of UBS, is facing a dilemma as he considers his bank’s future in a network created to drive global climate action but which has been left exposed since the re-election of US President Donald Trump.

Created in 2021, the Net-Zero Banking Alliance committed its members to “align lending and investment portfolios with net zero emissions by 2050”. Voluntary sustainability initiatives have however fallen out of favour, causing several major banks to quit.

As a founder member and one big enough to make a difference within the alliance, UBS is a good case study with which to explore the merits of staying in or leaving the NZBA.

One option for UBS (which declined to comment) is to remain and take a leading role in accelerating climate transition efforts. It could then help shape the future of the alliance, which still represents about 130 banks with $50tn in assets, liberated from the delays caused by departing American banks.

Climate initiatives also play a key role in managing reputational risk. While American banks face litigation threats for pro-climate policies, UBS could seize an opportunity to capture climate-aligned business.

The growing divide is already influencing decisions by clients. For instance, the People’s Pension fund recently shifted £28bn from State Street to Amundi and Invesco in order to prioritise sustainability.

Similarly, French banks attract less household deposits when they are known to finance fossil fuels. By staying in the alliance, UBS may be able to position itself as a leader in sustainable finance, appealing to clients who prioritise climate-conscious investment strategies.

This could enhance its reputation, attract much-needed ESG-focused capital, and strengthen long-term relationships with institutional investors seeking alignment with global sustainability goals.

The alternative path for UBS would be to follow in the steps of large US, Japanese and Canadian banks and leave the alliance.

As Ermotti put it in an interview with Bloomberg earlier this year, “the financial services industry is not the policeman of politicians,” highlighting that government action must be at least as effective as voluntary initiatives to ensure lasting impact. By leaving, the bank avoids bearing the burden of climate transition that should rest with governments.

In fact, business was never meant to lead the climate transition. Banks that find themselves decarbonising their portfolios at a faster pace than the rest of the economy risk facing profitability challenges, stranded assets, and client attrition.

In response, UBS has already delayed its net zero target by a decade, attributing the shift to its acquisition of Credit Suisse and the updated definition of a “net zero target” outlined in the European Union’s delegated regulation 2023/2772.

Increased policy uncertainty and limited effectiveness are key factors that could drive UBS to quit the coalition. This highlights a fundamental issue with sustainability targets: by focusing on regulatory thresholds and voluntary commitments, it risks neglecting deeper, more complex sustainability challenges.

The Goodhart’s Law adage states that “any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes”. In other words, when a proxy measure is adopted as a target, it often loses its effectiveness as a measure and becomes the primary focus.

By choosing to leave, UBS could instead decide to pursue a more focused, targeted sustainability strategy and adopt a more pragmatic approach to climate commitments.

The energy transition is in urgent need of financing and banks have a crucial role to play in actively shaping and supporting viable pathways for decarbonisation. A pragmatic approach may also mean that UBS can take steps towards climate resilience and adaptation, two acknowledged blind spots in the industry.

The NZBA may have been a good idea when the interests of banks, governments and regulators were aligned but it may be now too costly to maintain. Yet collective action remains essential to drive meaningful change, and stepping away from the coalition could risk undermining efforts to influence global climate policies.

Voluntary sustainability initiatives like the NZBA may offer a strategic response to the growing market segmentation driven by climate-conscious client preferences.

On the other hand, is this simply a case of rearranging the deckchairs on the Titanic? The ultimate challenge is whether UBS can contribute to meaningful action to mitigate climate change in a way that is both financially sustainable and environmentally responsible.