Banks’ climate goals are falling like dominoes. HSBC has told investors to expect a rejigged energy strategy and climate targets in the second half of the year, while Royal Bank of Canada has dropped its sustainable financing target altogether and UBS has pushed back a target to cut its greenhouse emissions to net zero by a decade. Wells Fargo is no longer aiming for net zero by mid-century.
All these banks are, or have previously been, members of the UN-convened Net-Zero Banking Alliance, which launched in 2021. It is one of the major financial sector collaborations to have led the way on climate target-setting after the 2015 Paris accord, when almost 200 countries agreed to limit the global temperature rise to well below 2C and ideally to 1.5C above pre-industrial levels.
Last month, in a sign of how far the tide has turned against sustainable investing in the past four years, NZBA members voted to water down the standard they are held to for cutting emissions from their lending. They argued it was no longer realistic to align their portfolios with a world in which warming is limited to 1.5C.
“There was an assumption you can move the market purely by stewardship . . . that was perhaps over-optimistic,” says Nina Seega, director of the centre for sustainable finance at the Cambridge Institute for Sustainability Leadership.
A report published by the institute earlier this month argues that the financial sector should double down on embedding climate risks into core risk models and executive pay structures, rather than focusing only on more niche “green” products.
More stories in this report
It also highlighted the need for a regulatory environment that incentivises lending to, investing in and insuring clean energy and climate adaptation measures. But the idealised picture it paints of a climate-conscious financial sector could not be more different from the one taking shape under President Donald Trump in the US.
Since the start of the year, his administration has made cuts to the clean energy industry and science funding, and criticised attempts to invest in line with environmental, social or governance goals.
Investors pulled a record amount from “sustainable” funds in the first quarter of the year, according to data provider Morningstar, with US investors cutting their exposure to sustainable mutual and exchange traded funds for a 10th straight quarter. In the EU, in contrast, tougher rules on making sustainability claims in fund names are coming into force this month following the introduction of the UK’s own naming rules in April.
The bloc also has measures in place to make financing clean energy projects in the real economy attractive.
While policymakers in Brussels are still weighing whether to roll back aspects of the EU’s green rule book, the price of a tonne of CO₂ in the bloc’s compulsory carbon-trading scheme is expected to keep rising — which increases the cost of doing business for big polluters. Data provider BloombergNEF forecasts it will hit €177 per tonne of CO₂ equivalent in 2035.
“One reason it’s really difficult for massive global financial institutions is that you have European [regulators] driving them to do more sustainable things and the Americans driving them to go pretty much exactly in the opposite direction,” Seega says. “Those that have large US networks are going quite quiet.”
One sign of the turn against ESG investing is criticism of sustainability disclosures, which financial institutions have long argued were a prerequisite for taking action on climate change.
As part of a financial sector consultation closing next month, the International Sustainability Standards Board has proposed to scrap a requirement for financial institutions to report emissions from investment banking activities, such as underwriting a bond or helping companies list on a stock exchange.
Reporting on these emissions briefly became normalised last year. But the ISSB, which develops global standards for reporting on sustainability issues, in April cited “confusion” and disagreement about how to count them.
Some investors, and particularly pension funds and insurers with a longer time horizon, say they will stay the course.
“This is a systemic risk that threatens the very foundation of the financial sector,” Günther Thallinger, a board member at European insurer Allianz, said in a post about climate change on LinkedIn in March.
He warned about the risk of a “climate-induced credit crunch” as a result of homes, infrastructure, transportation, agriculture or industrial projects being so exposed to fire or flooding risk that they cannot obtain debt or insurance. “This is not a vague or future issue . . . Capitalism must now solve this existential threat,” Thallinger wrote.
The investment industry net zero group he leads, the UN-convened Net Zero Asset Owner Alliance, representing institutions such as pension funds, has not watered down its entry requirements and has only seen a handful of members departing, in contrast to an exodus from the banking equivalent, as well as high-profile departures from Net Zero Asset Managers, a separate group.
In response to the backlash against sustainable investing, some activist investors are changing tack. Rather than pushing financial institutions to divest from fossil fuels, they are asking for targets on financing the clean transition.
At Barclays’ annual meeting earlier this month, investors managing £1.36tn in assets, including Rathbones Group and the Church of England Pension Board, called for the bank to set a funding target for the renewable energy sector. Another investor called for Standard Chartered to publish a plan on how it will finance more renewable power in markets in poorer countries.
Kelly Shields, of the responsible investment campaign group ShareAction, which helped co-ordinate both of these efforts, says banks are “not yet providing a clear strategy on how they will specifically finance the sectors and technologies most needed for the clean energy transition and limiting the harshest effects of global heating”.
