Several major U.S. banks, including Morgan Stanley, Citigroup, and Bank of America, have recently announced their departure from the Net-Zero Banking Alliance (NZBA). This global coalition was established to help financial institutions align their lending and investment portfolios with the Paris Agreement’s climate goals.
However, this wave of exits highlights the growing tension between climate commitments and political pressures, particularly in the U.S.
A Retreat from Climate Commitments: U.S. Banks’ Bold Move
The NZBA, launched in 2021 under the umbrella of the Glasgow Financial Alliance for Net Zero (GFANZ), committed its members to achieving net-zero greenhouse gas emissions by 2050.
The alliance required banks to set interim targets, reduce emissions associated with their portfolios, and report progress transparently. It also encouraged funding for projects like renewable energy and reforestation to offset emissions.
By 2023, the NZBA had gained significant traction, with over 100 member banks collectively representing 40% of global banking assets. This made it a key player in mobilizing financial resources for the transition to a low-carbon economy. Yet, political and market dynamics have increasingly complicated these ambitions.
Political Backlash and Legal Challenges
In the U.S., political opposition has intensified against net-zero initiatives. Republican-led states have accused financial institutions of prioritizing climate goals over economic interests.
In November, Texas and 10 other states sued major asset managers like BlackRock, Vanguard, and State Street, alleging antitrust violations tied to climate activism. These lawsuits argued that such actions limited fossil fuel financing, reduced coal production, and raised energy prices.
This political climate has pressured banks to distance themselves from alliances perceived as restrictive or politically charged. Morgan Stanley, Citigroup, and Bank of America’s decisions to exit NZBA follow earlier withdrawals by Goldman Sachs, Wells Fargo, and others, citing similar concerns.
So, What Now After the Exit?
Despite leaving the NZBA, these banks remain committed to their sustainability goals. Morgan Stanley reiterated its pledge to report on interim financed emissions targets for 2030, emphasizing its continued support for clients transitioning to greener practices.
The bank has committed to achieving net-zero financed emissions by 2050. To support this long-term objective, Morgan Stanley has set the following 2030 targets for major emitting sectors:
The firm plans to collaborate with clients to develop and implement strategies that facilitate the transition to a low-carbon economy. Additionally, Morgan Stanley emphasizes the importance of transparent reporting and has committed to disclosing its progress toward these goals regularly.
Citigroup also noted its progress on independent net-zero goals, while Bank of America stated it would continue working with clients to meet their sustainability needs.
Citigroup has pledged to achieve net-zero greenhouse gas (GHG) emissions by 2050, including both its operations and the emissions associated with its financing activities. As part of this commitment, Citi aims to decarbonize its own operations by 2030.
The bank has developed a Net Zero Framework that includes:
- calculating baseline financed emissions for carbon-intensive sectors,
- identifying appropriate climate transition pathways,
- setting emissions reduction targets for 2030 and beyond, and
- implementing strategies through client engagement.
Similarly, Bank of America remains committed to achieving net-zero GHG emissions across its financing activities, operations, and supply chain before 2050. To support this goal, the bank has set interim targets for 2030, focusing on reducing emissions in key sectors such as auto manufacturing, energy, and power generation.
- Their strategy includes mobilizing $1 trillion by 2030 through their Environmental Business Initiative to accelerate the transition to a low-carbon, sustainable economy.
Additionally, Bank of America achieved carbon neutrality in its operations in 2019 and continues to work towards making its operations more sustainable.
These approaches reflect a strategic balancing act among major bankers. On the one hand, these institutions seek to maintain credibility as leaders in sustainable finance. On the other, they aim to avoid political and financial risks that could arise from their association with climate-focused alliances.
Broader Challenges Facing NZBA
The challenges confronting NZBA extend beyond political opposition. Questions about the availability and quality of carbon credits, critical for offsetting emissions, have raised concerns about the alliance’s effectiveness. Ensuring that credits meet stringent environmental and social standards is essential to maintaining the credibility of net-zero commitments.
Operational complexities also pose difficulties. For instance, NZBA requires members to harmonize emissions reporting and reduction efforts across diverse portfolios and jurisdictions. This has led to administrative bottlenecks and slowed progress in achieving interim goals.
Another challenge is the perception of double regulation. Flights between the UK and the European Economic Area (EEA), for example, face overlapping compliance requirements under both CORSIA and local emissions trading schemes.
Similarly, banks must navigate overlapping climate regulations across multiple frameworks, further complicating their compliance efforts.
GFANZ’s Evolving Role
The Glasgow Financial Alliance for Net Zero (GFANZ), which oversees NZBA and other sectoral alliances, has adapted its strategy in response to these challenges.
GFANZ announced it would no longer require financial institutions to join specific alliances to benefit from its guidance. Instead, it will focus on addressing critical gaps in data, investment, and public policy to accelerate the transition to net zero. The Alliance stated in a statement that it has:
“achieved its initial goal of developing the building blocks of a financial system capable of financing the transition to net zero.”
This shift aims to unlock over $5 trillion annually to modernize energy systems and decarbonize economies globally. By prioritizing actionable investments and public-private partnerships, GFANZ hopes to sustain momentum despite recent defections.
But What Does it Mean for Sustainable Finance?
The exits from NZBA signal broader uncertainties in the sustainable finance sector. While financial institutions recognize the importance of addressing climate risks, they face competing pressures from stakeholders with differing priorities.
Investors demand accountability on climate goals, yet political forces challenge these commitments, particularly when viewed as detrimental to traditional industries like fossil fuels.
Moreover, the scaling back of collective initiatives like NZBA could slow progress in mobilizing the trillions of dollars needed for the low-carbon transition. Without unified frameworks, banks may pursue fragmented approaches, reducing the overall effectiveness of global climate action.
Opportunities And the Road Ahead for Net Zero Banking
Despite these setbacks, opportunities remain for financial institutions to lead in sustainable finance. By leveraging innovative tools like sustainable bonds and green loans, banks can support decarbonization while mitigating political and financial risks.
Moreover, investing in renewable energy, sustainable agriculture, and emerging carbon capture technologies offers pathways to align profitability with climate goals.
The exits of major U.S. banks from NZBA highlight the delicate interplay between climate ambition and political realities. While these developments may slow collective action, they also underscore the need for adaptable strategies to sustain progress. By addressing challenges proactively, the financial sector can continue to play a pivotal role in the global transition to a sustainable future.
