Are voluntary climate commitments obsolete? The Trump Era tests the limitations of non-regulated climate goals.
An exodus of US banks from the Net Zero Banking Alliance (NZBA) has raised questions over the effectiveness of volunteer groups and whether more mandatory measures are needed to ensure countries reach their climate goals.
By early January, six major US big banks, including JP Morgan, had left the UN-sponsored alliance. Banks in other countries have also followed, with four Canadian banks announcing on Friday that they were also leaving the NZBA.
Another coalition, the Net Zero Asset Managers initiative, announced earlier this month that it was suspending its activities after BlackRock’s departure.
The banks did not give insight into why they left, but some analysts have suggested it may be due to concern about political backlash, as incoming US president Donald Trump is expected to oppose any green transition efforts. A Republican-led battle against ESG investing has been raging for years, with some states suing asset managers for taking ESG factors into account when managing retirement accounts.
The climate chilling effect of Trump’s arrival includes the US Federal Reserve pulling out of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) and a number of European asset managers following their US counterparts in “pulling back” on a public show of climate action. Many are, however, still quietly assessing risks and new regulations, fund managers, lawyers, and consultants told the media at the time of Trump’s inauguration.
Natasha Landell-Mills, head of stewardship at Sarasin & Partners, a UK asset manager, said: “The chilling effect from the increasing politicization of climate change in the US is certainly spreading to Europe and beyond. “The danger is that we end up harming ourselves and future generations by pulling back.”
Trump’s election is “an easy way out” for many, including American banks that don’t want mandated climate disclosure rules.
But Trump’s election is “an easy way out” for many, including American banks that don’t want mandated climate disclosure rules, said Paul Schreiber, a senior policy advisor at thinktank Reclaim Finance.
“They’ve been using those institutions [like the NZBA] for a few years to avoid additional regulation to shield them from reputational risk, and that at the end of the day … they are just exiting,” he said.
Schreiber added that regulations and mandates are needed, as even the best organizations do not matter if banks can leave at any time.
“We should be very careful when we think about the contribution of these associations to fighting climate change because the requirements to be a member of these associations are pretty, pretty low, you don’t really have any obligation [other than target setting],” he said.
Banks existing NBZA are “science and financial reality deniers”
Schreiber isn’t the only one skeptical of volunteer net-zero groups. A European Central Bank (ECB) research paper found that voluntary climate commitments may not be effective in reducing financed emissions.
In a statement, New York City Comptroller Brad Lander condemned the financial institutions for exiting the volunteer groups, calling it a “shortsighted, weak-kneed” decision that denies the reality of climate change.
“By absconding from their responsibilities to combat climate change, these financial institutions yield to the authoritarian tone set by the incoming Trump administration. They are, in essence, becoming science and financial reality deniers,” he said.
John Kostyack, a climate strategist, thinks collaborations like the NZBA are valuable only when financial institutions truly commit. He was not surprised when US banks announced they were leaving, as he says they have not been working on a trajectory towards net zero.
In the end, it was just a signal to Republicans that they were listening, “but it doesn’t change any actual behavior on the part of the banks.”
“By absconding from their responsibilities to combat climate change, these financial institutions are yielding to the authoritarian tone set by the incoming Trump administration. They are, in essence, becoming science and financial reality deniers.”
However, the US banks have not returned on their net-zero efforts, and Kostyack said he expects the big institutions will still have climate pledges as “it’s tough to be a global institution and ignore the fact of climate change.”
US banks may still need to publish transition plans and disclose their carbon emissions, as other jurisdictions like California and the EU make it mandatory.
“We’ve learned from the 2008 crash that voluntary oversight [and] self-oversight of the industry does not work,” said Kostyack. The fact that financial institutions continue to invest in fossil fuels, sending a market signal that they do not consider it a risk, is a regulatory failure, as “banks are just not willing to [consider climate risks] without more strict oversight,” he added.
Ben Cushing, campaign director at Sierra Club, said financial institutions need to phase out their fossil fuel investments to meet their net-zero goals. While the NZBA plays an important role, what matters are the policies companies set. He added that it is up to regulators and shareholders to hold banks accountable.
“If Wall Street banks acquiesce further to climate denier politicians and fail to follow through on their climate commitments, it will isolate the US on the global stage, and the enormous costs will fall upon our global economy, financial markets and vulnerable communities,” he said.
A spokesperson from the NZBA declined to comment.