How the banking net zero fantasy ran out of gas
Over the past year, the world’s biggest banks‘ net zero enthusiasm has quickly and quietly dried up.
Top lenders have backtracked, diluted or outright abandoned their environmental, social and governance (ESG) policies.
The return of President Donald Trump has been highlighted as a turning point for green finance with firms across the financial industry turning sour on ESG commitments.
Trump has made no secret of his disdain for such policies, branding ESG investing as a “way to attack American business”.
The President, who ran for office on the motto “drill baby drill”, moved quickly to withdraw the US from the Paris Climate Agreement with his bullish attitudes triggering firms to follow suit.
Net zero club gets Trump’ed
The Net Zero Banking Alliance (NZBA) has been crushed under the mass withdrawal on ESG commitments, with the group announcing at the end of August it would pause activities to review its structure.
Wall Street giant Goldman Sachs announced in the month after Trump’s election win it would exit the group, which was convened in 2021 by the UN Environment Programme finance initiative.
Just months later in January, JP Morgan’s sealed a Wall Street exodus after Citi, Bank of America, Morgan Stanley and Wells Fargo all quit the group.
The exits of The Royal Bank of Canada, Bank of Montreal and Toronto-Dominion Bank at the end of January erased the fingerprint of North America on NZBA.
The ripple effect has spread to London, where HSBC and Barclays both ditched the club over the last month.
Barclays, whilst reiterating ambitions to become a net zero bank by 2050, argued the group “no longer has the membership to support our transition”.
A spokesperson for NZBA told CityAM the group “remains focused on supporting the many banks that are leading this transformation” despite the mass exodus.
They added amid a changing climate to environmental policies the “need for bold, resolute action from the banking sector has never been greater”.
Banks’ climate policies melt under heat
Maia Mesanger, sustainable finance research senior associate at BloombergNEF, told CityAM: “Although financial institutions are reconsidering their climate goals, the concrete implications of the journeys they started will likely continue to progress.”
She said the consideration of “climate risk” in investing and lending was contingent on policymakers continuing to “enforce such practices”.
But Scott Lane, founder and chief executive of ESG business solutions service Speeki, told CityAM: “it’s easy to blame Trump’s anti-ESG crusade” for the retreats but argued the real issue was internal.
“The biggest factor behind the scrapping of these initiatives is that they were half-baked and never given the chance to demonstrate value to shareholders and customers,” he argued.
In February, HSBC slapped a 20-year delay on its net zero target, which followed the bank shelving plans to build a dedicated carbon credits desk.
Barclays and Natwest have also dropped their climate goals from bonus schemes for senior executives, arguing it would better reflect the lender’s long-term climate goals.
And in March Lloyds Banking Group watered down its net zero pledge that prohibited bankers’ long-haul flights.
Lane said: “Banks and the like made micro improvements, set far-flung net-zero goals, and ran empty marketing campaigns based on promises – and no one felt any tangible business value from them.”
This echoed calls from Aberdeen chair and former HSBC chairman Sir Douglas Flint, who told a City conference earlier this year the financial services industry had made a “huge mistake” in ESG investing.
“It became a marketing thing,” he said, “let’s tell everyone we’re saving the world, we’re saving the planet”.
Banks trim the green
The row backs from the City’s banking giants come as top bosses look to slash costs across operations.
Barclays’ CS Venkatkrishnan, known as Venkat, is in the middle of a three-year plan that targets a reduced reliance on the lender’s investment bank, which made up over 50 per cent of its first-quarter income.
Meanwhile, HSBC’s Georges Elhedery has spent his near-12 months since taking the helm at the lender deploying strategies to reduce expenses, namely a significant scaling down of European operations.
Lane said investors will be eying failed ESG investments that have not materially benefitted the company.
“[Banks] spent a bit of money, wasted some time here and there, and kicked the can down the road,” he said.
“Now, shareholders are demanding to know why money is being spent on unproductive initiatives”.
Bill Winters, boss of Standard Chartered, scorned his banking peers last month for only speaking about climate issues when it was “fashionable”.
“Shame on them,” the FTSE 100 chief said, though did not name specific firms.
But a report from the UK banking regulator in April revealed the industry was battling an uphill battle to meet commitments.
The Prudential Regulation Authority’s (PRA) report said it observed a “common challenge among firms” in the “complexity involved in constructing and implementing CSA (climate scenario analysis)”.
It added they face difficulty in “using the outputs from CSA to assess their overall exposures to climate-related risks”.
“Data remain a significant challenge” the PRA said, with firms struggling to access information “on both climate projections and the data necessary to link those to their asset and lending portfolios”.
This included the likes of location data that without, banks were unable to effectively evaluate their exposure to physical climate risks, such as floods, heatwaves, or wildfires, which are tied to specific geographical areas
Cloudy ahead
A global index ranking from Z/Yen showed the world’s leading financial hubs were ditching ESG policies.
It marked the second consecutive report where almost all of the top ten hubs had their green finance rating slashed by double digits.
In the latest release London, despite topping the rankings, lost 36 points.
A report from business information system CRIF in June revealed over half of UK senior financial professionals believe their leadership will place less focus on environmental, social and governance (ESG) policies in the coming years.
Lane said the “inconvenient Trumpian political headwinds, and financial services executive who want to stay in his good books” along with the desire to appease shareholders through cost-cutting had provided a “good excuse to drop sustainability from the agenda”.
Though, should the political pendulum swing so ESG once more becomes “fashionable”, Bill Winters may be welcoming his peers back to the club.