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June 22, 2023

What does the future hold for Gfanz?

Mark Carney, former Bank of England governor and now UN special envoy for climate and finance, at the Net-Zero Leadership Summit in Ottawa, Canada in April 2023. Carney announced the creation of Gfanz in 2021. (Photo: David Kawai/Bloomberg)
Mark Carney, former Bank of England governor and now UN special envoy for climate and finance, at the Net-Zero Leadership Summit in Ottawa, Canada in April 2023. Carney announced the creation of Gfanz in 2021. (Photo: David Kawai/Bloomberg)

Can the Glasgow Financial Alliance for Net Zero keep things together, when its various associations are fast losing members?

The attempt to unite the investment community under one net zero transition umbrella appears to be coming under pressure. While the Glasgow Financial Alliance for New Zero is pushing on with initiatives in its role as overarching body, membership at its sub associations is dwindling, with political interference and unrealistic expectations of what such alliances can achieve among the reasons being given.

Members of Gfanz – which was unveiled in 2021 by former Bank of England governor Mark Carney – also belong to sub-groups from different financial sector areas, such as asset management, institutional investment and insurance. The Net Zero Asset Managers initiative, for example – launched in December 2020 by a coalition of investor groups – now has 301 signatories and $59tn in assets under management.

Meanwhile, the UN-convened Net-Zero Insurance Alliance, Net-Zero Asset Owner Alliance and Net-Zero Banking Alliance, and the alliances grouping financial service providers and investment consultants seek to achieve similar objectives for their signatories.

All prospective members of these sub-groups are expected to sign pledges that have varying commitments including a commitment to work with different actors across the financial system, such as regulators and proxy advisers. These charters include the setting of interim targets, with NZAM members expected to commit to CO₂ reduction by 2030 in line with requirements set out by the Intergovernmental Panel on Climate Change.

Member exodus

Support for Gfanz and its sectoral alliances seems to be wavering, however. “It’s got very noble aims, but there obviously are some challenges with it,” Rebecca Palmer, ESG director at asset management advisory firm Waystone Group, tells Sustainable Views.

A prime example was passive investment giant Vanguard dropping a bombshell at the end of 2022, when it announced it was leaving NZAM. This was to “provide the clarity our investors desire about the role of index funds and about how we think about material risks, including climate-related risks” and to ensure the independence of its voice on what matters to investors, Vanguard said at the time.

In April, it was followed by US manager Green Century Capital Management. According to Will Martindale, co-head of sustainability at consultancy Cardano: “The challenge that some of the larger, and particularly US passive, managers are having to accommodate is a divergent client base. There tends to be a view among some parts of the US institutional investment market that it’s for government to solve problems and for investors to make returns, and that those two things don’t go together. 

“There’s a clearer view in other parts of the US investment market and parts of Europe and the UK, that in order for investors to meet their return obligations, they need to understand and unpick some of these broader societal challenges, like climate change,” he tells Sustainable Views. 

US managers are having to manage clients across these competing views, Martindale adds. “I think that’s potentially forcing some of them into a decision [to rethink their membership].”

Asset managers face due diligence questionnaires from prospective investors, some of which ask whether they are NZAM members. Investor relations teams will urge managers to become signatories in order to secure big-ticket investment mandates, Waystone’s Palmer observes.

“The danger is that there’s not enough thought that goes into joining some of these alliances,” she says, referring to the commitments that such memberships entail.

Big exits

Departures from Gfanz alliances have not been limited to the asset management space. Last year, pension funds Cbus and Bundespensionskasse became the first NZAOA members to quit their group.

The exodus among insurers has been even more profound. The NZIA has lost more than half of its members this year, falling from 30 members to 12 in June. Former chairs Axa and Allianz are among those to have left.

The departures may be in response to pressures faced from anti-ESG voices. In May, the NZIA was targeted by a letter signed by US state attorneys-general, who challenged the legality of the initiative and accused it of advancing an “activist climate agenda” at a cost to their constituents. The letter also hit out at ESG-focused restrictions on asset managers.

“These political attacks are now interfering with insurers’ independent efforts to price climate risk, which will harm policyholders, main street investors and local economies,” a Gfanz spokesperson says. “Despite these political headwinds, we will continue to support insurers’ efforts to manage climate risk and develop transition plans.”

Most members that have left the sector alliances have remained in Gfanz itself. But ShareAction EU policy officer Caroline Metz tells Sustainable Views that recent exits from the NZIA were “another proof that those types of industry initiatives are very much far away from delivering what they should be delivering on, which is to align the sector with the needs of our planet and its people”.

‘Low bar for entry’

In January, the NZIA launched a new protocol for setting climate targets to coincide with this year’s Davos conference. It is aimed at helping members set intermediate targets for their portfolios as part of the path to limiting the global temperature rise to 1.5C by 2100, with a deadline of the end of July.

But insurers and insurance marketplaces have been criticised for their failure to align with the Paris Agreement and their continued underwriting of fossil fuel activities. The sector remains exposed to fossil fuels despite research pointing to high risks and increased premiums as a result of climate change.

“We have always thought that the [insurance] initiative had a low bar for entry and no accountability mechanism for its members, which was a problem, and meant that many of the members continued to underwrite and invest in risky projects, such as fossil fuel projects,” Metz says. 

NZAM, meanwhile, has been monitoring the number of asset managers to have published initial targets for their proportion of assets managed in line with reaching net zero by 2050 at the latest. As of November 2022, this had risen to 169 managers, up from 83 managers in May that year.

Eleanor Fraser-Smith, head of sustainability at Victory Hill Capital Partners, a NZAM signatory, says the alliances remain important. The net zero commitments permit investment in so-called hard to abate sectors such as steel, cement and petrochemicals, helping managers “increase the proportion of investments that can be managed to net zero over time”, Fraser-Smith tells Sustainable Views,

“These alliances are therefore essential to keep the sector moving towards the Paris Agreement goal as they provide the forum for collaboration and emerging practices. To achieve net zero, business strategies and operating practices need to adapt and change,” she adds. “Passive investors will struggle with this.” 

An ESG head at one asset management company, who did not wish to be named, says most asset managers “including us” would agree with the spirit of NZAM.

Reset needed

Despite the uncertainty surrounding the membership of its sector alliances, Gfanz continues to be active. In June, its Asia-Pacific network opened a consultation over voluntary guidance designed to help phase out coal-fired power plants in the region. 

A Gfanz spokesperson says: “The transition to net zero will not happen overnight and a lot of work needs to get done before we get there – which is exactly why Gfanz was created.”

Some industry observers believe, however, that expectations over Gfanz’s impact may have been unrealistic. “We need to be honest about what these alliances can and can’t do,” says Oxford Sustainable Finance Group director Ben Caldecott. “Gfanz is important, but it can’t do everything. It is not the panacea to the global financial system; it is not going to mobilise the funding and then finance everything that’s needed for decarbonisation.

“There has been perhaps too much hype around Gfanz, and over-promising, and over-committing, that it’s inevitable, of course, that it doesn’t meet those over-extended expectations,” he adds. However, “Gfanz has got an important role to play” in terms of emphasising the sharing of best practices and ratcheting up ambitions on climate, says Caldecott.

A reset of expectations over Gfanz, as well as what it truly means to be a responsible investor, may be necessary. “Responsible investing understanding its limitations is welcome,” says Cardano’s Martindale. “Responsible investment has to mean something. It is forcing us as investors to fully understand the implications of what these groups are working towards and what that means for our ability to manage money on behalf of our clients.”

“Some investors have decided that these commitments are coming into conflict, and have therefore decided that these initiatives are not for them,” he adds.

A Gfanz spokesperson says: “Gfanz is developing tools and resources designed to support financial institutions as they implement net-zero commitments and track progress against those commitments, driving transparency into how they are financing the net zero transition.

“The private sector can only go so far. Ultimately, governments need to act to truly catalyse climate action. Voluntary initiatives certainly will play an important role in the net zero transition, but there is no substitute for effective government action.”

A NZAM spokesperson says: “NZAM’s overarching aim is to provide a framework to allow its signatories to align their AUM with net zero by 2050. This mission is part of a multi-decade process to allow the industry to realise fundamental change, and will set the stage for investors to continue to deliver returns well into the future, as part of a sustainable transition to net zero.

“NZAM is at the very start of that long-term process and has already secured unprecedented cohesion and commitment from across the global investment industry on this vital topic. Ultimately, the success of the initiative should be judged over these long-term horizons.”

NZIA has been contacted for comment.

A service from the Financial Times