Here is what you need to know as the Mark Carney-founded group waters down commitment to Race to Zero criteria.
The Glasgow Financial Alliance for Net Zero was launched in April last year and by the time COP26 kicked off in Glasgow six moths later, it had gathered the support of 450 companies, committing their $130tn assets to the green transition.
The initiative was spearheaded by former Bank of England governor Mark Carney (pictured) and launched in partnership with the UN-backed Race to Zero campaign “to coordinate efforts across all sectors of the financial system to accelerate the transition to a net-zero global economy”. Membership to Gfanz meant adherence to Race to Zero criteria, which requires members to “phase out development, financing and facilitation of new unabated fossil fuel assets”.
What happened
On Thursday, less than two weeks before COP27, Gfanz published a progress report. In it, it listed various achievements including the launch of regional networks in Africa and Asia-Pacific, and the fact that the group now counts on over 550 members from over 50 jurisdictions.
It also highlights the governance and structure of the organisation, which brings together seven sectorial initiatives including the Net Zero Asset Managers initiative and the Net-Zero Banking Alliance. Financial companies sign up to one of these alliances to become members of Gfanz.
On page 3 (slide 14) of the report, Gfanz highlights that the alliances “are independent initiatives subject only to their individual governance structures” with “distinct governance and accountability frameworks”, which the alliances have “sole responsibility” for managing.
It also says that, in the future, the alliances “will continue to evaluate and update their membership criteria, as and when the science, technology, and policy contexts evolve, in a manner that is consistent with the diverse economic, legal, and regulatory contexts in which the signatories operate.” And that they “will take note of the advice and guidance of” the Race to Zero campaign.
Race to Zero criteria have now become advice, rather than a membership requirement. In a statement Gfanz confirmed that now “member alliances are encouraged, but not required, to partner with the Race to Zero”, as reported by Reuters.
Ahead of the progress report, earlier in October, NZBA steering group chair Tracey McDermott had published a letter clarifying that neither Gfanz nor Race to Zero have the ability to force decisions or impose requirements on NZBA members.
The build-up
In September, there had been reports of US banks like JP Morgan and Morgan Stanley growing increasingly uncomfortable with how their membership to Gfanz (and, therefore, the adherence to the Race to Zero decarbonisation requirements) would expose them to legal risks, as reported by Bloomberg.
One senior executive at a US bank said: “I am close to taking us out of these global green commitments – I’m not going to allow third parties to create legal liabilities for us and our shareholders. It is immoral and irresponsible,” according to the Financial Times. “What if we get it wrong, make a mistake or someone lies? Then the bank can be sued, that is an unacceptable risk.”
Others have taken banks’ concerns with scepticism. “The excuse of ‘concerns around’ legal issues is a diversion and an insult to the informed,” said Johnny Mulligan, founder of ESG consultancy The Martello Advisory, in a social media post at the time. He added that banks’ “calculations are based on the cost of stranded assets and the loss of capital returns from coal”.
The FT also reported that the Race to Zero campaign had weakened its requirements for members to “restrict the development, financing and facilitation of new fossil fuel assets” by omitting the explicit mention of a “no new coal” guidance after resistance from some Gfanz parties and legal advice that the binding language could breach competition law.
In the US, anti-ESG sentiment has been mounting in recent months. More than 20 Republican states including Texas, West Virginia and Utah have either taken or have threatened action against financial institutions that espouse policies to reduce greenhouse gas emissions.
Most recently, Missouri announced it was pulling funds from the world’s largest asset manager and Gfanz member BlackRock, with Missouri’s attorney general also leading a coalition of 19 states investigating six large banks because of their membership of the NZBA.
Earlier in October, Louisiana said it is to divest all of the $794mn it held in BlackRock funds by the end of the year and state treasurer John M. Schroder wrote to the investment firm saying that its “blatantly anti-fossil fuel policies would destroy Louisiana’s economy”.
The Race to Zero criteria
The Gfanz website still lists the Race to Zero criteria members are/were expected to follow. In fact, as of Monday morning, it said: “All members commit to the following UN Race to Zero criteria through their sector-specific alliances”. These are:
- using science-based guidelines to reach net-zero emissions across all emissions scopes by 2050;
- setting 2030 interim targets that represent a fair share of the 50 per cent decarbonisation required by the end of the decade;
- setting and executing on a net-zero transition plan;
- transparent reporting and accounting on progress against those targets;
- adhering to strict restrictions on the use of offsets.
The Gfanz progress report says that the organisation and its sectorial alliances will continue to engage regularly with Race to Zero as well as with the UN Climate Change High Level Champions and relevant international bodies including the UN Framework Convention on Climate Change, the Intergovernmental Panel on Climate Change, the International Energy Agency, the G20 and its Sustainable Finance Working Group, the G20’s Financial Stability Board, the Network for Greening the Financial System, and the UN’s High Level Expert Group on Net Zero.
Does the change matter?
The move is at the very least symptomatic of the challenges of global coordination when it comes to the green transition. Some view it simply a triumph of short-term financial interests over scientific advise.
“Clearly [Gfanz] are giving in to their Wall Street members who have been reported as threatening to quit the alliance if they are expected to actually pull back on their finance for fossil fuels,” said Paddy McCully, senior analyst at environmental campaign group Reclaim Finance.
He added that “in reality, regardless if any ‘net-zero’ or ‘1.5-aligned’ alliance or financial institution commits to following the Race to Zero criteria, the credibility of its climate policies will continue to be judged against these criteria, and in particular on their continued financing for companies expanding the supply of fossil fuels. Banks and investors cannot wish away the terrifying math of the global 1.5C carbon budget which has zero room for any new coal mines or oil and gas fields.”
Financial companies, however, have also left Gfanz because of lack of resources to deal with the organisation’s data tracking and reporting requirements. Pension funds Cbus Super and Bundespensionskasse became the first to leave the alliance earlier this year citing such issues, according to the FT. Australia’s Cbus was a member of the Net Zero Asset Owner Alliance and Austria’s Bundespensionskasse was a member of the Paris Aligned Asset Owners group, both of which are part of Gfanz.