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The financial industry’s initial rush to commit to net zero carbon footprints at the 2021 COP26 summit in Glasgow has hit a reality check.

Banks that pledged to reduce financed emissions and invest billions in “green” and “sustainable” deals are re-evaluating their net zero commitments after facing the realities these drastic changes will have on their business.

A report by Bloomberg at the end of March highlighted the challenges faced by banks in meeting unrealistic climate goals while maintaining their client base.

The world’s biggest banks can’t live up to the green regulatory ideal unless they start dumping huge numbers of clients worldwide at a reckless pace and also roil economies in large swathes of the globe that primarily rely on dirty fuels. Faced with that dilemma, many lenders are quietly reeling in their climate ambitions,” Bloomberg wrote.

UBS banker, Judson Berkey, sparked controversy during a meeting in February hosted by the Financial Stability Board – a coordinator of global regulations – by arguing that banks cannot align with the ideal of green regulation due to the challenge of transitioning away from high-carbon assets.

“Banks are living and lending on planet earth, not planet NGFS,” Berkey told the group in an impassioned speech alluding to the Network for Greening the Financial System (“NGFS”), a collection of central bankers that creates model scenarios for how the energy transition may evolve.

The UBS banker’s outburst got little pushback from others in the meeting and exposed the cracks emerging in a multitrillion-dollar transition finance project. It also taps into what’s rapidly becoming one of the most contentious issues in the global banking industry. In private, senior bankers in sustainable finance divisions in London, New York, Toronto and Paris grumble about unrealistic expectations from regulators, civil society and climate activists around the industry’s role in getting the planet to net zero.

The standoff that’s brewing is setting the stage for a showdown at the heart of the environmental, social and governmental (“ESG”) movement. Banks play a crucial role in financing the transition to a greener economy but profitability remains a key factor. 

Banks that made net zero commitments are now reassessing their strategies and are having second thoughts as the real-world ramifications of acting on those pledges become painfully apparent. They are finding it difficult to align with net zero goals and cutting ties with high-carbon industries.

Commitments to net-zero goals would disqualify banks from doing business in coal-dependent countries such as South Africa, Poland and Indonesia.  And, not only do the commitments make it harder for banks to serve commodities clients like Glencore Plc, but even companies not always associated with heavy carbon footprints are ending up in the crosshairs such as technology company Nvidia Corp. and cosmetics giant L’Oreal SA, according to data compiled by Morningstar Inc.

Lenders are looking for ways to hold on to clients in an array of high-emitting industries spanning cement to shipping and aviation. Major banks, including Deutsche Bank, HSBC, and Bank of America are adding caveats to their restrictions on financing coal to protect their revenue.  In some cases, banks are even placing the financing of coal plants under an ESG banner.

However, some global banks and investors say continued ties with coal just aren’t worth the risk.

Published on 28 March, UBS’s sustainability report referred to a “notable shift in emphasis” in climate change discussions from net zero pledges to recognising the need for a transition phase. This follows BlackRock’s Larry Fink saying he will stop using the term ESG, a string of financial heavyweights withdrew from Climate Action 100+ and lenders, including HSBC, decided to withdraw applications to get their climate goals certified by the UN-backed Science Based Targets initiative.

Bloomberg noted that as banks balance the needs of their clients against their “green” commitments, veterans of global finance say they want regulators to be honest and acknowledge that progress on climate is slow and that without the right incentives, bankers won’t play the role expected of them.

Sources for this article include:

• ESG Frustration And Backlash In The Banking Sector Continues, Zero Hedge, 29 March 2024
• UBS Banker’s Frustration Exposes Cracks in World of Climate Finance, Bloomberg, 28 March 2024