GFanz eases fossil fuel rules to keep alliance together

The Glasgow Financial Alliance for Net Zero has relaxed its rules, so that the seven sectoral alliances within it will no longer have to be affiliated to the UN’s Race to Zero campaign.

The change, which was swiftly criticised by NGOs, follows reported unhappiness among banks that Race to Zero was pushing them to exit fossil fuel financing too fast.

The change will mean that any of GFanz's seven member alliances could, if it chooses, decide no longer to follow the guidance of Race to Zero. So far, none have dropped out.

A spokesperson for GFanz said it was moving to a “more technically oriented phase of work”.

“As part of this, GFanz member alliances are encouraged, but not required, to partner with the Race to Zero,” the group said.

This easing of requirements appears to be a way to release tension within GFanz and keep it together. It could reduce the pressure for either alliances or individual firms to pull out of GFanz.

While many leading banks and financial firms say they are committed to net zero, they are more reluctant to start cutting their supply of capital to the oil and gas industry and other heavy emitters right now. Sceptics among them see Race to Zero as too aggressive or object to its governance structure.

During the summer, several large US banks in particular were reported as grumbling about GFanz and Race to Zero and considering pulling out.

But environmentalists regard Race to Zero’s requirements as vital.

Jeanne Martin, head of the banking programme at ShareAction, the UK responsible investing NGO, said in a statement that the group was “extremely concerned” by GFanz’s decision. “This comes at a crunch point for the planet,” she said. “The [International Energy Agency] and UN agencies are calling for an immediate, rapid decline in fossil fuel supply and consumption to have any chance of preventing the worst impacts of climate change.”

Paddy McCully, senior energy transition analyst at Reclaim Finance, an NGO which campaigns for a greener financial system, in Oakland said the change mattered because Race to Zero was the main source of rigour in GFanz.

"We face an incredibly urgent situation," he said. "Every scientific body is shouting and screaming about how urgent it is that we take immediate action and we have this big financial alliance that is supposedly committed, but without Race to Zero all it is is promising to do something in the far future."

GFanz was set up in 2021 in the run-up to the COP26 climate change conference in Glasgow, as a broad drive to get as much as possible of the financial sector signed up to reducing financed emissions to net zero by 2050.

Mark Carney, former governor of the Bank of England, and media entrepreneur Mike Bloomberg led the push and successfully corralled 450 institutions with assets totalling $130tr into the alliance. In the past year another 100 have joined.

GFanz is an umbrella group that took in several existing sectoral bodies such as the Net Zero Asset Owners’ Alliance and Net Zero Asset Managers’ Initiative, but also brought new ones into being such as the Net Zero Banking Alliance and Net Zero Insurance Alliance.

GFanz itself acted as a cheerleader, encourager and coordinator, helping to pull organisations into the sectoral alliances, raise their profile and provide some kind of harmonisation between them.

The last element has proved problematic. All net zero commitments require more detail to be credible. How fast an organisation makes its transition to net zero is vital to determining whether its contribution to reducing emissions is ambitious or inadequate.

Working out which transitions are fast enough is a discipline still in the early stages of evolution. Organisations such as the Science-Based Targets Initiative and Transition Pathway Initiative have led the way in providing guidance.

But financial institutions are wary of committing themselves to externally determined programmes which could have serious financial implications, such as forcing them to back away from high emitting clients, or making it harder for them to win business from them.

To ensure that GFanz members observed a certain level of robustness in their commitments to climate change mitigation, each member alliance was required to be accepted as a member by the UN’s Race to Zero campaign.

This organisation, which goes beyond finance, also including companies, local government and educational institutions, is trying to encourage non-state actors of all kinds to get behind the net zero transition.

“All actors must meet stringent criteria,” says Race to Zero on its website, adding that members are “committed to halving emissions by 2030”.

McCully said that when the financial firms joined GFanz in 2021, "The Race to Zero was a very obscure, UN-affiliated body, with mainly cities and progressive businesses that were active in it. The financial sector didn't really know about it and didn't pay attention and read the small print. The small print said that if you join GFanz you need to align with Race to Zero and it will review its criteria every year."

The trigger for discontent was when Race to Zero reviewed and changed its criteria in June.

“One of the minimum requirements for members was changed to be the phase-out of all unabated fossil fuels,” said Jake Kroeger, a spokesperson for ShareAction, the UK responsible investing NGO. “The Race to Zero guidelines required members to lay out what they were going to do to achieve those new requirements in the next 12 months, two years, three years and by 2030. There needed to be an explicit plan with interim milestones.”

Members of the Net Zero Banking Alliance appear to have been particularly vocal in complaining about the new criteria.

Some objected, not just to their substance, but to the fact that Race to Zero had decided this policy and the NZBA therefore had to accept it, without having a say.

"Suddenly they noticed it and weren't very happy about it," said McCully. "At the same time in the US the attacks from the right wing on ESG investing had started, so financial institutions started to get very concerned."

Banks claimed there were legal difficulties for them in accepting the Race to Zero criteria. For example, some feared, if a group of banks together decided not to finance new gas infrastructure, for example, they could be accused of anti-competitive coordination.

"US institutions were concerned attorney generals in red states would launch antitrust actions against them, which even if they didn't have any merit, would not look good and could be a hassle to deal with," McCully said.

During the last few months there has been intense diplomacy behind the scenes as Carney and others tried to avoid the NZBA or GFanz falling apart, which would have sent a very depressing signal about how realistic it is to control climate change.

The solution GFanz has adopted is a compromise, and will not please everyone.

A source familiar with GFanz's thinking said the changes it had made responded to the fact that the financial sector was heavily regulated, and this had not been taken into account adequately in the original design of GFanz.

"[This] will enable GFanz members to benefit from the best of Race to Zero while also allowing them to reflect their legal obligations."

The changes would "help GFanz and the alliances reflect different regional contexts and legal obligations which are quite unique to the financial sector, to ensure they can continue to support net zero and the broader transition," the source said. "There is no established playbook of how financial institutions can achieve net zero. We always knew it would be challenging. This evolution is to help make sure the financial sector can keep working to transition."

All the seven alliances in GFanz are still members of Race to Zero. GFanz is still encouraging them to stick to it.

But after this rule change, they will now be able to make up their own minds.

"It's certainly possible some alliances will leave," McCully said. "The Banking Alliance is the most likely to, but some of the others are likely to make clear they remain committed to Race to Zero. There is a huge divergence between the alliances in the ambition of their commitments."

The Net Zero Asset Owners' Alliance is widely seen as the boldest and the most closely aligned with Race to Zero, partly because its members, mainly big insurance companies and some pension funds, feel they have clear mandates from their stakeholders to align their asset portfolios with net zero.

Among asset managers, some are cautious because of concerns about their fiduciary duty to make money for clients. BlackRock, the largest asset manager, has been widely criticised for talking impressively on climate change but not backing it up with action. The firm says it cannot take strong positions on climate unless customers explicitly ask it to, and more than half its assets are passively managed to track conventional benchmarks.

For banks, fear of being caught up in litigation or the culture wars over 'woke capitalism' are big obstacles.

But critics believe they also just do not want to stop making money from oil, gas and coal.

According to data collected by the Rainforest Action Network, in 2016, the year after the Paris Agreement was signed, the top 14 banks in financing fossil fuels each provided over $20bn to the industry, with a total between them of $431bn.

Five years later, in 2021, those same banks provided $414bn between them, just 4% less.

That aggregate figure hides substantial increases by some banks and decreases by others. Whether by accident or design, Deutsche Bank stands out for having consistently reduced its total, to now 43% of what it was in 2016.

But the major banks as a group are nowhere near halving their financed emissions by 2030, even just in the fossil fuel sector.

To halve the 2016 figure by 2030 they would have to cut by 7% a year starting in 2022. It is doable for a bank: Deutsche has reduced at about 15% annually since 2016. But the top cohort as a group have managed less than 1% a year.

In September, Jamie Dimon, CEO of JP Morgan, the biggest bank in fossil funding, was reported by Bloomberg as having told the US Congress "Investing in the oil and gas complex is good for reducing CO2."

There is much more to GFanz and the member alliances than just the Race to Zero criteria. On Thursday GFanz released its second annual progress report, a 60 page document full of detail on the work it and member alliances are conducting.

It said 114 asset managers, 40% of the NZAMI members, had set at least some interim targets for cutting emissions, as had 44 asset owners, 57% of the NZAOA, and 53 banks, 45% of the NZBA.

These targets do not yet cover all sectors or asset types.

GFanz and its more active member alliances are producing guides and advice for members on how to tackle decarbonisation.

Financial firms constantly complain about lacking adequate data for this work. GFanz is supporting the Climate Data Steering Committee which is recommending how to design an open source platform, the Net Zero Data Public Utility. A pilot is intended to be up and running by the end of 2023, with the help of financial data providers, governments and international organisations. It will ultimately be housed in the UNFCCC.

But at the centre of the GFanz effort is the voluntary determination of individual financial institutions to stop financing damaging pollution and pivot to clean technologies.

The language on this in the latest GFanz report is fairly gentle. "The members of each alliance also set interim science-based targets for 2025 or 2030, reflecting maximum effort toward a fair share of the 50% global reduction in GHG emissions needed by 2030," it said.

Firms and alliance will take different views on what constitutes "maximum effort".

“We urge the sub-alliances and members to live up to their responsibilities to support the phasing out of fossil fuels in line with a 1.5°C-aligned pathway,” said Martin at ShareAction. “It’s clearer than ever that voluntary initiatives alone aren’t enough to drive the urgent action needed to secure a liveable future. Governments should step up with tougher regulation of financial institutions that continue to fund fossil fuel expansion.”