Quitting climate alliances risks trust and transparency for banks

The Net Zero Banking Alliance (NZBA) is a United Nations-backed initiative founded in 2021 ahead of the COP26 climate summit that brings together global banks committed to aligning their lending and investment portfolios with net-zero emissions by 2050. The NZBA provides a framework for setting credible, science-based targets and requires banks to publicly disclose planned actions, expected timelines, and progress toward achieving these goals.

As of October 2024, the alliance included 144 banks across 44 countries, with combined assets of USD74 trillion (tn), representing 41% of global banking assets. This marked a significant increase from its launch, with 43 members in 23 countries collectively holding USD29tn in assets. European banks constitute a substantial portion of the membership, accounting for nearly half of the total assets, while North America and Asia-Pacific represent 28% and 21%, respectively.

Starting in 2024, major banks began to exit the NZBA. This has cast a shadow over international climate commitments. The wave of departures began with leading U.S. banks — Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo — and later extended to top Canadian banks. A major Australian lender, Macquarie, has also withdrawn, as have five Japanese banks in the past few weeks. The banks that left the alliance accounted for almost 39% of the total assets.

Losing trust, influence, and transparency

The departure of several major American banks from the NZBA appears to reflect shifting political and legal dynamics, including increased scrutiny of environmental, social, and governance (ESG) policies. Some banks have cited legal risk as a contributing factor in their decisions. While they maintain that their climate goals remain unchanged, these exits from climate alliances have raised questions about the consistency and credibility of those commitments.

The NZBA and the Net Zero Asset Managers Initiative (NZAM) were designed to hold financial institutions accountable for their climate commitments while advancing the energy transition and global decarbonization efforts. The withdrawal of these influential banks raises the risk of other institutions deprioritizing their climate goals. As major players in the global economy, the actions of these financial institutions carry significant weight.

The banks that exit these alliances may have been only superficially committed to climate goals. However, alliances gain leverage and influence through scale, and withdrawals by some of the world’s largest financial institutions can diminish their ability to exert pressure on carbon-intensive industries to transition. Reduced influence in promoting sustainable practices and increased financial support to fossil fuel sectors can significantly delay the energy transition. Therefore, the withdrawal of these banks is consequential.

Exiting climate alliances will likely damage public trust in these financial institutions, as many have previously publicized their climate commitments. Trust in the financial sector in advanced economies declined after the subprime mortgage crisis of 2008-09. According to recent surveys, the public perception of U.S. banks in 2024 was finally recovering to pre-crisis levels. Many bank customers suggest they care deeply about the climate, to the point of choosing financial service providers based on their climate-friendliness.

The loss of transparency and standardization resulting from reduced participation can be another self-imposed disadvantage for the financial sector. Alliances like the NZBA establish frameworks for reporting and measuring financed emissions, promoting transparency and comparability across institutions. The departures can lead to a divergence in reporting practices, making it harder to track progress and hold institutions accountable. Standardized climate data and disclosures benefit corporations, financiers, investors, and policymakers in assessing the financial sector’s contribution to climate goals and making informed decisions.

Asian banks have no reason to follow

While headlines have focused on high-profile banks exiting climate alliances, there has also been a counter-response to these decisions. Institutional investors and pension funds (whose stakeholders have the most to lose from climate change in the long term) are considering pulling back investments or withdrawing their funds from management by U.S. groups that have quit NZAM. While this trend is germinating in Europe, responsible investors globally are likely to vote against such actions.

Asian banks would be ill-advised to follow their North American peers. While there may be some marginal short-term benefits, such as avoiding voluntary climate-related reporting, there are unlikely to be any lasting long-term benefits. Climate change and its impacts are real and directly impact the financial sector. The politically charged winds can deflect from this reality only temporarily. Many Asian countries are proceeding with strengthened climate reporting requirements. In just the second half of 2024, 21 policies adopting sustainable finance measures such as taxonomies, disclosures, and reporting were announced in the Asia-Pacific region. Leaving the NZBA may expose banks to increased regulatory attention, particularly as climate-related policies continue to gain momentum. 

Following the lead of banks exiting climate alliances may pose risks for Asian banks, particularly as economic trends increasingly favor climate-positive policies. Governments and regulators in climate-vulnerable countries in the region understand the negative impacts of climate change and are increasingly focused on finding solutions. An overwhelming majority of the region’s population also views climate change with concern.

In light of these circumstances, the decision of Japanese banks to exit the NZBA may be hasty. These banks hold the largest share of total assets among Asian NZBA members, followed by South Korea and Singapore. Currently, 18 Asian banks are part of the alliance with combined assets of approximately USD5tn, including five from Southeast Asia.

The financial case to stay the course in Asia

The Asian energy landscape is transforming, with renewable energy sources increasingly out-competing fossil fuels. Solar, in particular, and renewables, in general, are now the cheapest power generation sources across almost the entire region. This trend will likely continue, with prices expected to fall steeply over the next few years, making renewables even cheaper. This cost advantage is driven by several factors, including China's booming manufacture of solar modules and wind turbines, which have reduced prices across Asia. Industry analysts such as Wood Mackenzie project that by 2030, renewables will be approximately one-third cheaper than fossil fuels in the region, a view shared by others.

This shift makes a compelling case for banks and financial institutions to maintain their commitments, remain aligned with global climate goals, and achieve significant profits. Power and energy systems are the backbone infrastructure of any country or region.

The finance sector is heavily involved in funding and developing renewable energy buildouts. In Asia, renewables and sustainable investments offer an economically compelling case. Continued support for fossil fuels would be financially risky and misaligned with national ambitions for cheaper and secure energy supplies and climate change mitigation. Southeast Asia has a significant stake in addressing climate change. Progress could support economic growth over the next 50 years, while inaction could result in losses as high as USD28tn during the same period. Others report that prioritizing low-cost sustainable energy could lead to USD2.2tn of investment savings in the Asia-Pacific region while reducing household energy costs and improving trade balances.

Asia’s political landscape differs from the West, with its climate vulnerability driving interest in sustainable energy, alongside a focus on improving living standards. Several Asian countries already have net zero targets incorporated into their laws or other mandatory commitments. Political and financial considerations are thus largely aligned. For their part, to fully capitalize on these opportunities and support the financial transition, Asian governments must continue improving their regulatory frameworks and taxonomies to further develop sustainable finance.

The withdrawal of major banks from the NZBA poses risks to global climate efforts by weakening accountability mechanisms and sending negative signals to the market. These moves may also lead to diminished trust in banks, particularly in light of previous statements and marketing around sustainability. The economic case for the energy transition remains strong in Asia and should serve as a powerful incentive for banks to maintain and advance their climate commitments.