Why Are So Many Banks Backing Away From Net Zero Goals?

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Net zero is an accounting term. It represents a goal that, if reached, would stabilize the Earth’s climate. The equation is simple, even for those of us who are math-challenged: for every ton of carbon emitted into the atmosphere, another one must be removed.

The methods to achieve a net zero balance, however, are anything but simple.

That’s because we’ve accrued more than 250 years of  burning carbon, and it’s created what Joppa and Willmott in Nature call “a carbon-emitting economic and technological paradigm.” Now, under the terms of the 2015 Paris climate agreement, the world has just 25 years — or a few business cycles — to replace the carbon-dependent parts with net-zero components. The net zero “journey requires unprecedented coordination, innovation, investment, and speed,” they argue, “to avoid the catastrophic consequences of failure — including increasingly severe natural disasters, from rapidly rising sea levels and floods to heatwaves and wildfires.”

Yet the goal of net zero is fraught with issues, according to Joppa and Willmott, including:

• a premature desire for perfection
• overly precise guidelines for implementation
• insufficient flexibility in carbon accounting
• unhelpful constraints on collaboration
• a disproportionate focus on the actions of others

How can markets be compelled to calculate carbon costs for all of their products and services? In the era of net zero thinking, won’t the cost of removing carbon dioxide and other greenhouse gases from the atmosphere need to be factored in? Mechanisms to remove carbon and provide low-carbon alternatives must become less expensive and, hopefully, excel in performance relative to higher carbon competitors.

But such a market shift is possible. After all, it happened after decades of advances in solar and wind energy, which ultimately saw the costs of these renewables plummet by more than 70%. Technologies competed, and winners emerged for different applications depending on the locale. A market-driven approach introduces the most effective solutions to materialize organically over time.

Bank-led and UN-convened, the Net Zero Banking Alliance (NZBA) is a group of leading global banks committed to aligning their lending, investment, and capital markets activities with net zero greenhouse gas emissions by 2050. NZBA’s framework, guidance, and learning opportunities support members to design, set, and achieve credible science-based net zero targets for 2030 or sooner that deliver value for their investors and clients.

NZBA signatories agree to align their portfolios so that net zero emissions levels are reached by 2050. Such a level keeps the average global temperature rise at the Paris Agreement’s goal of 1.5 C above pre-industrial levels by 2100. With progress that that goal quite uneven, most scientists now conclude those next 20 years will see the Earth breach 1.5 C. In fact, the UN points to a much higher warming trend — twice that much warming.

Billions of people could not survive such warming.

Early movers and adopters offer hopeful signals that change to net zero alternatives is possible, but, for mainstream businesses, such rapid shifts are often difficult due to regulations that are convoluted and confusing. Wall Street has signaled it’s not happy with the rigor of the NZBA, which is seen as adhering to “a scenario that’s becoming increasingly improbable,” Royal Bank of Canada CEO David McKay told Bloomberg.

By October 2024 the NZBA had already pointed to areas in need of additional attention and support. Setting decarbonization targets for banks remained a challenging exercise, they admitted, due to the quality of client greenhouse gas emissions data, unclear decarbonization pathways, and a lack of a supportive policy environment. Of the one-fifth of banks that had not met the milestone to set targets covering all or a substantial majority of carbon-intensive sectors, almost all were from emerging markets, where these challenges are particularly acute.

At this moment of authoritarian support for fossil capitalism, CEOs are reluctant to divest from the Big Oil sector, as their profitability would suffer, at least in the short term. That being so, more work needs to be done to develop a regulatory framework that would enforce positive change, RBC CEO McKay outlined.

The logic is that, to achieve net zero by 2030, investments in excess of $4 trillion annually must take place. A loop borne of capitalism is stagnating net zero progress, though. Governments don’t want to require net zero regulations until the markets agree, yet markets have trouble anticipating price structures without government guidance.

Recognizing these obstacles, the Joppa and Willmott suggest some remedies:

• pursue progress over perfection
• prioritize direct over indirect emissions
• focus on demand over delivery
• allow flexibility between emissions reduction and removal

Rhian-Mari Thomas, a former Barclays banker who now runs the Green Finance Institute, sees a long term business interest for financial sectors to acknowledge the risks posed by a warming planet. “The need for financial institutions to meet their fiduciary duties is often cited as a reason not to pursue opportunities that are aligned with net-zero pathways,” she said. “Surely another consideration, based on science, is to ensure market integrity: Deals that may seem rational in the short term could ultimately threaten the resilience of the markets.”

Are Autocrats Actually Secure As They Deny Net Zero & Other Systemic Issues?

By last September, the Biden–Harris administration had more than 60,000 projects to rebuild deteriorating bridges, make roadways safer, upgrade ports to be more efficient, modernize airport terminals, and expand public transit and passenger rail services, including delivering the first high-speed rail systems in the country. Together, these projects were strengthening the US economy by fortifying supply chains, lowering costs, improving America’s global competitiveness, creating good-paying jobs, and unlocking economic opportunity for communities of all sizes, including rural and tribal communities.

US President Donald J. Trump is a strong proponent of additional fossil fuel development. He has, again, removed the US from the Paris Agreement and is doing everything he can to eliminate climate action funding with the Bipartisan Infrastructure Law and the Inflation Reduction Act.

“Just because you have a President that’s trying to ignore the science and economics of climate change, it’s bizarre to think you can avoid the massive climate-related or climate-accelerated physical disasters that we’re seeing,” says Catherine McKenna, Canada’s former minister of environment and climate change and chair of the United Nations Secretary General’s expert group on private-sector net zero targets.

As an editorial in The Contrarian posits this morning, autocrats who incur quick defeats after taking office “lose the aura of invincibility, undermine morale among supporters, and fuel more enthusiasm among opponents.” Perhaps financial institutions’ malaise about net zero could change again if citizens stand up in support of a livable planet.