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GFANZ relaxes Race to Zero commitment as reality bites

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In its latest progress report, the Glasgow Financial Alliance for Net Zero (GFANZ) seems to be easing net zero commitments for its members amid rising global challenges.

  • GFANZ appears to have reduced its alignment with the UN’s Race to Zero campaign.
  • A key element of Race to Zero is the phase-out of fossil fuels, yet many financial institutions continue to invest in greenfield oil and gas projects.
  • Relaxing commitment to climate goals cannot detract from the fact that not reaching net zero by 2050 will have adverse impacts on the global economy, including banks and financial institutions.

Engaging with, rather than being anchored into Race to Zero criteria

In its first progress report in November 2021, it stated that “entry to GFANZ is grounded…in the UN’s Race to Zero campaign”. At the time, it called for financial institutions to develop a framework of actionable sectoral pathways to drive decarbonisation. At the heart of this was tackling hard-to-abate sectors and fossil fuels. 

It also favoured establishing a material price on carbon. In its October 2021 call to action report, GFANZ called for a phasing out of fossil fuel subsidies and ensuring that these were redistributed to support the World Bank’s Just Transition for All.

In just over a year since the alliance’s formation, however, this language has changed. In its latest progress report published in October 2022, GFANZ stated that it “will take note” of the guidance of the UN’s Race to Zero. While this means it will continue to engage with the campaign, along with a host of other international climate policy-making bodies, there was no mention of phasing out fossil fuel subsidies.

What changed in a year to cause this? A series of geopolitical and economic events, ranging from higher energy prices following Russia’s invasion of Ukraine, galloping inflation, slower economic growth, supply chain issues and a lingering threat of the resumption of pandemics. 

Sustainability and energy security are proving formidable challenges for banks

The challenges banks face in financing the transition to net zero have never been higher. For example, rising energy prices have forced many countries to prioritise energy security over climate change. This stems from a need to ensure the energy supply is adequate to meet the needs of people over the winter of 2022 while driving economic growth.

Major European and global economies are turning to coal, as a result. The threat of Russian gas being turned off in the winter has led to Austria, Germany, Italy, Poland and the Netherlands all increasing their use of energy from coal-fired plants. China has said that it will continue to use coal to ensure supply to its factories, even though it has been the world’s largest market for renewable energy. 

Enthusiasm over the passing of the Inflation Reduction Act in the US was also dampened by a number of concessions to the fossil fuel industry. A pushback against ESG-based investing has led to the banning of major banks from doing business in 19 US states. India, the third largest polluter, is also increasing its coal mining output.

While the blame for increased coal use can be placed on the energy crisis, banks, insurers and institutional investors have played a part in driving investment.

Banks refuse to see lose-lose scenario from fossil fuel financing

Despite net zero pledges, many major global banks continue to finance new oil and gas projects. Both the International Energy Agency (IEA) and the Intergovernmental Panel on Climate Change have warned that the development of new oil fields is not aligned with a net zero by 2050 scenario. 

Sub-sector alliances within GFANZ, such as the Paris Aligned Investment Initiative, have also called for limiting lending to new fossil fuel projects. According to the Rainforest Action Network, the top 10 bankers to oil and gas increased their lending to the industry by 6% in 2021, after an 18% decline in 2020.

Continued financing to the oil and gas industry presents, however, a lose-lose scenario for these lenders, says UK-based NGO Share Action. Reduced use of fossil fuel in the IEA’s Net Zero scenario will result in oil and gas assets becoming stranded, as they will be uneconomic under new regulations. The financial hit from the continued use of fossil fuels will destroy value for banks and investors.

The Royal Bank of Canada, the fifth largest lender in the industry, has acknowledged this. In April 2022 it stated that “to have a 50% chance of meeting a 1.5°C warming target (the stretch goal for the Paris Agreement), the world will need to leave 60% of the world’s remaining oil and gas, and 90% of its coal in the ground”. 

Many large climate action groups have been formed with the best intentions relating to tackling climate change. Financial institutions, however, are facing challenges in staying the course while dealing with geopolitical events and economic downturns.

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