The transition to a net-zero economy will require “trillions of dollars in new investment — likely in the ballpark of $100 trillion,” according to Mark Carney, U.N. special envoy for climate action and finance, and former New York City mayor Michael Bloomberg.
In a Bloomberg editorial published during the recently concluded Conference of the Parties in Glasgow (COP26), they argue that most of that investment “will have to come from the private sector, especially after the enormous toll that the pandemic has taken on governmental budgets.”
The proposed source for these funds: the Glasgow Financial Alliance for Net Zero, a global coalition of about 450 financial institutions that includes asset owners, asset managers, consulting firms, banks, and insurance companies “responsible for assets over $130 trillion” and committed to “reducing emissions across all scopes swiftly and fairly in line with the Paris Agreement, with transparent action plans and robust near-term targets.” (Carney and Bloomberg are co-chairs of GFANZ.)
“Make no mistake, the money is here if the world wants to use it,” Carney said at the climate summit.
For more than a decade, I have been arguing that private capital certainly must be part of the climate solution, but GFANZ’s $130 trillion in assets — more than half of the world’s investable assets — is not, in its current form, the answer.
The grandiosity of Carney and Bloomberg’s solution masks its significant shortcomings:
- The numbers boasted by the coalition are a bit inflated. Citing a source familiar with GFANZ’s calculations, Bloomberg reports that the headline figure “disguises some double counting.”
- Members might be “responsible for” these assets, but they do not have full discretion as to their deployment. GFANZ members must invest their assets to fulfill specific legal objectives for a specific group of stakeholders (e.g., pension funds manage assets to meet future pension liabilities).
- Members’ assets are not simply sitting in some account waiting to be invested; they are currently invested and would need to be liquidated and redeployed. As BlackRock CEO Larry Fink admitted during a panel at COP26, “deploying that capital is going to be far harder” than securing the commitments.
A critical review of GFANZ members’ pledge reveals that the actual commitments are not likely to achieve members’ emissions reduction goal.
A report by Reclaim Finance, a French think tank focused on climate finance, points out that GFANZ signatories are committed to “complying with the criteria of the UN’s Race to Zero Campaign . . . which [require] halving emissions by 2030 and reaching net zero by 2050.” Reclaim Finance identifies numerous weaknesses that make the fulfillment of this commitment unlikely, and certainly not doable with the sense of urgency required. For example:
“While the Race to Zero stresses the need for its partners to take immediate actions, it fails to note the most important immediate action to take, which is to adopt policies to restrict the production and use of fossil fuels.”
“It is not mandatory for alliance members to reduce Scope 3 greenhouse gas emissions from the companies they support.”
“Absolute emission targets are not required. The alliances suggest but do not require that targets are set using absolute emissions numbers, instead requiring only emission intensity metrics.”
“None of the net-zero alliances prohibit the use of offsets or even state a cap for the percentage of emission reductions that can be met via offsetting.”
More generally, there is the overarching problem that there is no agreed-upon definition or measure of “net zero.”
The recent investment activity of GFANZ members and their cohorts shows a worrisome chasm between words and deeds, revealing no clear, persistent commitment to invest in climate-related opportunities.
A report by New Financial shows that the capital flowing into investments that seek to address climate change is dwarfed by investments in opportunities that are the cause of the problem in the first place. And Bloomberg reports that banks have organized “almost $4 trillion of loans and bonds for the oil, gas, and coal sectors since the Paris Agreement.”
In November, the European Central Bank published a report on the state of climate-related and environmental risk management among the 112 banks it directly supervises, concluding that “none of the institutions are close to fully aligning their practices with the supervisory expectations.”
In the U.S., the Sierra Club and the Center for American Progress performed an indicative assessment of the size of the global carbon footprint of the country’s eight largest banks and ten asset managers and found that they financed an estimated total of 1.968 billion tons of CO2 emissions based on year-end disclosures from 2020. (This total includes 668 million tons of CO2 emissions from banks and 1.3 billion tons from asset managers.) “If the financial institutions (FIs) in this study were a country, they would have the fifth-largest emissions in the world, falling just short of Russia,” the report says.
Meanwhile, institutional investors don’t appear fully committed to advocating for climate policies through shareholder activism or divestment.
In June 2020, Reuters reported that seven major European investment firms had sent a letter to the Brazilian government demanding it halt deforestation of the Amazon, explicitly threatening to divest from beef producers, grain traders, and even Brazilian government bonds “potentially as soon as this year ” if they did not see sufficient progress. Yet in December 2021, according to the Financial Times, none of the seven had done so — even as deforestation continued to soar. The FT reported that “more than 13,200 sq km of rainforest was razed in the 12 months between August last year and July — a 22 percent jump from the previous year and the highest rate of deforestation in 15 years.”
A recent academic study of the voting practices of members of the Net-Zero Asset Owner Alliance, a sub-alliance of GFANZ, found that “overall, transparency levels with respect to the voting practices of NZAOA members . . . are low and that very few NZAOA members have publicly observable climate votes that have been cast directly by them.”
As if these and other points were not enough to cast sufficient doubt on GFANZ’s ability to meet its net-zero goal, there is a far deeper problem in GFANZ’s model that almost certainly dooms it to failure.
As William Nordhaus, the Sterling Professor of Economics at Yale University and winner of the Nobel Prize in Economics in 2018, wrote in 2020, “In addition to facing the intrinsic difficulty of solving the hard problem of climate change, international climate agreements have been based on a flawed model of how they should be structured. The central flaw has been to overlook the incentive structure. Because countries do not realistically appreciate that the challenge of global warming presents a prisoner’s dilemma, they have negotiated agreements that are voluntary and promote free-riding — and are thus sure to fail.”
Nordhaus’s critique of international climate agreements applies equally to GFANZ (as well as to the U.N.’s Race to Zero and the Principles of Responsible Investment). Although GFANZ claims that “all actors must meet stringent criteria,” the members’ commitments and pledges are entirely voluntary. Said another way, there is no enforcement mechanism in place to ensure compliance. “The Race to Zero does not mention any actions to be taken against any entities that do not follow through on the actions they commit to when they receive their accreditation,” notes Reclaim Finance.
And importantly, the voluntary nature of GFANZ also promotes free-riding. Notably absent from GFANZ membership are the world’s three largest banks — Chinese banks that are all major providers of financing for fossil fuel projects — all Russian and Indian banks, and eight of the largest U.S. asset managers, which declined to participate, according to Bloomberg, because of their fiduciary duty and a reluctance to be bound by external rules. Also missing from GFANZ membership are private equity firms, which since 2010 have invested more than $1 trillion in fossil fuel companies — “double the market value of Exxon, Chevron, and Royal Dutch Shell combined.”
But the fault is not entirely GFANZ’s. Climate change is a global problem, and, to paraphrase Larry Fink, the financial services industry cannot be the climate police. A proper response requires an international climate policy that is legally binding, with incentives and penalties that — in the language of climate finance — are long, loud, and legal. Until such an agreement has been formally adopted, nations, regions, cities, industries, individual companies, and other critical stakeholders have little incentive to create mandatory policies themselves.
Carney himself acknowledges that the potential success of the Race to Net Zero and GFANZ is founded on the assumption that countries will turn Paris commitments into legislated objectives and concrete actions.
He claimed at COP26 that there’s money to finance the climate transition, and it’s “not blah blah blah.” But isn’t GFANZ just that?
Angelo Calvello, Ph.D., is co-founder of Rosetta Analytics, an investment manager that uses deep reinforcement learning to build and manage investment strategies for institutional investors.