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October 4, 2022updated 06 Oct 2022 10:47am

Exclusive: Race to Zero to respond to Gfanz banks’ protests

After banks in the Glasgow Financial Alliance for Net Zero (Gfanz) complained that the UN Race to Zero campaign set them unrealistic targets without consultation, Race to Zero is seeking to diffuse tensions. But there is scepticism over the lenders’ claims.

By Virginia Furness

Race to Zero, Gfanz, Bank of America
Executives at Bank of America and other lenders feel Race to Zero is not being sufficiently transparent on its climate criteria. (Photo by Hans Engbers/Shutterstock)
  • Banks have complained that the UN Race to Zero initiative had failed to consult them before setting unrealistic decarbonisation targets.
  • Race to Zero aims to alleviate concerns among Gfanz members by clarifying how it operates as a standard-setter.
  • The initiative is unlikely to review its criteria again for some time and plans to work more closely with Gfanz signatory companies.

The UN Race to Zero initiative will no longer tighten its emissions-reduction criteria on a rolling basis and is holding off on introducing a mechanism by which it could eject non-compliant financial institutions, say sources familiar with the matter.

These developments come after banks threatened to leave the Glasgow Financial Alliance for Net Zero (Gfanz) over legal issues and other concerns. A central issue is that some lenders say they were not aware of how Race to Zero would operate – claims that have met with scepticism in some quarters.

Race to Zero – a UN campaign set up in 2019 that aims to accelerate collective action on climate change and provides accreditation to Gfanz – does not expect to review its membership criteria again for some time, a London-based source close to the campaign tells Capital Monitor. “They have been annually reviewed for the last few years because Race to Zero felt they needed tightening up, but now it is pretty locked in [with] alignment to science. The plan is not to be reviewing it every single year. Race to Zero does not want to shift the goalposts.”

The move comes after member firms of the Net Zero Banking Alliance (NZBA) accused Race to Zero of introducing increasingly stringent decarbonisation requirements without consulting its signatories. The changes left lenders open to legal challenges and imposed unrealistic expectations on them, representatives from several banks tell Capital Monitor.

As a result, Bank of America, JP Morgan and Morgan Stanley have threatened to walk away from Gfanz, the Financial Times reported last month. These developments, along with the exit of pension funds (Australia’s Cbus and Germany’s Bundespensionskasse) and investment consultancy Meketa from Gfanz-affiliated groups, have raised questions over the future of the umbrella alliance.

Transparency concerns

Bankers and broader industry participants cite various reasons for the tensions, including: the anti-ESG backlash; incoming climate disclosure requirements from the US Securities and Exchange Commission; and high energy prices along with the related challenge for many banks of phasing out fossil fuel financing.

But it is Gfanz’s governance structure that has raised particular concerns for some. “We can’t allow third parties to sign us up to things we can’t deliver on or are unrealistic,” a senior representative of a US bank tells Capital Monitor. “It is a huge litigation risk.”

The spat arose after Race to Zero updated its guidelines for members in June. Marking a substantial tightening from earlier iterations, the new criteria made the explicit requirement for alliance members to “phase down and out all unabated fossil fuels”. Crucially, this means “no new coal projects”, according to the accompanying Interpretation Guide.

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The position was endorsed by Gfanz co-chairs Michael Bloomberg, Mark Carney and Mary Schapiro in August, but was latterly updated after Race to Zero received legal advice that the wording of its June criteria may amount to a potential breach of competition law. While the language has been changed, Race to Zero stresses, that the guidance and ambition of the group remains the same, and banks must choose a 1.5°C-aligned science-based pathway for decarbonisation.  

In any case, the International Energy Agency has made it clear since its widely cited report in May last year that no new investment in new coal projects can be made if net zero is to be reached by 2050. But data this year from campaign group Rainforest Action Network suggests banks are not aligning with this.

Meanwhile, Race to Zero’s planned compliance mechanism was due to be launched at the Cop27 climate summit next month, but has been delayed to await legal advice on whether it breaches US competition law, says a London-based policy specialist at a climate consultancy.

“Ultimately, for these voluntary alliances to work, they have to have legally binding rules that everyone follows, but these can be seen as acting in concert so they want to build a legally watertight foundation for climate compliance.”

This could involve lobbying to change competition law in the US to include carve-outs for climate, he adds.

The changes sparked anger among several of NZBA’s signatory firms, which said Race to Zero had not consulted its members before introducing them.

‘Moving the goalposts’

While the coal policy apparently triggered the pushback, a spokesperson at a large international bank says the issue was largely down to Race to Zero’s “opaque governance” in allowing for a unilateral decision by its expert panel to be applied to the Gfanz sub-alliances without the membership having any voice.

“We are alive to the need for incremental improvement but can’t be signing up to the principle of moving goalposts without our consultation,” he tells Capital Monitor

The London-based banker agrees that lenders would not have signed up if they had known they would have no say on how the initiative would proceed. His institution did not know about Race to Zero’s role in the governance of Gfanz, he says.

However, people involved in some of Gfanz’s working groups argue that banks were fully aware of Race to Zero’s involvement from the start and that the new criteria were set collaboratively with all the partner alliances.  Hence “it’s not fair to say they had no idea happening”, the source close to Race to Zero says.

Similarly, the consultant says he “doesn’t buy” the banks’ argument that they were unaware of Race to Zero’s role. “Multinational banks don’t sign up to high-level UN Alliances without having some comprehension of what it actually means.”  

Race to Zero does, however, plan to collaborate more closely with members of the banking alliance, says the source close to the initiative, admitting it needed to be “more consultative and rigorous in the way it conducts these processes”.

Gfanz declined to comment for this article, including on whether it had notified members accordingly.

Gfanz’s future in question?

Commentators agree the tensions are inevitable teething problems for an industry effort of unprecedented scope to tackle climate change. But they are divided as to whether Carney’s group would remain intact and whether it matters if some banks were to depart.

The consultant suggests there could be a ‘soft split’ between Race to Zero and Gfanz, whereby the latter acknowledges its members do not have to fulfil the Race to Zero criteria but can remain in the broader Gfanz group.

However, if Gfanz were to crumble, he adds, that would “send incredibly negative messages about developed country financial institutions’ commitment to supporting net zero transition” and would make for “terrible optics around Cop27”.

A head of climate at a European bank said the departure of high-profile names from the group would make Gfanz look weak and be a source of disappointment to the many European lenders that have been working to fully integrate the group’s requirements.

More concerning, though, is insufficient dialogue between the different parts of Gfanz, particularly among NGOs and bankers, says James Vaccaro, executive director of the Climate Safe Lending Network (CSLN) in San Francisco and an advisory panel member of Gfanz. CSLN is a US body aimed at accelerating the decarbonisation of the banking sector.

The incident also raises questions about Race to Zero’s role as a standard-setter with some commentators disappointed that the campaign appears to be bowing to pressure from the banks.

Similarly, though, the insurance industry is not warming to Race to Zero’s requirements, with only Germany’s Allianz publicly voicing support as of last week.

Nonetheless, Race to Zero must stay 100% aligned with the science, Vaccaro says, so if the world economy continues to drift towards the climate cliff edge in the coming years, the criteria are likely to have to tighten even further.

The following firms and organisations declined to comment for this article: Bank of America, Gfanz, Goldman Sachs, JP Morgan, Race to Zero, and the UN Environment Programme Finance Initiative.

Whether Gfanz remains a broad church for collective industry action or a slimmed-down version perhaps more capable of delivering change remains to be seen. But if targets and commitments cannot be agreed on, regulators may step in. And while banks may publicly call for greater regulatory action, they are understood to be privately less enthusiastic about the idea.

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