Quick Take

Why a Net-Zero Pledge Nets Zero Progress

Michael Goldhaber

April 15, 2024

In recent years, numerous major banks joined the Net-Zero Banking Alliance, a group promising to advance the goal of reducing greenhouse gas emission to “net zero” by 2050. The idea was that financial institutions would use their lending practices and other forms of influence to slow climate change. But a new academic study, titled “Business as usual,” finds that the righteous-sounding pledges generally aren’t working. Banks in the Alliance have been just as likely as other banks to offer favorable loan terms to companies implicated in climate change. The authors of the study, who include business school professors from Columbia and the Massachusetts Institute of Technology, found no evidence that Net-Zero banks are pushing their clients to decarbonize.

To students of sustainable self-regulation, none of this comes as a surprise.

The UN Principles for Responsible Investment is the mother of all voluntary ESG pledges, with over 5,000 members managing assets of $120 trillion. Yet a 2020 study found that joining PRI had virtually no effect on the ESG performance of those institutions’ funds. Whatever ESG rating system they used, the authors found mediocre ESG scores before a fund manager joined the UN coalition—and mediocre scores afterward. And though a devoted core of PRI members conduct exemplary ESG engagement campaigns, the vast majority sit on the sidelines.

The Net-Zero Asset Management initiative, a sister group to the net-zero bankers, provides another case in point. The non-profit ShareAction found little difference between the climate proposal voting records of NZAM members and non-members in 2022. Last year, NZAM membership did predict a better voting record, but certainly didn’t guarantee it, with members BlackRock and T. Rowe Price supporting 10% or fewer of climate resolutions on proxy ballots.

Vanguard was at the vanguard of the rear guard when it rescinded its Net Zero Asset Managers pledge in 2022. The move came a week after red state attorneys general opposed a regulatory petition by Vanguard to raise its national utility holdings and cited Vanguard’s net-zero policy as the grounds for its objection. Kentucky’s AG declared victory.

Big US financial institutions are comfortable belonging to such a group until the groups get serious. In 2022, JPMorgan and Morgan Stanley threatened to leave the Glasgow Financial Alliance for Net Zero – an umbrella group for eight sectoral alliances including the net-zero bankers and asset managers – unless GFANZ severed ties with the UN Race to Zero. The US institutions were reportedly concerned that the Race to Zero’s commitment to stop financing coal and phase out fossil fuel finance would run afoul of red state anti-ESG laws. The Global Financial Alliance for Net Zero gave in, and the US financial giants stayed put.

Climate Action 100+ saw a large wave of departures because it was less pliant. Unwilling to abet greenwashing, the investor coalition, which pushes the world’s largest carbon polluters to cut emissions, challenged its members to move from words to action. Climate Action 100+ called on signatories to engage with public officials and to be transparent about their proxy votes and company engagement. State Street, JPMorgan, and Pimco all said in so many words: “Adios, pardner.” BlackRock switched its membership to its small global arm. In this case Vanguard had no need to withdraw, because it had never joined.

If the point of signing an empty pledge is to send a pro-ESG signal, then there are two logical reasons to rescind the pledge. Either the pledge is no longer empty. Or the bank that’s leaving the coalition wishes to send an anti-ESG signal. Either way, the moves represent corporate insincerity and ought to inspire customers to take their business elsewhere.