One year ago at COP26 in Glasgow, ex-governor of the Bank of England Mark Carney announced that more than $130trn (£109.54trn) of private capital had been committed to net zero under his landmark initiative, the Glasgow Financial Alliance for Net Zero (GFANZ). This was a strong sign that financial institutions were ready to take responsibility for their impact on climate change, and GFANZ has only swelled in size since then.

As detailed in its latest progress report published in October, GFANZ’s membership has grown from 160 members when it first launched in April 2021, to 450 members by COP26, to now more than 550 member institutions globally.

Yet despite its expansion, GFANZ’s journey has not been plain sailing, with many questioning whether its members have strong enough rules on fossil fuel financing.

GFANZ on trial

On 24 October 2022, Mark Carney stood before the UK’s Environmental Audit Committee (EAC) in Parliament and answered a series of questions about GFANZ’s progress. The hearing formed a part of the EAC’s wider inquiry into the UK’s net-zero strategy, which was launched in May this year.

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The hearing was lively, and at times, exchanges grew testy as the cross-party group of MPs fired increasingly probing questions at Carney regarding GFANZ’s progress. Near the end of the hearing, Green Party MP for Brighton Caroline Lucas asked how GFANZ planned to “close that gap” between progress already made by financial institutions on net zero and what “urgently” needs to be done, considering that “only 60 out of the 240 largest GFANZ members have any policy excluding support for companies developing new coal projects”.

Of those, Lucas added, just 11 have adopted “robust policies to end financial services for all companies building new coal mines, plants and related infrastructure”.

Lucas was referring to figures submitted to the committee as part of a dossier of evidence into GFANZ’s progress collected by a number of actors including climate finance think tank Carbon Tracker. The evidence also contained a series of responses to questions put to prominent GFANZ members as part of the inquiry.

Last week, Carbon Tracker published an analysis of these responses, which observed that while more than 60% of respondents had some form of explicit fossil fuel exclusion policy in place, the majority of these policies target companies receiving more than 20% of their revenue from coal or unconventional fossil fuels (like Arctic or oil sand-related activities), leaving a “significant gap in policies targeting fossil fuel expansion across all subsectors”.

Analysis of other data, such as the fossil fuel policies of major financial institutions, compiled by non-profit Reclaim Finance in its Coal Policy Tool, highlights GFANZ members’ blind spot when it comes to policies restricting coal expansion.

GFANZ faces pressure on fossil fuel rules

As an umbrella group, GFANZ represents seven individual financial alliances for net zero, each with its own policies and target-setting guidelines. Some of them have stricter guidelines on fossil fuels than others.

As pointed out in evidence submitted to Parliament by Carbon Tracker over the summer, the Net Zero Asset Owners Alliance appears to have the most stringent rules on fossil fuels, having produced a position paper on thermal coal, as well as a second Target Setting Protocol launched this year, which states that, as a minimum, members can no longer finance additional fossil fuel asset infrastructure.

Asset managers have slightly more leeway under the Net Zero Asset Managers, which requires members to cease investment in new thermal coal power projects, as well as adopt a science-based policy for fossil fuel phase-out. It endorses three different scenarios that investors can choose from to follow, either individually or in combination: the Paris-aligned Investment Initiative’s Net Zero Investment Framework, the Science Based Targets initiative for Financial Institutions, or the Net Zero Asset Owner Alliance Target Setting Protocol.

The Net Zero Banking Alliance (NZBA) does not have any firm policies on new fossil fuel investment, although it does require banks to decarbonise all sectors in line with science-based net-zero pathways.

As such, a number of groups are now pressuring GFANZ to up its game on fossil fuel restrictions. On the eve of Finance Day at COP27, the UN’s High Level Expert Group published a report into corporate greenwashing, urging GFANZ (among others) to implement tighter standards. The report makes clear that net zero is “entirely incompatible with continued investment in fossil fuels”.

Also coinciding with COP27 Finance Day, the NZBA released its first progress report, which was met with criticism from NGOs including financial non-profit ShareAction, due to the wide range of ambition shown in the targets set by its members for fossil fuel sectors.

“Wishy-washy targets alone are not enough without knowing how they'll reach them," Beau O'Sullivan, senior strategist for the Sunrise Project’s Bank on our Future campaign, said in a statement. "They need to be coupled with actual policies that stop all support for new coal, oil, and gas, while drastically scaling up clean energy financing. That's one thing NZBA conveniently fails to address."

As evidence for banks’ supposed complacency on fossil fuels, O’Sullivan points to an October report from Global Energy Monitor, which finds NZBA member banks and asset managers have provided billions of dollars to companies expanding coal assets over the past two years.

Accusations of ‘cartel’ behaviour

While it seemed for a short period over the summer that GFANZ members would be forced to adhere to stricter rules on fossil fuel financing – to the relief of many NGOs – this sense of relief was short-lived.

In June, Race to Zero – a global campaign for net zero encompassing businesses, cities, regions and investors – updated its ‘starting line’ criteria for all members, which included GFANZ as a whole.

For the first time, Race to Zero’s new rules dictated that within a year’s time, from June 2023, all members would be required to commit to phasing out all unabated fossil fuels, and according to the criteria’s interpretation guide, written by Race to Zero’s Expert Peer Review Group, this meant “no new coal projects”.

Three months later in September, in response to this explicit wording on coal, it was widely reported that major Wall Street banks were threatening to leave GFANZ, citing antitrust or ‘competition’ laws as the reason. While such laws can be subject to varying interpretation, they are designed to ensure that institutions are not able to conspire and make behind-closed-doors decisions that could distort market competition.

In response to these concerns, in September, Race to Zero hastily amended its wording to remove the explicit reference to ‘no new coal’, as well as adding a sentence noting that in addition to the IEA’s 2021 net-zero scenario, which envisages an immediate halt on building new coal plants as well as no new oil and gas fields, ‘other credible’ scenarios, such as those from the IPCC, ‘differ in some details’.

But it was too late – in late October, it was reported that GFANZ had removed the requirement for its members to sign up to Race to Zero, with Carney publicly citing antitrust concerns as the reason. It remains unclear why GFANZ took this step when Race to Zero had already alleviated these concerns by changing its wording.

As Thomas Hale, co-chair of Race to Zero’s independent Expert Peer Review Group, tells Energy Monitor, in light of accusations they could be implicated in ‘cartel-like’ behaviour, Race to Zero followed the advice of lawyers to ensure the updated wording was “ironclad against threats” that it was in breach of competition law, while “keeping the principles and substance very much aligned to the science”.

In September, Hale published a paper outlining the context for how these laws have become, in his words, “weaponized” by those with vested interests in the fossil fuel industry, who are “nefariously… seeking ways to twist the basic rules of the economy to delay climate action”. Specifically, Republican politicians in the US are lashing out against what they perceive to be the “woke capitalism” ideology underpinning ESG investment.

This ‘anti-ESG backlash’ has been heating up over the past couple of months, and it reached a tipping point in summer when US Senator Tom Cotton of Arkansas wrote an open letter to the world’s largest asset manager, BlackRock, arguing that its policies to restrict fossil fuel financing ‘threatens our national security’ and are a ‘violation of antitrust laws’.

Hale says that the “huge push” by US state-level Republican attorneys general on “so-called ‘woke capitalism’ has picked up on these antitrust topics as a tool to go after financial actors” making “very sensible choices on how to solve the structural problem of climate change”.

So far, it seems, they have succeeded, and as a result Hale, along with others, is pushing for ‘urgent reforms’ to these laws.

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While GFANZ’s disaffiliation from Race to Zero might seem like a serious setback, Jeanne Martin, head of banking at ShareAction, points out that as GFANZ is just an umbrella group, the individual alliances remain bound to Race to Zero’s rules. However, as Martin tells Energy Monitor, GFANZ’s exit means that other alliances now have a right to exit – “though it remains to be seen whether they will do so”.

There is currently no firm evidence to suggest that any of the alliances under GFANZ plan to sever their ties with the Race to Zero campaign. However, Martin notes that an October open letter by Tracey McDermott, senior representative of Standard Chartered Bank and part of the NZBA’s steering committee, indicates the NZBA is distancing itself from the campaign.

In the letter, McDermott says while the individual alliances will “consider” Race to Zero’s new rules, it is “important to understand that RtZ [Race to Zero] does not have the ability to impose requirements either on the NZBA as a whole or on individual members”.

When Energy Monitor reached out to the UN Environment Programme Finance Initiative (UNEP FI), which convenes three of the major GFANZ alliances (asset owners, banks and insurers) as well as the conveners of the Net Zero Asset Managers’ initiative, for comment, only UNEP FI responded, reiterating it is currently assessing whether its existing rules comply with Race to Zero’s updated criteria.

It remains unclear if GFANZ members will, by June 2023, update their rules to force members to commit to no new fossil fuel financing, as per Race to Zero’s updated criteria. Until then, this raises an important question: what is the purpose of a net-zero alliance when members are allowed to continue investing in fossil fuel expansion?