GFanz becomes new oversight body for climate finance

The Glasgow Financial Alliance for Net Zero, up to now a loose ad hoc grouping of financial service providers for the build-up to COP26, took a firm and permanent form on Wednesday, as a body that will report to the G20, attempting to steer the financial sector on its decarbonisation journey.

Marking this progress, media entrepreneur Michael Bloomberg was appointed co-chair on Wedneday, alongside Mark Carney, former Bank of England governor.

On the day of its birth it had its first taste of criticism. “They speak about $130tr of assets managed by institutions that have joined GFanz, but that doesn’t mean $130tr of assets are aligned with net zero,” said Lucie Pinson, executive director of Reclaim Finance, an NGO based in Paris.

She pointed to the announcement on Monday by the Net Zero Asset Managers’ Initiative, one of the financial sector net zero organisations that are members of GFanz. The NZAMI said 43 asset managers out of 128 then in the group had declared 35% of their assets were being managed in line with achieving net zero by 2050.

“So it’s — I wouldn’t say ridiculous — but insignificant, in regard to the climate emergency. Every euro or dollar needs to be aligned,” Pinson said. “And net zero by 2050 is a long term commitment. What matters is what is being done right now to achieve deep cuts in emissions.”

ShareAction, a UK-based NGO, also criticised the NZAMI announcement, calling it “paltry” and saying the bar for membership of NZAMI was too low.

“This average figure hides a wide variance of individual members’ proportion of assets targeting net zero by 2050,” it said. “Eleven members have committed 100% of assets to this target, while others have committed tiny fractions of their assets. GIB Asset Management, for example, has committed just 1.26% of its assets to net zero by 2050.”

The quality of interim targets also varied widely, ShareAction said. Many members were targeting reductions in emissions intensity, thereby allowing continued increases in absolute emissions.

GFanz will not be political, nor yet fully private, but will have the same kind of hybrid governance by the great and the good as the Taskforce on Climate-Related Financial Disclosures.

The TCFD was formed in 2015 at the behest of Carney, then governor of the Bank of England and chair of the G20’s Financial Stability Board. It was put together by a team led by Michael Bloomberg, the media entrepreneur and former mayor of New York.

The Bloomberg company provided the secretariat for TCFD, and Mary Schapiro, former chair of the US Securities and Exchange Commission, soon joined to head the secretariat.

TCFD from the beginning portrayed itself as a private sector, market-led initiative — partly because climate consciousness in financial markets was then still considered radical by some, especially in the US. Donald Trump was president for four years of the TCFD’s evolution.

The TCFD promoters wooed businesses to join as supporters and then gradually implement its recommendations. Only after some years did TCFD start to be smiled on by public authorities such as the Bank of England, and later integrated into official policy. So far, nine jurisdictions have made it mandatory.

In a different public and political climate, GFanz can be more open about the top-down side of its nature.

The impetus came from Carney — who as well as working at Brookfield Asset Management is a UN special envoy on climate, and finance adviser to the UK presidency of COP26 — as well as from Nigel Topping and Gonzalo Muñoz, the UNFCCC Climate Action Champions.

Asset managers through an initiative of their own, and asset owners in a process convened by the UN, had already been forming net zero alliances. GFanz took these in as members and during 2021 cajoled banks, insurance companies, investment consultants and other financial service providers such as rating agencies into assembling further net zero groups for their sectors.

Now GFanz — essentially a collection of these net zero clubs — has become a formal organisation. Along with Bloomberg and Carney as co-chairs, Schapiro will be vice-chair and run the secretariat. Topping is also in the leadership team.

The group is also led by a board of 19 “principals” — all CEOs of major financial firms, including Brian Moynihan of Bank of America, Larry Fink of BlackRock, Jane Fraser of Citigroup, Noel Quinn of HSBC, Ana Botín of Santander and Amanda Blanc of Aviva.

GFanz has been run up to now by the COP26 Private Finance team under Mark Carney, but this will pass from January 1 2022 to the secretariat headed by Schapiro.

The aim of GFanz is to provide “a practitioner-led forum for financial firms to collaborate on substantive, cross-cutting issues that will accelerate the alignment of financing activities with net zero and support efforts by all companies, organisations, and countries to achieve the goals of the Paris Agreement”.

What this will mean in practice, and how influential the GFanz will be, are not clear yet. But it is involved in or sponsoring no less than 24 initiatives to encourage and help firms make net zero finance a reality.

They address four broad areas: corporate reporting on climate issues; risk management; helping investors identify opportunities; and increasing private financial flows to the developing world.

GFanz has seven workstreams: defining pathways for each sector to reach net zero emissions; describing what the financial sector expects of corporate transition plans; helping financial institutions craft their own transition plans with “convergence”; developing portfolio alignment metrics for financial institutions; mobilising private capital for developing countries; policy advocacy; and gathering more supporters.

Five “catalytic initiatives” GFanz is backing include Climate Finance Leadership Initiative Country Pilots, starting with one in India. The idea is to create country platforms bringing together governments, companies and financial institutions.

Another is FAST-Infra, a labelling scheme for sustainable infrastructure assets, intended to stimulate interest from investors and create confidence. The scheme, also launched on Wednesday, has been developed as a public-private partnership by HSBC, Macquarie, the International Finance Corp and the Global Infrastructure Facility.

A third is the Global Energy Alliance for People and Planet, unveiled on Wednesday. It aims to provide reliable clean energy to 1bn people to “accelerate and scale an equitable energy transition in developing and emerging economies through fossil fuel transitioning, grid-based renewables, and distributed renewables”. GEAPP is backed by an initial $10bn commitment from philanthropic, government, multilateral and private sector partners.

Also under GFanz’s umbrella is Innovative Finance for the Amazon, Cerrado and Chaco, which will try to provide loans, investment funds and capital markets finance to support farmers in those threatened regions of south America, to decouple beef and soy production from deforestation.

Despite this wealth of positive initiatives, environmentalists are worried GFanz will not have the heft to solve the development finance problems barring the way to net zero, and that it is too soft on the existing, climate-damaging economy.

Organisations joining GFanz are required to meet the criteria of the UN’s Race to Zero campaign, “to ensure credibility and consistency”.

This means GFanz firms’ net zero commitments must use science-based guidelines to reach net zero emissions by 2050, cover all emission scopes and include 2030 interim targets. Firms have to commit to transparent reporting and accounting. Firms are expected “to take rigorous and immediate action to halve global emissions by 2030”.

But most large banks and investors are still far from having adopted Science-Based Targets for decarbonising. The first three financial firms had their SBTs ratified only last month: La Banque Postale, South Korean life assurer KB Financial Group and Swedish private equity firm EQT.

Most large banks have now joined the Net Zero Banking Alliance — JP Morgan, Mizuho and SMBC were among the main holdouts, but joined in October.

But as the Rainforest Action Network has documented, they continue to finance the fossil fuel industry, including companies that are expanding production. Since the Paris Agreement was signed, the top 60 private sector banks have provided $3.8tr of financing to fossil fuels, led by JP Morgan, Citi, Wells Fargo and Bank of America, with $1tr between them.

Climate activists are alarmed that membership of the NZBA, and hence GFanz, does not seem to be bringing a rapid change in this financing.

“It doesn’t mean they are now going to stop supporting the expanding of fossil fuels,” said Pinson. “In over 1,200 words in this press release [announcing GFanz] there is no mention of coal, oil or gas. With all the climate pledges financial institutions are making, they are joining a body where there is not a single rule about stopping the development of assets that are totally incompatible with 1.5°C.”

Kate Levick, associate director for sustainable finance at E3G, the climate change think tank, in London, said she thought NGOs’ concerns about GFanz were valid.

She agreed that the $130tr of assets held by all the member firms of GFanz simply meant that these were covered by a net zero commitment — that the firms had “pledged to become aligned”.

Nearly half the total, $57tr, comes from the Net Zero Asset Managers’ Initiative, whose members — now 220 after 92 joined at COP26 — cannot fully commit to making their assets net zero-compatible, because investment decisions are ultimately made by their asset owner clients. NZAMI members commit to working with clients “consistent with an ambition to reach net zero emissions by 2050”.

Controversies around GFanz centre on the question of how long fossil fuel investment can continue.

“Often it’s a question about timeframes,” said Levick. “It’s the same debates we see playing out in the political forums — for example the EU is still struggling to finalise its Taxonomy.”

Some countries want gas and nuclear power to be included in the Taxonomy of Sustainable Economic Activities, the EU’s official guide to green investing.

But Levick said: “If we’re looking at a 1.5°C trajectory, the International Energy Agency made it clear we can’t develop more fossil fuel infrastructure.”

Banks are very wary of committing to exiting fossil fuel finance, except for very specific categories such as new thermal coal infrastructure and Arctic oil drilling. La Banque Postale has set a date to exit oil and gas, but it is an outlier, and is a mainly retail bank owned by the French government.

“We understand where the NGOs are coming from,” said Jörg Eigendorf, head of sustainability at Deutsche Bank in Frankfurt. “They want to have exclusions.”

He contrasted this with Deutsche’s view. “We are rather thinking about transition,” Eigendorf said. “If we have only clients which have signed up to Science-Based Targets, we could fulfil the GFanz goal, even if some of them are oil companies. If an oil company has signed up and has a credible pathway, that’s OK.”

The more forward-thinking oil companies, mainly in Europe, are beginning to make plans to reduce their emissions, but their plans are still far from compatible with the economy reaching net zero in 2050. It is not clear how much pressure they have felt from banks to accelerate.

“I don’t like this categorical way of opposing certain things,” said Eigendorf. “We have to manage carbon usage down — we can’t stop it now — the world would break down. We all need to see quick progress on coal — it’s taking too long for governments and industry to phase out.”

But he added: “If we followed a pure policy of immediate divestment, oil and gas assets would end up with untransparent owners.”

NGOs, however, are not arguing for a complete and sudden stop in fossil fuel use or financing. They want a clear plan to begin phasing out fossil fuels now, and do so at a pace that gives the world a chance to avoid disastrous global warming.

GFanz should, Pinson said, “acknowledge the IEA’s finding that no new fossil fuel projects should be developed.”