Todd Cort, co-director of the Yale Center for Business and the Environment, and Daniel Esty, the Hillhouse Professor of Environmental Law and Policy, discuss the potential impacts of big U.S. banks pulling out of the Net-Zero Banking Alliance.
The Net-Zero Banking Alliance (NZBA), convened in 2021 by the UN Environment Programme finance initiative and led by banks, supports efforts to align lending, investment, and capital markets activities with achieving net-zero greenhouse gas emissions by 2050. However, six of the biggest banks in the U.S. — J.P. Morgan, Citigroup, Bank of America, Morgan Stanley, Wells Fargo, and Goldman Sachs — recently quit the NZBA. Todd Cort, co-director of the Yale Center for Business and the Environment, and Daniel Esty, the Hillhouse Professor of Environmental Law and Policy, talked with YSE News about the potential impacts of their exit from NZBA on sustainable financing.
Q: Now that all six of the largest U.S. banks have quit the U.N.-sponsored Net-Zero Banking Alliance, is it effectively dead?
Cort: The Alliance will struggle. Not only do those big banks represent a big chunk of assets under management, but the reputation of the NZBA is now diminished.
From an economy-wide perspective, this exodus will only increase the risk of climate impacts on the banks and the rest of society. It sends a signal from large lenders that they care less. Smaller banks may be less inclined to navigate the climate risk waters, and borrowers may be less pressured to focus on their own emissions and climate resilience.
Esty: Finance for the transition to a clean energy future represents a fundamental pillar of any serious response to climate change. Thus, the decision by the banks to withdraw from the Net-Zero Banking Alliance must be understood as a step back for prospects of a ramped-up response to climate change in the next few years.
Q: Why do you think the big banks quit the NZBA now?
Cort: Several things are happening. There’s been commentary that this may be in reaction to the political climate. That’s possible, but I think it is a simplification.
The fundamentals are that the economics of fossil fuel development are improving for various reasons. Demand is continuing to skyrocket, and oil and gas companies are becoming more efficient in terms of greenhouse gas emissions. The reputational burden of investing in them is dropping. Renewable energy stocks are also doing quite well. However, there’s this consensus that we will need every energy source, and there’s very little thinking that fossil fuel companies will drop off. Therefore, as a bank or as a lender, you’d have a significant opportunity cost if you bailed on fossil fuel companies, and a lot of what the NZBA talks about is reducing the carbon emissions in portfolios.
You balance that against this: The banks also know that if we continue to invest in fossil fuel development, the energy we create will have climate change impacts, and there will be climate change impacts on the economy. The short-term nature of that risk, for example, is that there’s a drought in Southern California right now, and it’s creating fires, which has an economic impact. That risk is distributed around the entire economy. It’s not just one bank holding the risk for those houses in Los Angeles. So, even though we know that we’re creating a negative on that side of the ledger, it’s a distributed negative, meaning everybody will pay a little bit. These bigger impacts are a bit farther down the road, and cash in hand today is worth more than cash tomorrow.
Another reason is there are legal and regulatory considerations. Banks and companies are being sued for their net-zero commitments. Regulators are also saying, ‘This is what you should and should not consider when you’re doing net-zero commitment.’ Add to this the political debate over ESG, and we can start to see why a bank may drop out of the NZBA.
Read the full article by Yale’s Bree Shirvell, with Todd Cort and Daniel Esty here
