Late last year, Vanguard surprised the sustainable investing world by withdrawing from one of the main climate-conscious industry alliances, the Net-Zero Asset Managers (NZAM) initiative.
The exit came at the same time as pressure grew in the US, particularly from a number of Republican state leaders, to denounce ESG considerations in investing – and the firm’s decision appeared to be well-received in some of those states.
Meanwhile, there was another industry alliance exit but for different reasons. Earlier this month, GLS Bank, a German bank that specialices in ethical practices, opted to leave the Net-Zero Banking Alliance (NZBA), a group for which it was a founding member. In comments to Bloomberg, GLS pointed to large-bank members of NZBA that have too much business supporting fossil fuel projects.
Vanguard said that it chose to leave NZAM because “industry initiatives can advance constructive dialogue, but sometimes they can also result in confusion about the views of individual investment firms.” Conversely, GLS left a net-zero group because its membership criteria appeared to be too lax.
But the two exits lead to the same question: How effective are net-zero alliances, when membership is easy to attain but holding those companies accountable is difficult? And, given that most of these groups are only a few years old, is it fair to expect much progress from them?
“They’re incredibly well intentioned. They’ve arisen out of the fund manager industry recognizing that not much is changing,” said Paul Jourdan, CEO of Amati Global Investors.
“It’s very enticing to sign up, as a manager, because there is not a particularly high barrier to do so.”
That can be positive if it encourages companies to pursue paths to net zero, when they otherwise might not be inclined to. But there is the possibility that attracting a wide range of members means that some companies will join for the exposure, but avoid changing their ways.
Once financial services companies sign up for alliances, they must make commitments around net zero, but how they will be held to such goals is also in question.
“Everyone gets a lot of press when they sign up for a commitment, and not as much follow up,” said Leslie Samuelrich, president of Boston-headquartered Green Century Funds.
Alliances “raise awareness of climate risk, which is good,” she said.
“It’s all in the details. All of these organisations need requirements, and then accountability.”
Members of such groups often put the alliance logos on their sites, which could help give them some credibility with environmentally conscious clients. Thus, joining alliances might be more of an image move for firms that are less interested in doing the hard work of reducing emissions, Samuelrich said.
“Some companies might strategically use them that way,” she said. “Some are intentional, well-meaning and committed. For others, it’s window dressing.”
A report last year by ESG Clarity found that many asset managers who had made net-zero commitments did so in ways that might not have much real-world impact.
Staying out of alliances
Samuelrich said Green Century avoids being a part of any such initiatives, including NZAM.
“Net zero might lead companies to reduce their emissions, but there are potential negative pieces about how net zero is calculated that could lead to a false sense of accomplishment,” Samuelrich said, regarding the use of carbon credits that could be miscounted, such as forest area in a land trust that would never be built on or harvested for timber in the first place. “We would prefer straight-out reductions working toward zero emissions, not net zero.”
The other, practical reason why Green Century is not part of a net-zero alliance is that measuring carbon in some financial instruments is currently an imprecise exercise.
“For a fund company to achieve net zero or a Science-Based Targets initiative [goal] … you have to be able to measure your portfolio, which is challenging, especially with fixed income,” Samuelrich said. Portfolio holdings, such as oil and gas companies, can also sell off their most carbon-intensive assets, and thus look cleaner on paper – although the assets they sold off continue to exist and emit. That makes engagement particularly important, she noted.
Fossil fuel financing
A recent report from the Sierra Club and other groups found that member banks in the Glasgow Financial Alliance for Net Zero (GFANZ) have only 3% of their energy-related financing in clean projects.
A public relations firm representing GFANZ disputed the findings, saying that the report did not include 70% of power generation companies, which represent most wind and solar energy. The PR firm said in an email that GFANZ would not be available for an interview.
According to the group’s 2020 progress report, it is supporting development of the Net-Zero Data Public Utility. That project is expected to go live in a pilot form this fall, “promoting unprecedented transparency on the net-zero transition with support from financial data providers, governments and international organisations,” the report read. “This purpose of this initiative is to address data gaps, inconsistencies and inaccessibility that slow climate action, providing climate transition-related data, including financed emissions, targets and performance against targets, openly available in a single place for the first time.”
Reputation is the enforcer
Disclosure and transparency can pressure companies to make changes, including financial services firms that are members of net-zero alliances. But beyond the incentives to maintain their reputations and credibility, there may not be much that members in alliance groups can be threatened with, except being kicked out.
“These are voluntary groups. The only power you have is reputation,” said Daniel Klier, CEO of ESG Book, whose firm is working with the Net-Zero Asset Owners Alliance (NZAOA) on a “gold standard” for measuring net zero.
“The exit from an alliance is being noticed,” he said. “Joining it give you less PR than leaving it – and that’s not good PR.”
Last month, NZAOA rolled out new standards for members, with a critical new detail being that carbon credits will be off the table for the net greenhouse gas emissions they calculate. It is also requiring members to set targets for their private equity holdings.
For alliances to be successful, they need a core group of members who are committed to the cause, Klier said. “It has to be CEOs, because there is a personal reputation at stake.”
Along with that, “setting a rulebook that tightens over time,” such as what NZAOA recently did, is key, he said.
“It’s a wonderful case study of how good alliance groups work.”
There is a kink that the alliances seem to acknowledge, which is that they are not a substitute for government action on climate change.
While the groups are open about that, they could still have the effect of taking pressure off of governments to take meaningful steps to clamp down on carbon, Jourdan said.
“The great danger with these alliances is that they act as a substitute for government policy … and in doing so, they could do more harm than good,” he said. “Our system is not designed for private corporations to solve government problems.”
And while net-zero alliances may have no intention of being substitutes for government policy, politicians can see it differently – particularly as difficult actions like instituting taxes for carbon use could be seen as unpopular.
“There’s a kind of desperation to pass the buck somewhere else,” Jourdan said. Alliances “allow the politicians to pass the buck to private corporations.”