Banks Step Back from Climate Pledge, Driven by Profit Not Politics

The Rise and Fall of Net-Zero Banking Alliances

A significant business-led initiative aimed at combating climate change has faced a major setback. In August 2025, the Net-Zero Banking Alliance suspended its operations after several leading U.S. and European banks withdrew their support. While many have pointed to the strong political opposition in the U.S. against climate action and sustainable investing as the primary cause, there are deeper reasons behind the alliance's decline.

The Net-Zero Banking Alliance was established in 2021 with the goal of reducing lending to carbon-intensive sectors so that total greenhouse gas emissions from companies in the banks’ loan portfolios approach zero by 2050. This objective aligned with the Paris Agreement but lacked binding targets and clear short-term plans. Similar alliances were formed in insurance, asset management, and other financial sectors under the United Nations Environment Program’s Finance Initiative. Over the past 16 months, these alliances have also faced similar challenges.

These net-zero initiatives were built on the idea that climate risk is equivalent to financial risk and that addressing it requires a collective effort. The aim was to use the power of finance to encourage companies to reduce their carbon footprints. Key financial regulators, central banks, and major asset managers supported these efforts, believing that climate change poses long-term systemic risks to global markets and economies. Prominent figures such as Larry Fink of BlackRock and former Bank of England head Mark Carney lent credibility to these initiatives.

Environmental groups initially supported these alliances as a way to pressure companies on climate issues. However, our research revealed that many financial institutions joined not out of concern for climate-related risks, but due to peer pressure, investor demands, activist campaigns, and regulatory expectations. Reputational risk was a significant factor, with many seeing a low-carbon transition as inevitable due to regulation, technological innovation, and consumer demand.

During the Biden administration, substantial funding flowed into clean energy through the Inflation Reduction Act. This period saw the rise of a lucrative industry focused on sustainability data and consulting services. The global market for sustainability data and software reached over $1 billion in 2024 and continued to grow. Accounting and consulting firms experienced rapid growth in climate strategy and sustainability reporting. Asset managers also benefited by charging higher fees for funds screened for sustainability, even though these funds did not consistently outperform the broader market.

Vested interests drove the expansion of net-zero networks. At its peak in 2024, the Net-Zero Banking Alliance had over 140 members globally, managing an estimated $74 trillion in assets—over 40% of global banking assets.

Political Backlash and Economic Realities

Despite the initial momentum, the collapse of these alliances was triggered by a combination of factors. A major driver was the political backlash against climate action following the 2024 election of President Donald Trump. Finance officials in over 20 U.S. states demanded that major asset managers restrict the use of environment, social, and governance benchmarks, claiming they eroded traditional fiduciary duties and hurt investors. In August, 23 Republican attorneys general accused climate disclosure organizations of operating an anticompetitive "climate cartel" and violating antitrust laws.

However, the continued profitability of fossil fuels and the high costs of deep decarbonization played a crucial role in the retreat from climate commitments. Investors and banks prefer to finance profitable companies and avoid risky measures. Oil companies like BP and Shell, which had relatively strong climate targets, suffered financially, prompting them to scale back their commitments and shift capital back to fossil fuels. High energy prices post-Russia-Ukraine war further boosted the sector’s profitability. Low-carbon alternatives for industries such as aviation, steel, and cement remain expensive.

The Trump administration has also rolled back clean energy subsidies and eased regulations, opening more land for oil and gas exploration. These policies made it difficult for the banking alliance to reduce fossil fuel financing, with money continuing to flow into oil and gas projects.

European banks that cut funding to fossil fuel companies saw their business diverted to non-bank sources, which have grown significantly in the past two years. Facing this loss, major banks increased their lending to oil and gas companies in 2024, reaching a three-year high of $869 billion.

The Cost of Membership and Internal Challenges

Membership in the net-zero alliances became increasingly costly over time. Stricter standards required specific plans and timelines for ending fossil fuel financing, along with disclosures of Scope 3 emissions. Financial institution managers reported pushback from clients due to the complexity and demands of these requirements. Membership also shifted from a reputational asset to a liability, as activist organizations highlighted the hypocrisy of continued fossil fuel lending despite climate commitments.

Ignoring Long-Term Risks

Despite the risks associated with long-term fossil fuel investments, banks continue to finance these projects. These loans typically span 10 to 25 years, exposing investors to potential losses if a transition to clean energy makes these projects worthless. One study estimates that investors are exposed to over $1 trillion in potential losses.

Our interviews revealed that organizational silos separate climate risk analysts from loan originators, leading to decisions that may not account for long-term risks. Current risk assessment tools are often crude and fail to provide the quantitative metrics needed by loan underwriters. Additionally, loans are frequently securitized, obscuring the underlying risks.

The Future of Climate Governance

While the Net-Zero Banking Alliance is not entirely gone, it is currently considering a restructuring into a weaker "framework initiative" offering voluntary guidance instead of binding commitments. Some banks leaving the alliance have stated they will maintain their climate goals and sustainability policies.

Climate risks are real and growing. The Boston Consulting Group estimates that physical risks such as floods, droughts, and wildfires could cost companies up to 25% of their profits by 2050, significantly impacting global GDP. A transition to a low-carbon economy will involve trillions of dollars in costs and create disruptions, but also opportunities as new technologies and companies emerge. The longer action is delayed, the greater the risks to the planet and the global economy.