In early 2021, the financial industry launched an initiative called Net Zero Asset Managers (NZAM). Its mission? To align global asset managers with the goal of limiting global temperature increase in line with the Paris climate accord.
If firms could work together to move investments away from polluting industries and into cleaner technologies, that would help avoid climate catastrophe. The idea proved popular enough that it was folded into the Glasgow Financial Alliance for Net Zero (GFANZ), an even bigger financial industry alliance that was rolled out with a lot of fanfare for last year’s climate talks in Scotland.
“ When fossil fuel investments are so lucrative, why bother holding the companies you’re investing in to even a weak promise of offsets or direct air capture? ”
But barely a year and a half later, several of the largest financial institutions were thinking of quitting the alliance. And on Dec. 7, 2022, Vanguard—the world’s second largest asset management firm, with $8.1 trillion in assets under management—announced its withdrawal.
What happened? And how should financial regulators worldwide plan for getting money out of polluting industries and into the transition to a livable future?
To answer that, we need to unpack the vagueness of the term “net zero”—and ultimately, the flawed incentive structure of capitalism itself.
“Net Zero” does not mean zero
What exactly is “net zero”? It doesn’t mean zero emissions. Instead, it’s based on the premise that instead of just polluting less, we can simply remove some emissions from the atmosphere—whether by natural means like soil and forests, or unproven mechanical technologies like “direct air capture.”
Unfortunately, the entire concept of “net zero” is flawed.
First, it gives polluters a free pass. They can continue business as usual—cutting none of their emissions—if they claim their emissions are being balanced out by natural or technological withdrawals now or in the future. Even if that were the case, this option does nothing about the harmful health effects of coal-power generation and other industrial pollution on nearby communities.
Second, claims of natural removals are dubious at best. They are hard to verify, and are often based on false claims.
Illegal deforestation because of mining and logging, as well as wildfires, make them notoriously impermanent. And they can lead to serious violations of the land rights of indigenous peoples and farming communities.
Finally, “direct air capture” machines that suck carbon out of the sky don’t exist in any practical sense. There are only 19 experimental projects in operation worldwide, which collectively capture 10,000 tons of carbon dioxide a year—a negligibly small fraction of annual global emissions of about 60 gigatons. They don’t add up to anything close to the scale needed to back up corporations’ massive “net zero” claims.
Even if these machines existed at the required scale, they would be prohibitively expensive, and would use vast amounts of electricity which would be better used to electrify home heating and transportation. Relying on speculative technology to avert planetary catastrophe is egregiously irresponsible, especially since proven solutions like renewable energy and electrification of home heating exist.
In practice, the distinction between actual zero emissions and “net zero” emissions has consequences for investment choices. An oil refinery project that claims to offset its emissions with forest protection, or that its emissions would disappear by some future date when direct air capture comes to fruition, would be consistent with “net” zero—but dangerously counterproductive.
Financial institutions won’t regulate themselves
It’s likely that Vanguard, and some of the other financial institutions reportedly considering quitting NZAM, never would have joined an alliance for real zero emissions. In that sense, their quitting shouldn’t come as a surprise.
Still, the immediate motivation for some of them to leave GFANZ reportedly had to do with the improved financial outlook for fossil fuels. Oil CL00,
When it’s clear that there’s a lot of money to be made in financing oil and gas, the supposed commitment of big banks to our shared planetary future evaporates.
Bloomberg News characterizes it as “Wall Street just doing its job: making money.” That, exactly, is the problem. When it’s a choice between averting catastrophe and making money, Wall Street will always choose making money.
The best that the investment industry was able to do on its own initiative was to create a nonbinding commitment to climate-safe investments with a “net zero” loophole—and when there was money to be made in oil and gas, even that weak commitment felt like too much.
Clearly, the financial industry can’t be trusted to regulate itself, especially when it comes to an existential threat such as climate change. What, then, is the future of efforts to transition finance away from climate destruction?
The U.N. Framework Convention on Climate Change (UNFCCC) and its member governments must start with the premise that big finance can’t be trusted to regulate itself. There need to be robust regulatory frameworks at the national and international level to compel big finance to jettison oil and gas even when it’s profitable.
What regulation should look like
“Change Finance, Not the Climate,” a 2020 book by my colleague Oscar Reyes, lays out a detailed plan for what this regulatory framework could look like.
Key features include requiring central banks (such as the U.S. Federal Reserve) to address the climate-related risk of the financial sector, regulating banks to limit the flow of capital to fossil fuels and other climate pollution, and creating publicly owned “green banks” to drive investments to renewable energy and other climate solutions.
Left to its own devices, capital will never clean up its own messes. That’s why it’s left to the rest of us to make sure it happens.
Basav Sen directs the climate policy program at the Institute for Policy Studies.
More on climate and investing
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‘Anti-woke’ reaction? Fund giant Vanguard quits net-zero climate alliance.