Forest fires now are burning nearly twice as much tree cover as they did 20 years ago – an increase roughly the size of Belgium. (Image Credit: National Interagency Fire Center | Flickr | PDM 1.0 DEED)

Is Private Capital the Key to Climate Finance? The Trillion-Dollar Question GFANZ is trying to answer

To limit global warming and cover the costs of adapting to a changing climate, the world needs to mobilise trillions of dollars. The scale of these figures dwarfs the public resources available, making it more compelling to explore alternative avenues.

Many still remember the headlines when wealthy nations were struggling to meet their $100 billion annual pledge to help developing countries, which are hit hardest by global warming and also need far more finance to decarbonise. The good news is that the goal seems to have been achieved in 2022, according to preliminary data. The bad newsis that much of it was debt, and lending as it is done in this context can have horrifying consequences for the budgets of those struggling the most already. Moreover, it is probable much of it was also merely a repurposing of aid: by CARE International estimates, 52% of the finance provided by 23 countries between 2011 and 2020 was previously allocated for development budgets. 

This reality reflects the gravity of the problem that is public climate finance scarcity, which weighs especially heavily on those with the most limited resources. Yet, richer governments are also having immense difficulty amassing the capital. Climate Policy Initiative estimates that in the context of reaching the 1.5°C warming target, global climate finance will need to amount to between $8.1 and $9 trillion a year through 2030. However, annual funding has only recently surpassed $1 trillion. What the world needs is a huge amount of money, and it is a huge issue.

Climate finance encompasses both mitigation and adaptation costs; therefore if the world fails to raise enough capital for mitigation funding, finance needs would skyrocket in the future, as adaptation would impose an even greater burden. (Image Credit: Author’s own graph based on numbers from Climate Policy Initiative, IMF, SPIRI)

Enter the formation of the Glasgow Financial Alliance for Net Zero (GFANZ) at COP26, the 2021 United Nations Climate Change Conference. Bringing together $130 trillion in assets, managed by more than 450 financial institutions as its signatories, the group boasted that the huge sum would from now on be at the service of advancing the net-zero agenda. Members were to follow science-based guidelines to meet the targets set in the Paris Agreement while providing interim 2030 goals.

The sheer magnitude of the commitment inspired optimism. Mark Carney, credited with bringing together the alliance, declared at the announcement that “up until today there was not enough money in the world to fund the transition; this is a watershed.” With GFANZ representing “four in every 10 dollars under management globally”, the scale was unprecedented, marking the much-anticipated entry of financial heavyweights into funding global warming mitigation efforts. 

However, many were sceptical (to say the least), given the alliance’s equally unprecedented green-washing potential. Ben Caldecott—director of the Oxford Sustainable Finance Group at Oxford University—pointed out that the sum is “not a fresh pool of money, and most of it isn’t allocatable.” He further placed emphasis upon that although “this is an important development, we need to communicate responsibly.”

To address greenwashing concerns, it was then established that Race to Zero, a UN-backed verification body, would be tasked with examining members and supervising their progress. Those who do not comply with its criteria would be removed from the alliance. So, GFANZ was to be subjected to stringent oversight, and a “self-governing club of financiers” would get the chance to prove that it is not, in fact, “blah blah blah”. 

Yet just a year later, right before the next COP, what many feared had materialised – this was no longer exactly the deal. After big firms like JPMorgan Chase & Co. and Morgan Stanley threatened to leave, GFANZ reduced its reliance on the verification body, giving the members the freedom to essentially ignore its proposals. 

To make matters worse, the Net-Zero Insurers Alliance (NZIA)—one of GFANZ’s seven subgroups—did actually see roughly half of its members depart (including many high-profile firms) due to political pressure from US Republicans over potential antitrust law violations. These developments were tied to the anti-ESG (environmental, social, and governance) backlash in the US: an effort promoted by conservative legislators to roll back the forms of socially responsible financing, primarily aiming to limit or ban the integration of ESG factors in investment decisions.

 “We must wonder whether their ditching of the alliance has more to do with fears of losing business in the U.S. than real legal jeopardy” – said Partick McCully, senior analyst at Reclaim Finance. Since then, the insurers sub-alliance dissolved and restructured to form another net-zero group, involving more antitrust lawyers and regulators, and detached itself from GFANZ.

European governments at the time also expressed their concerns related to NZIA, although privately, reports the Financial Times. Their fears regarded the consequences for energy costs if the sub-alliance collectively were to lessen its support for fossil fuels. A source close to the GFANZ leadership said: “For national security [reasons] they are worried about keeping the lights on”. It is not surprising that the energy crisis, exacerbated by Russia’s invasion of Ukraine, drove many governments to prioritise fossil fuels over decarbonisation efforts.

Despite the state of events, Carney’s alliance attempts to remain optimistic, now having grown to more than 550 firms. The group published guidance on measuring portfolio alignment, launched an initiative to standardise climate transition data, and so on—it is staying quite active, and keeps urging its members to set earlier targets. There are even estimates that current bank member pledges are on track to help get $1.9 tn in energy transition finance by 2030. 

So far though, as a study from the European Central Bank found, there does not seem to be a significant difference between the behaviour of the banks that are part of GFANZ, and the rest. Those who are a part of the group have exhibited the same lending patterns with respect to their climate goals, casting doubts on whether there is any benefit from such voluntary alliances at all. Continued backing of fossil fuels adds to that sentiment, and only 60 out of 240 of the group’s largest members had any policy excluding support for companies developing new coal projects. GLS, a German bank, left GFANZ, with spokesperson Antje Tönnis telling the New York Times, “What sense does it make to be in an alliance like that?”

The gap between what is feasible and what is preferred will likely keep widening at an accelerating pace, and many similar voluntary groups are encountering some of the same challenges. The energy security crisis, its affordability, and pressures from conflicting interests in the way they have affected undertakings by groups like GFANZ do not comprise the entirety of the complex landscape. 

Yet, the question of finding the trillions that bought GFANZ its hype remains on the agenda. So much so that the next COP, which will be held in Baku this autumn, is already considered to be dedicated to finance. And in November, there will be no end to discussions on how to make private capital go green, as the sheer gravity of the challenge makes this a necessity. It is urgent to figure out how to move what is “against the structural grain”, otherwise the costs, not only in terms of currency, might just be much too high to comprehend.

By Kseniia Sharnina

May 17, 2024

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