The Current - Why big banks are backing out of climate initiatives

Episode Date: January 15, 2025

A growing number of banks and asset managers are pulling out of climate initiatives, designed to gear investment practices towards net-zero goals. What’s driving the exodus, and what will it mean for efforts to curb climate change?

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This is a CBC podcast. Hello, I'm Matt Galloway, and this is The Current Podcast. Mark Carney has become recently a big newsmaker once again for Canadians. The former Bank of Canada governor is expected to formally announce his bid to lead the Liberal Party in the coming days. But four years ago, Mark Carney was in the news for something completely different. GFANS is the gold standard for Net Zero. All members have followed rigorous internal governance processes to make their commitments,

commitments that will reshape their business models to fund the sustainable transformations of our economies. That's back in 2021 at the UN climate summit in Glasgow. More than 160 financial institutions signed on to the Glasgow Financial Alliance for Net Zero or GFANS. Finance is no longer a mirror that reflects a world that's not doing enough. It's becoming a window through which ambitious climate action can deliver the sustainable future that people all over the world are demanding. It will help end the tragedy of the horizon. But now a growing number of banks and asset managers want out.

Many of them have been dropping out of GFANS, including the world's biggest assets management firm BlackRock, which quit last week. Catherine McIntyre is a reporter with The Logic. She has been covering this story and joins us now. Catherine, good morning. Good morning, Matt. Let's start with the beginning. I spoke with Mark Carney about this at the time. There was great promise from his perspective about this alliance. What exactly was was great promise from his perspective about this Alliance. What exactly was this Climate Initiative, GFANS? Yeah, there was a lot of hope, as you said,

going back in 2021, when this coalition of banks and asset managers and insurers all rallied around this idea of reaching net zero portfolios by 2050. So ultimately, the idea here was to funnel money away from projects and companies that have a lot of carbon emissions and towards low carbon assets. Firms that participated in this, the idea was really to tap into this collective financial power of global members to essentially help finance the energy transition and curb global warming.

BlackRock, as I mentioned, is the world's largest asset manager. The CEO of that firm, Larry Fink, famously said that climate risk is investment risk. They were all in on this, so why are they out now? Right, yeah, I mean, leading up to this decision to quit, there has been a growing backlash to environmental and social business practices in the US in particular. A lot of this has been driven by

Republican lawmakers arguing that climate finance initiatives like GFAMs are effectively boycotts on the oil and gas industry, which of course that isn't true. Many of these members, they still are heavily invested in fossil fuels or lend to companies in the industry. But the accusation here is that it's a boycott. Critics have also said that members may be violating their fiduciary duty by prioritizing or even considering things like climate change in their investment decisions or

business decisions, and that they may not hold up to legal challenges if they were to be raised against them. And those legal challenges are already coming, right? BlackRock and some of its rivals are being sued. That's right. Yeah.

So this isn't just empty threats, of course. There are real lawsuits against members of GFans who say, you know, why do you have this third party, which is a UN-based organization, influencing your investment decisions and how you manage your shareholders and your clients' money. This isn't a regulator, they're not shareholders. And in terms of just a concrete example, here a couple years ago, even Florida and Texas banned state pension funds from considering things like environmental or social factors in their investment decisions. So, so there is real, um, while, while the, um, the kind of catalyst here is, is political, I'd say there's real potential financial and legal risks

associated with, with now staying in alliances like this. How much of this has to do with the imminent arrival of Donald Trump to the Oval Office? Yeah. I mean, the timing seems, uh, to link it pretty clearly to that. Like I said, there's been some pushback against G fans from the right, um, for the last couple of years, but all of the sudden starting this year, we see

this kind of exodus from big Wall Street banks, like JP Morgan, um, Bank of Bank of America, Goldman Sachs, all abandoning this climate alliance. We know that Donald Trump is expected to roll back climate initiatives like the Paris Agreement and just kind of generally stoke this backlash to, um, to anti climate finance and just more broadly this, you know, what's perjoratively described as, as woke capitalism more broadly. Why does this matter? I mean, you've said that particularly around Blackrock, a lot of money at stake here.

You said that Blackrock pulling out of this climate alliance, in your words is, um is exceptionally poignant. Why does this matter in the broad terms of the fight against climate change? Because that's what Mark Carney was speaking about at the beginning, right? That this is a way for these big players in the financial world to take a leading role

in that fight. Yeah, I mean, historically, whenever BlackRock does or says something, the industry pays attention. To illustrate that a bit, every year BlackRock CEO Larry Fink writes a letter detailing where he thinks the economy and financial markets are going and how BlackRock plans to operate based on those conditions. And everyone in the financial industry

reads that letter and takes it to heart. When he wrote in 2021 about climate change being an existential threat and the biggest priority for clients, they all listened and they made moves. So, you know, when it comes to BlackRock leaving this alliance, I think, you know, it's fair to say that the rest of the industry will pay attention to that. Just since they left, the organization that within GFANS that BlackRock was part of,

in GFANS that BlackRock was part of. The Net Zero Asset Managers Initiative has since paused its operations and they're now reviewing how they operate and what they're doing. So it already is having kind of a meaningful impact there. It's having a meaningful impact in Canada as well. Canadian banks like RBC, you suggested, could leave the Net Zero Banking Alliance. The CEO of RBC, you suggested, could leave the Net Zero Banking Alliance. The CEO of RBC said, pulling out of the Net Zero Banking Alliance, hypothetically, doesn't

lead to a non-commitment to Net Zero or climate change, which is quite a thing to parse. We also heard from the bank of Montreal CEO, Daryl White, who said that that bank is still a member of the Alliance, at least we are today. Do you expect Canadian banks to follow suit? Yeah, so as of now, and I just checked, all of Canada's big six banks are still part of this GFANS, their respective GFANS Alliance. But I do think this kind of signals a breakdown

of this international effort here, just with Canada's banks kind of opening the door to leaving, um, I mean, the CEO of BMO, it's interesting. The CEO BMO said that at the same time, I mean, they're committed still to a transition to a low carbon economy, but they still have in his words, a commitment, particularly here in Canada, to our legacy energy customers completely. We won't abandon them.

So what does that tell you? Yeah, I mean, it tells you that these banks, and even as part of the GFANS Alliance, these banks have continued financing the fossil fuel industry. That's something that I think there's a lot of confusion about is, you know, this argument that this is a boycott on the oil and gas industry is just false. They have already been financing the fossil fuel industry. Being part of this alliance just means that they want to make sure that their oil and gas clients

portfolio companies, just like any other company, has a transition plan, that they have net zero targets in place and that they have a credible plan for achieving that. So it is fairly incremental. And, you know, just like the Canadian banks, the American banks, as well as BlackRock have said that even though they're no longer part of this alliance, they do still plan to meet their climate goals. Of course, this is a layer of transparency and credibility that's now removed from that whole process. But they're saying, we're still committed here. I have to let you go, but just very briefly, how do you think this is going to impact

the global fight against climate change? This was a signal in many ways, in addition to being a material effort, it was a signal, right? Yeah, yeah, it was a signal and it was symbolic. I think, you know, there is a risk that the momentum was symbolic. I think, you know, there is a risk that, that we that the momentum that things like GFANS and Mark Carney and BlackRock were building around sustainable finance starts to slow down a little bit here. And that I think is concerning. You know, just given

how little time there actually is to get global warming under control and how expensive that task will be. Catherine Buleva there, good to talk to you. Thank you. Thanks, Matt. Catherine McIntyre is a reporter with The Logic. We did contact BlackRock, but we were told that no one was available to participate in an interview with us at this time. I'm Sarah Trelevin, and for over a year, I've been working on one of the most complex stories

I've ever covered. There was somebody out there who was faking pregnancies. I started like warning everybody. Every doula that I know. It was fake. No pregnancy. And the deeper I dig, the more questions I unearth. How long has she been doing this?

What does she have to gain from this? From CBC and the BBC World Service, The Con, Caitlin's baby. It's a long story, settle in. Available now. Black Rock's green retreat could be a harbinger of what's to come for the climate finance landscape. Julian Bollew is a lecturer in law

at the University of Sherbrooke, and joins us now from our studio in London, in England. Julian Beaulieu is a lecturer in law at the University of Sherbrooke and joins us now from our studio in London in England. Julian, hello to you. Hello, how are you? I'm well, thanks. This is a conversation around what's known as ESG, environmental social governance. Can you explain what exactly ESG investing is?

Yeah, certainly. So ESG in itself doesn't mean much. As you said, it's an acronym, it stands for environmental, social and governance. It essentially refers to indicators of how a company performs on sustainability issues such as greenhouse gases, diversity, equity, inclusion, good governance practices. ESG is essentially just information on issues that are not purely financial, as opposed, let's say, to profit margins and other things like that, but that still have financial implications. So that's ESG.

So in itself, ESG is just information. And what matters is what you do with that information, and that's where ESG investment comes in. So, yeah. Who determines that an investment fits into that bucket? So there's different approaches, and that's why people are really confused because these approaches are fundamentally different. On one side of the spectrum,

you've got people who use this information, all these ESG indicators, to make traditional investments. So they're going to say, okay, greenhouse gases, it might be good to predict whether a company is going to be exposed to changes in policies,

therefore I'm going to incorporate that in my investment strategies. But the goal is still not to save the planet. The goal is to make financial returns and to minimize risk. That's on one side of the spectrum. And on the other side, you've got people who use this information as goals. So they're going to say, well, I want to save the planet. I want to contribute to a more inclusive society. So I'm going to use the ESG information to achieve positive societal impact.

And that's impact investing. So they're fundamentally different. One is traditional investment, just with more granular information, whereas the other is really about achieving positive things in the economy and for people. BlackRock seemed to be trying to do a little bit of both over the course of that announcement

in the wake of that announcement. And as I said, there was great fanfare, particularly when it came to the alliance that was trumpeted out of the Glasgow climate summit by Mark Carney and others. How surprised are you to see the largest asset manager in the world step back from that? I'm not entirely surprised. We've seen this phenomenon taking place for some time. This is not the first departure. There are really in an odd place right now these financial actors. On one side there is all these natural disasters driven by climate change. The risks of climate

change have never been higher. We see it with the L.E. fires, with hurricanes in Florida, and they need to incorporate that in their financial decisions. That's certainly on the radar. On the other side, they see these political changes and they're trying to incorporate that in their financial decisions. That's certainly on the radar. On the other side, they see these political changes, and they're trying to signal that maybe they are aligned with the new administration in the US. Maybe they are not so supportive of certain environmental policies in Canada.

And we see similar things happening in Germany. So I think they are really in this odd place where they're trying to please everyone. And that's why we are seeing them taking a step back from these initiatives initiatives but still saying that they are still committed and that they still have pledges. They are also facing a lot of legal risk and I think that's not to be underestimated. Whether it's accusations of greenwashing if they do something but don't deliver on what they pledge to but

whether it's all these lawsuits for acting on ESG using this information there's this whole anti-ESG litigation movement that's taking place. So it's all these lawsuits for acting on ESG using this information, there's this whole anti-ESG litigation movement that's taking place. So it's not an easy place to be in. And that brings the next question, which is, well, is it the role of these asset managers to save us from climate change? And I think that brings a broader societal debate. And it speaks to the idea of greenwashing as well, right? I mean, people might make these commitments, but it is the job of people who are watching that to ensure that the commitments are followed through and that the banks and financial organizations live up to those commitments so that it's not just making them look climate friendly.

Yeah, so greenwashing, maybe for the listeners who are not very used to this term, is essentially when a company makes claims in order to exaggerate its environmental performance, to make them Greenwashing, maybe for the listeners who are not very used to this term, is essentially when a company makes claims in order to exaggerate its environmental performance, to make them look greener than they actually are. And unfortunately, we've seen a lot of greenwashing in the financial sector. There's been several studies showing that funds that were committed to achieve ESG goals were actually not delivering. There's really been a lot of studies out there that have shown all the problems with these green claims. So this is

another issue and that's actually driving this departure from ESG as well because investors are losing trust, they are becoming increasingly skeptical and if there's no trust then why would you invest in one of these new products? Why would you invest in an ESG investment fund when you can just go for the same old traditional mutual fund or ETF that you've been investing in your whole life? So that's unfortunately taking place. And that's why regulation need to be adopted to establish standard disclosure requirements and so on to give some structure to that emerging sector.

But it gets to that philosophical debate that you were talking about. I mean, is it the role of these banks and money managers to save us? Isn't their role to make money? So I think like they are- For their investors, for the people who have their money parked with these organizations? I mean, that's why some of them are being sued because some people say that by integrating ESG information, they have breached their fiduciary duties to maximize returns, to minimize risk.

Other people would argue the other way, that you need this information to maximize returns and minimize risk. But coming to the societal debate, I think these are profit-maximizing companies. They are looking at the risk, they are looking at the political changes, and they're just gonna go where the wind blows.

Although we did hear from, I mean, the CEO of BlackRock said, what did he say, climate risk is investment risk, that the two people believed in the past were tied. And you could have said the same thing around, people talk about DEI and diversity, that diversity was good not just for societal benefits, but for business as well.

What has happened to that argument? Yeah, well, I think the argument is still very true and it's supported by science. These risks, again, as the year passed by, the science is becoming clearer and clearer, not only about the fact that climate change is real, but that it is having significant economic impacts. Somebody is going to have to pay for that unless we do something. So they might also be just changing their narrative, but without changing how they are

investing. And I think we should take a close look in the next few months about the investment decisions that these actors make. Are they changing their practices? Maybe it's only just talk. They want to be seen favorably by the new administration. They want to prevent policy changes that would harm them, and therefore they're trying to look very friendly and very supportive of the new policies that will be implemented in the US.

But will that change their investment decisions? Maybe not. So in the end, corporate discourse and corporate action are sometimes two different things, and you need to take a close look at both of them. Yeah. What about in this country? We just have a minute and a half or so left. What about in this country?

We're talking a lot about what's going on in the United States and the new administration there. What do you expect to see here in the coming year? Yeah. So before, so under the current government, there's been a lot of policies that were announced, notably to tackle greenwashing, to create a sustainable investment taxonomy that would classify

investment products. So the current government has really tried to add some structure to this marketplace. The new, well, we'll see what happens after the election. There's a risk that these policies are not maintained and that would harm the rise of ESG even more. Now if there's stronger headwinds as well on the substantive issues like the current tax that might create an incentive not to invest in clean tech and, um, and, and emerging green sectors.

Is that the death of ESG then? Um, some people say it's a debt of ESG, but that sustainability will remain. Uh, so maybe that's, that's what you like. Clearly climate change is not going away. It's going to get worse unless we do something about it. Um, so whether we want to avoid this issue or not, it's going to get worse unless we do something about it. So whether we want to avoid this issue or not, it's going to be there. And I think if you want to make some investments,

you cannot ignore the biggest challenge of the century. Julian, we'll leave it there. Thank you very much. Thanks very much. Julian Bely is a lecturer in law at the University of Sherbrooke and a doctoral researcher at Imperial College London. He was in our London, England studio.

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