Financial institutions must find the courage to continue delivering on net zero

As the impacts of climate breakdown intensify, disrupting value chains and economies, devastating communities, and undermining resilience, financial institutions appear to be hesitating. Instead of accelerating climate action, banks and asset managers are backing away from net zero commitments and related industry alliances are wobbling.

While the political and regulatory context in which finance operates has radically changed, the science of climate change has not. Financial institutions everywhere have a critical role to play in keeping global warming within 1.5°C as well as enhancing nature-based solutions to climate change. And in navigating today’s geopolitical and regulatory complexity, it’s vital they retain ambition and double down on financing the net-zero transition, even if they dare not speak its name.

Of course, the retreat from net zero is not happening in a vacuum. Questions about whether sustainable finance is compatible with fiduciary duty and competitiveness have been politicised. In response, some leading banks and investors are reining in ambition and exiting net zero alliances, forcing them to forego target-driven membership and restructure as commitment-free frameworks. Even where progress is real, institutions are hesitant to talk about it.

In January, the Glasgow Financial Alliance for Net Zero (GFANZ) announced a new focus on ‘addressing barriers to mobilising capital’, no longer requiring its members to set and deliver on science-based net zero targets. Since then, the Net-Zero Banking Alliance (NZBA) has haemorrhaged members, while those remaining are now voting on becoming a framework; the Net Zero Asset Managers initiative (NZAM) is undergoing a full review; and the Net Zero Asset Owner Alliance (NZAOA) has also been rattled. Even in the face of political pressure, these developments are unfortunate and risky for organisations created to help deliver the transition.

For financial institutions, shying away from climate action exposes their clients’ capital and risks their own credibility. The climate crisis and related risks, whether physical or transitional, aren’t going away any time soon. And the claim that taking climate action goes against fiduciary duty is debatable. In July, the International Court of Justice ruled that states have binding obligations to prevent climate harm, strengthening the case that financial institutions too must treat climate risk as core to fiduciary responsibility.

Financial institutions must hold the line. Even if political realities limit communication around net zero, they must maintain ambition, and continue to strengthen client engagement and transition planning and investment. There are plenty of frameworks and approaches at hand to help them assess and mitigate climate- and nature related risks, including the CDP-WWF Temperature Scoring Methodology and the Science-Based Targets Initiative.

Net zero alliances under attack must adapt but not fold, and continue to promote best practice and enable their members to set science-based targets in ways that meet their fiduciary duties and net zero objectives, and that scale investment in the business opportunities of transition.

And central banks, financial regulators and supervisors can no longer sit on the fence. They need to make it explicit that climate change and nature loss are material financial risks, and treat them accordingly. Stress testing, disclosure, and capital requirements must reflect reality.

Securing a net zero, nature-positive global economy also demands that governments, regulators and policymakers bolster rather than hinder the ability of financial institutions to deliver transition. Complementing voluntary action with enabling policy works. In Europe, the EU Taxonomy has already shaped €800 billion in climate mitigation investments, and in Asia and leading emerging markets, net-zero policies have tripled across G20 countries since 2020.

The business case is clear. Renewables, for example, are cheaper than fossil fuels. Since 2023, nearly all new solar photovoltaics and onshore wind projects have undercut new coal and gas, and three-quarters were even cheaper than existing fossil plants.

With crude oil prices expected to remain low for the next few years, António Guterres was right when he declared in July that ‘the fossil fuel age is flailing and failing. We are in the dawn of a new energy era.’ The world is already investing nearly twice as much in clean energy as in fossil fuels, and existing clean tech has the potential to displace 75% of today’s fossil fuel demand. Investors who continue to cling to oil and gas are in denial.

Encouragingly, there are some signs that the message is hitting home. With pressure mounting on pension funds to take more account of climate risks, Dutch pension fund PFZW is the latest to act, recently withdrawing from BlackRock, Legal & General and AQR Capital Management to match a shift in its investment strategy toward greater sustainability.

Financial institutions already have models for interest rate swings, credit cycles, and geopolitical shock. Climate change is a systemic risk that encompasses all of these and more. Engaging with it is good risk management. Ignoring it is negligent.

The financial sector stands at a crossroads. It can bow to political pressure, dismantle the fragile progress of recent years, and pretend that fossil fuels are still a safe bet. Or it can double down, align with science, and make finance part of the solution.

Political headwinds do not change commercial realities. Major financial institutions know that aligning strategies with a net zero and nature positive agenda will unlock huge opportunities and contribute to a future in which people and nature thrive.

WWF is ready to work with any financial institution serious about integrating climate and nature in its strategy. And we will continue to support initiatives and regulators that set robust standards. This is a time for courage rather than retreat.