Tug of war at crossroads of climate change

According to the Copernicus Climate Change Service (C3S), 2024 was the warmest year on record globally. Exploring the C3S website reveals striking and humbling graphical representations of temperature trends over past decades. For the first time since record-keeping began in 1967, the average global temperature exceeded 1.5-degree Celsius above pre-industrial levels during the past calendar year.

Additionally, data on five-year global surface air temperature averages dating back to 1850 highlights a significant inflection point occurring a few years after World War II. Since the 1980s, the upward trend has resembled the rapid growth of "Magnificent 7" tech stock prices – an undeniable trajectory for any impartial observer.

However, in spite of record-breaking, alarming predicament on the climate change front, an ironic event has taken place at the world stage: On December 6, 2024, Goldman Sachs decided to part ways with the UN-sponsored Net Zero Banking Alliance (NZBA).

The departure saw Wells Fargo, Citigroup and the Bank of America follow suit the same month. JP Morgan, another red and blue global banking behemoth, walked through the exit door on January 7, 2025. With overwhelming evidence on global climate change, the overarching question becomes: why are all these banks walking away from NZBA and besides, why does UN-sponsored alliance matter at all?

According to the United Nations' Environment Programme and Finance Initiative (UNEPFI), NZBA, formed in 2021, is UN-convened, climate accelerator of Principles of Responsible Banking (PRB), where a group of leading banks commit to aligning their lending, investment, and capital markets activities with net-zero greenhouse gas emissions by 2050.

The bank-led alliance is expected to provide framework and guiding principles for members to design, set, and achieve credible science-based net-zero targets for 2030 and beyond.

UNEPFI further explains Commitment Statement of the alliance, which stipulates not only transition of attributable Greenhouse Gas (GHG) from the banks' lending and investment portfolios to be aligned with net-zero paths but also focus on priority sectors where banks can have the most impact, ie the most GHG-intensive sectors within their portfolios.

As part of the commitment, banks ought to set targets which are aligned with the 1.5-degree Celsius warming ambition of the Paris Agreement and must follow a pathway that allows for no/low overshoot of the 1.5-degree Celsius ambition.

The Commitment Statement further goes on to list other agreements relating to reporting and publishing progress. All of the above sounds principled and intuitively sensible given C3S's revelations of temperature increases in 2024, so then what happened to the cognitive prowess of the big banks?

Unfortunately, banks have found themselves caught in the crosshairs of the United States' incoming political leadership. President-elect Donald Trump campaigned on promises of energy sector deregulation, dismantling environmental rules, and promoting increased drilling – policies likely to shape the agenda of the new administration. Notably, all the banks that have exited NZBA are US-based, though they operate globally.

It has been reported that these banks appear to be repositioning themselves in anticipation of the new administration's policy direction, aiming to avoid scrutiny from both government and media. Additionally, some may face pressure from their domestic client base, who are aligned with Republican policies, risking potential revenue losses and damaged relationships.

By distancing themselves from the NZBA, these institutions free themselves from stringent net-zero emissions commitments, enabling greater flexibility to support the anticipated pro-fossil fuel policies. President-elect underscored his stance during a speech on January 7, 2025, at the Mar-a-Lago Club, where he pledged full support for corporate America's oil and gas drilling efforts.

For US banks, this strategic shift not only safeguards existing business interests at home but also positions them to capitalise on emerging opportunities in fossil fuel financing, infrastructure development, and the broader energy value chain.

At the same news conference, the president-elect further went on to explain that the incoming administration would allow drilling in a lot of places, enhancing production, which would bring down energy prices and consequently inflation.

While intuitively this sounds reasonable, inflation in the United States has already been on a decline along with the Federal Reserve's policy rate, so the question becomes, is there more to unleashing a wave of oil and gas boom?

There are a couple of plausible aspects to consider: First, the oil and gas moguls and executives have turned out to be Trump's biggest campaign financiers. Apart from the president-elect's personal views on climate change and green funding, there is a strong elite-capture at play which, through the country's political economy, has coerced US banks to reconsider their net-zero commitments.

Second, the race to the future world hegemony runs through the veins of artificial intelligence (AI) and its related ecosystem. It is a known fact that data centres, which make the bedrock of AI, require insatiable energy to function.

According to the US Energy Information Administration, as of 2023, 60% of the total electricity produced in the United States came from fossil fuels, followed by renewables at around 21% and nuclear at around 19%. Natural gas was the single largest source accounting for 43% of the aggregate electricity produced in the country.

Given the imminent rise of AI, its related infrastructure and its fundamental importance to lead the next wave of industrial revolution, it is paramount that fossil fuels be explored to meet rising energy needs. Therefore, there lies the Achilles' heel of US banks' cognitive prowess.

Decisions have consequences, especially when they are national and global in footprint. US banks may have opted out of the NZBA but this act clearly goes to the heart of their global reputation when it comes to climate change fight. While they may still stand by their uncommitted commitments, such moves arguably dent their global repute as climate champions.

It must be kept in perspective that banks typically tend to work in groups; there is a possibility for other banks to follow suit given the stellar lineup which has taken the exit route. Such decisions are seldom unique to one bank and tend to develop a "path" for others to emulate.

Further, this also raises questions about decision making and governance at the executive level, especially when it comes to such matters. Finally, it lays bare the unrelenting capitalist nature of the banking system, even at a time when human lives continue to be challenged by climate change.

For the global climate change fight, the next few years appear challenging. The United States is the leader in global initiatives and policy directions. Climate change initiatives may be hard-pressed to show progress if the United States looks the other way. Let us hope they continue to advance.

Finally, for Pakistan it is not great news who direly needs climate change narrative, ensuing commitments and related financing to proceed. What it does mean is that for the foreseeable future, climate change will continue to show its colours, and adverse implications. Pakistan must itself drag through climate mitigation, adaptation and adoption quagmire as world policies are not based on empathy.

The writer is ex-member (Private Sector Development & Competitiveness), the Planning Commission of Pakistan. Presently, he remains engaged in agriculture and with the government in the areas of investments, policy formulation and private sector development