Quo Vadis, NZBA? Navigating the Path to Sustainable Finance

Vesa Puttonen

1. Net zero banking alliance (NZBA)

Net zero banking alliance, also known as NZBA and established in April 2021 is according to UNEP FI “group of leading global banks committed to aligning their lending, investment, and capital markets activities with net-zero greenhouse gas emissions by 2050”  (UNEP FI). NZBA has already 136 banks across the globe with over 100 NZBA banks having science-based sectoral targets for 2030 using for their financial emissions using the 1,5°C scenarios in the Paris agreement (UNEP FI). It represents a collective bank-led commitment from the financial sector to reach net-zero emissions. The NZBA is a part of the Glasgow Financial Alliance for Net Zero, which includes financial institutions committed to similar goals across various sectors of finance. A pre-requisite for joining the NZBA is the signing of the commitment statement by a bank’s CEO. In signing the NZBA commitment, banks commit to set targets that are robust, ambitious and science-based.

2. Assessing Progress: The 2024 Progress Report and Its Criticisms

The NZBA's 2024 Progress Report, compiled from data provided by 122 member banks up to May 2024, serves as a benchmark for evaluating the alliance's progress. However, the report has been met with criticism for showing limited tangible progress (Aubineau, 2024). The report focuses on target setting and transition plans but lacks a thorough assessment of actual progress towards these targets. Claims of increased sectoral emissions disclosure are not substantiated with definitive data, raising questions about the effectiveness of target setting without real-world emission reductions.

Several major U.S. banks, including Citigroup, Bank of America, and Morgan Stanley, have exited the alliance due to political pressures and opposition to environmental, social, and governance (ESG) initiatives. These banks have stated their intent to pursue independent climate goals, despite leaving the NZBA. This reflects the complex interplay between environmental commitments and political dynamics, particularly in regions with shifting political climates (Mirza, 2025).

Kacperczyk and Peydro (2024) shows that banks committed to the Science-Based Targets initiative influence high-emission firms by reducing their access to debt. However, this reduction in debt is more about preference than risk management, as evidenced by unchanged debt maturities and a shift away from medium and long-term financing. This preference for reducing exposure to high-emission firms highlights a potential bias towards easier, less impactful solutions.

3. Moving Forward: Strategic Engagement with High-Emission Firms

The NZBA could maximize its impact by fostering deeper engagement with high-emission firms. Rather than primarily divesting from these firms, banks should be incentivized to support their transition to sustainable practices. Hartzmark and Shue (2023) argue that investing in brown firms and aiding their transition can achieve more significant emission reductions than the current strategy of divestment. This approach, however, entails more resources and careful monitoring, presenting a greater challenge but also greater potential for meaningful change.

To achieve genuine climate action, the NZBA must strengthen its accountability mechanisms and provide more effective incentives for banks to facilitate substantial emission reductions:

1. Enhanced Accountability: The NZBA should have a stronger supervisory authority to enforce commitments, requiring more frequent and detailed reporting. This would ensure that banks are held accountable for their goals and progress.

2. Interim targets: The interim targets for 2030 should be removed because they make it impossible to finance brown companies today.

3. Structured Engagement: Banks should be encouraged to engage with high-emission firms through targeted lending practices, such as project finance, where funds are allocated specifically for transition projects rather than general corporate financing.

4. Regulatory Interventions: Regulatory bodies can play a crucial role by ensuring that banks adhere to stringent reporting and disclosure standards, thus maintaining transparency and accountability.

5. Incentive Realignment: The NZBA should re-evaluate its incentives, rewarding banks for engaging with brown firms and facilitating their transition. This could involve providing cheaper funds or fewer restrictions for banks that demonstrate genuine efforts in supporting high-emission clients in their transition.

4. Conclusion

Diving into the guidelines of the alliance, one is left wondering whether the NZBA’s goal is to make a real impact or simply to make the banking sector appear more sustainable to the public by turning client portfolios green. The recent departure of major American banks forces the NZBA to reconsider its direction and development strategies to remain relevant.

While the NZBA’s goals are well-intended, the mechanisms by which banks are expected to contribute to sustainability need further refinement. The most meaningful emission reductions are achieved through aiding the transition of brown firms. This strategy, which deviates from the predominant approach to sustainable investing, poses challenges for banks in navigating the requirements and expectations of the alliance. There is a risk of adverse reactions from investors and other NZBA advocates, who may view capital allocations to brown firms as contrary to the alliance’s objectives.

NZBA banks lack incentives to target brown firms, as divesting from them is easier and enhances their own ESG ratings.  When a bank has committed to the Net Zero initiative and begun reporting its emission reductions, it becomes nearly impossible for it to start financing brown companies now.

Public scrutiny, along with pressure from investors and advocacy groups, often intensifies the incentives for banks to limit their exposure to carbon-intensive firms. Engaging with brown firms requires more resources (e.g., for monitoring) and could damage short-term reputations. Therefore, the NZBA should rethink its incentives and reward banks more for working with brown firms, which have greater potential for emission reductions compared to green firms. To drive meaningful change, the NZBA should prioritize engagement with brown firms and support investments that lead to real emissions reductions.

Vesa Puttonen is a Professor of Finance at the Aalto University School of Business.

References

• Aubineau, Q. (2024). New Net-Zero Banking Alliance report shows no progress towards reaching net zero. BankTrack.

• Hartzmark, S. M. & Shue, K. (2023). Counterproductive sustainable investing: The impact elasticity of brown and green firms.

• Kacperczyk, M. & Peydró, J.-L. (2024). Carbon emissions and the bank-lending channel. ECGI Working Paper Series in Finance, No. 991/2024.

• Mirza, Z. (2025). Bank of America, Citigroup, Morgan Stanley exit NZBA. ESG Dive. January 3, 2025.

• NZBA. (2024). 2024 Progress Report.

• UNEP FI (n.d.) ‘Net-Zero Banking Alliance.’ Available at: https://www.unepfi.org/net-zero-banking/