Study: “… high costs and risks …” Collapsed the Net Zero Banking Alliance

Essay by Eric Worrall

Apparently it wasn’t just the Trump effect, banks were worried about the commercial viability of Net Zero.

Banks retreat from climate change commitments – but it’s business more than politics

Published: September 25, 2025 10.20pm AEST

David L Levy Professor Emeritus of Management, UMass Boston
Rami Kaplan Senior Lecturer of Sociology and Labor Studies, Tel Aviv University

Another business-led effort to fight climate change is unraveling. 

On Aug. 27, 2025, the Net-Zero Banking Alliance suspended its activities after several major U.S. and European banks backed out. 

While most observers are blaming the strong political backlash in the U.S. against climate change action and sustainable investing, we believe the banks didn’t need much of a push: These net-zero alliances never made much business sense and were not particularly effective at fighting climate change. Indeed, for us the puzzle was why they had flourished in the first place.

To examine their rise and fall, we recently conducted a research project that encompassed interviews with more than 80 executives from various financial institutions, activist organizations and oil and gas companies.

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Fossil fuels – too lucrative to abandon

While the political pressure in the U.S. has indeed been intense, the collapse of net-zero networks and the broader corporate retreat from climate commitmentsis largely due to the continued profitability of fossil fuels and the high costs and risks of deep decarbonization. Investors and banks, of course, want to keep on financing profitable companies and avoid pressuring their clients to take risky measures. 

Oil companies such as BP and Shell that had relatively strong climate targets suffered financially as a result, prompting them to retreat from these targets and shift capital from renewable projects back toward fossil fuels. High energy prices in the wake of the Russia-Ukraine war made the sector even more lucrative. Low-carbon fuels and processes for industries such as aviation, steel and cement are still very expensive.

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Read more: https://theconversation.com/banks-retreat-from-climate-change-commitments-but-its-business-more-than-politics-265176

The abstract of the study;

The Rise of Investor-Driven Climate Governance: From Myth to Institution?

Rami Kaplan, David L. Levy
First published: 23 February 2025

Funding: This research was supported by Grant No 0610218182 from the United States-Israel Binational Science Foundation (BSF) and The Climate Social Science Network.

ABSTRACT

Investor-driven climate governance (ICG) is premised on mobilizing finance to address climate change by leveraging investors to pressure companies to reduce emissions. Examining the rapid growth of ICG from an institutional political economy perspective, we argue that powerful financial and regulatory actors with varied interests coalesced to promote the discourse that climate risks equal financial risks, and to develop a finance-centered mechanism of climate governance. The flourishing field created market opportunities for other actors such as data vendors and accountants, and attracted activists seeking leverage on emitters. In turn, institutionalization exerted isomorphic pressure on financial firms to adopt ICG practices. However, ICG practices of disclosure and emission commitments became increasingly decoupled from actions to reduce emissions due to the weak business case for decarbonizing investors’ portfolios and corporate operations; the core economic mechanism was largely a myth. This decoupling created contradictory forces: it erodes the legitimacy of the ICG discourse, but we also identified dynamic feedback loops that strengthen the field, potentially making the myth self-fulfilling. Overall, we conclude that the field’s momentum, interests of key actors, and feedback effects are likely to sustain the field, which is deeply institutionalized despite the current headwinds.

Read more: https://onlinelibrary.wiley.com/doi/10.1111/rego.70000

There are good reasons to be concerned about the safety of bank loans for Net Zero projects.

Even in Britain, whose current government leads the global pack in terms of Net Zero fanaticism, the national government has wide ranging powers to terminate contracts deemed not to be in the national interest, even if such termination clauses are not present in the contracts. This power is usually used to cancel land release schemes concocted by corrupt house builders and local planning authorities, or noncommercial sweetheart deals for sports clubs chaired by the local mayor to lease public land, but it could also be used to cancel Net Zero subsidies.

In July this year, Richard Tice, deputy leader of Reform UK, informed energy companies that a future Reform government would cancel green energy subsidies. Reform is currently riding high in the polls, after staging a surprise breakout in the last election, and stands a significant chance of holding the balance of power, or even forming a government on their own, after the upcoming 2029 national election.

Without subsidies, it seems likely that renewable companies would be unable to meet their financial commitments.

Politics also affects the profitability of fossil fuel companies, but not to the same extent. Even in radical green jurisdictions like California, companies which import fossil fuel can still make a profit – they just have to raise prices to cover the higher cost of doing business.

With such sensitivity to the prevailing political mood, and today’s deeply unsettled global political landscape, there is no wonder banks are pulling back from high risk loans to green energy companies.