The financial world is trapped in a sort of prisoner’s dilemma. If all banks stop funding fossil fuels, the world, financial markets, and banks will be better off. If a few banks fund fossil fuels, everyone loses, but fossil banks lose less than their cleaner peers. This is a coordination problem.

Ideally, this coordination would come from government entities and regulators. For example, US regulators might forbid banks and export credit agencies from financing international coal, as the US agreed to do at COP26, but has not followed through on. To do this, regulators could require legally binding carbon emission target setting, forbid certain types of financing like coal power plants and fossil fuel expansion, or mandate a clean energy supply investment ratio (clean energy financing-to-fossil fuel financing).

Bloomberg conservatively estimates that this needs to be at 4-to-1 by 2030 going to 10-to-1 by 2040 to be Paris-aligned. (This means pursuing efforts to limit the temperature increase to 1.5°C.) For reference, in 2022, Bank of America had a roughly 1-to-1. Citi and JP Morgan had an even more pitiful 2-to-3 and 4-5 ratios, respectively.

The strongest international leadership on this collective action problem would require the US and its allies to enforce international climate finance regulations. They might do this in the way they did with Russian sanctions and the Ukraine war – financial entities that weren’t Paris-aligned could face restricted access to the SWIFT financial transaction processing system. In effect, banks would align their financing with credible net-zero targets within the week.

Unfortunately, the incoming Trump administration is unlikely to pursue such leadership or provide domestic regulatory clarity. Instead, Trump has pledged to withdraw the US from the Paris Agreement. Trump-appointed regulators are also likely to view organizations like the Net Zero Banking Alliance as price-fixing schemes against fossil fuels, opening the banks to legal and anti-trust concerns.

This brings us to the Net Zero Banking Alliance (NZBA), a group of banks that, at least nominally, are, "committed to aligning their lending, investment, and capital markets activities with net-zero greenhouse gas emissions by 2050." Bank of America, Citi, JP Morgan Chase, and Morgan Stanley all dropped out this January.

Even when they were part of the alliance, these banks consistently showed that they were not committed to limiting climate chaos. Instead, in 2023, they financed $60 billion of fossil fuel expansion, an activity that the International Energy Agency has said is incompatible with any net zero commitments.

By leaving the NZBA, these banks are confirming that they don’t intend to lead the fight against climate change. What they do intend to do is to keep their heads down and either shield themselves from the liabilities that leadership might bring, try to curry favor with the incoming administration, or both.

Back to the prisoner's dilemma, the actions of these banks will make us all lose, but they hope to lose less.

It’s unclear whether they’ll live up to other sustainability pledges they've made. It would be better for them if they all did, but they won’t talk about it if it will bring down the new administration’s regulators.

People have occasionally asked Bank.Green whether NZBA membership helps boost banks' ratings on our website. NZBA, in its current form, is all about talk, and talk is cheap. We have never awarded points in our rating methodology for NZBA membership.

On a related note, it's interesting that Bank of America, Citi, and Morgan Stanley all dropped out on January 2, just after holiday gatherings but before many people returned to the office. Chase dropped out today. This timing shows that the banks planned this. It also implies that while they're dropping out for regulatory reasons, money, or both, they don't expect their actions to be popular with their customers or the public.

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