Not a month goes by, it seems, without a new policy to attract investment into the transition to net-zero emissions. We see broad laws, like the European Green Deal or the US’s Inflation Reduction Act, and more specific rules such as those requiring companies to report on their climate risks. These steps are vital: they create the systems through which capital should flow to the energy transition.

But there’s another action that governments could take that would speed up the flow of capital through these systems: making it safe for financial institutions to collaborate on sustainable financing by removing the risk that they might be breaching competition law.

Just how big a problem this is was starkly reinforced by news last week that six more big firms were leaving the Net Zero Insurance Alliance (NZIA). At least nine firms have now left the NZIA, part of Mark Carney’s Glasgow Financial Alliance for Net Zero (GFANZ), in the past year.

The latest moves have come after US Republican attorneys-general wrote on 15 May^[1] to the NZIA questioning the legality of its member firms’ action on climate in relation to antitrust law. The letter raises similar concerns about the goals of the Net Zero Asset Owner Alliance (NZAOA), also a GFANZ sub-group, and Climate Action 100+, another large investor collective.

These direct challenges follow months of allegations from Republican politicians that these alliances are illegally colluding against carbon-intensive industries such as oil and gas. Climate Action 100+ and GFANZ represent institutions holding a total of some $200 trillion of assets. The implications for efforts to slow catastrophic climate change are clear.

So far the NZAOA, Net Zero Banking Alliance and Net Zero Asset Managers initiative have largely held firm in the face of political pressure. Whether that remains the case is a big question. After all, two companies have already left the GFANZ-affiliated Net Zero Investment Consultants Initiative, and major Wall Street banks in September were reportedly threatening to leave GFANZ, citing antitrust risks as the reason.

Yet such concerns are not only an issue for big collectives; they could potentially dissuade institutions from working together towards sustainability goals generally.

War effort

The upshot of all this is that we badly need reform, or at least clarification, of the rules for the financial sector on collective environmental action.

The transition to net zero by 2050 is a colossal undertaking, requiring structural change across energy, transportation, industrial processes and most other sectors. According to consultancy McKinsey, reaching net-zero emissions by 2050 will require an average of $9.2 trillion of spending annually on physical assets. Financial institutions will have to provide a large chunk of that.

Financing efforts to mitigate and adapt to climate change is such an urgent global imperative that financial institutions must be allowed to act in concert to mobilise the necessary resources, just as they might to fund the war effort in a time of conflict.

Groups like GFANZ provide a vital framework and common goal for financial institutions as they manage the complex task of reducing their financed emissions. They are certainly not beyond the law – or criticism – but it does not make sense for their participants to be at risk from antitrust lawsuits.

After all, non-financial firms are receiving guidance about how they can collaborate on climate change. Britain and the European Union are seeking to clarify that corporates can make certain ‘sustainability agreements’ with competitors without fear of breaching antitrust rules. To this end, new EU rules came into force in January^[2], and the UK’s Competition Markets Authority is working on draft guidance on environmental sustainability agreements.^[3]

Sadly, efforts to create similar ‘safe harbours’ for financial firms still appear to be lacking. Institutional investors remain wary of working together to pressure companies in which they hold stakes to reduce emissions, for example, or allocate more capital to renewable energy projects.

Combining resources

Collaboration between financial institutions does more than mobilise capital: it increases influence over companies. In 2021, activist hedge fund Engine No.1 famously managed to have three directors appointed to energy giant Exxon’s board with the aim of pushing it to reduce its carbon footprint. That would not have happened without the support of asset managers BlackRock, Vanguard and State Street, three of Exxon Mobil’s biggest shareholders.

Meanwhile, just this month three major Toyota shareholders filed a resolution for the Japanese auto maker’s Annual General Meeting on 14th June with a view to accelerating its transition to electric cars and ensuring greater transparency in its lobbying. Between them, Danish retirement fund AkademikerPension (with US$20 billion of assets under management), Norway’s Storebrand Asset Management (US$120 billion) and Dutch pension fund APG Asset Management (US$600 billion), reportedly hold $400 million of Toyota stock. Whether they will succeed in their proposal is yet to be seen, but by acting in concert they undoubtedly increase their chances.

Of course, climate resolutions filed by external parties typically get voted down, while the company’s own climate plan tends to get approved – as was the case at Shell’s AGM last week. But if bigger groups of investors were prepared to combine their weight, they would be much harder to counter, as the Engine No.1 episode showed.

So it is in everyone’s interest for governments to ensure that competition law does not hamper financial collaboration to tackle climate change. Building protections for financial institutions who want to work together towards environmental goals will not be popular with everyone, and may well face legal challenges. But it’s essential that governments take action: failing to do so will make financing and influencing the transition harder than it needs to be.

[1] https://attorneygeneral.utah.gov/wp-content/uploads/2023/05/2023-05-15-NZIA-Letter.pdf

[2] https://www.twobirds.com/en/insights/2022/finland/greening-competition-law

[3] https://www.gov.uk/government/consultations/draft-guidance-on-environmental-sustainability-agreements