Over the last few years, it seemed that climate action had finally gained serious traction in the finance sector.
Major banks joined the Net-Zero Banking Alliance (NZBA), fund managers signed up for initiatives like ClimateAction 100+, and regulators worldwide began warning they would clamp down on misleading “green” claims.
Yet more recently, there have been signs of a pullback. Several high-profile banks have looked to scale down their involvement in the NZBA—citing concerns about legal risks and the complexity of meeting strict emissions targets. Likewise, one of the world’s largest asset managers withdrew from the Net Zero Asset Managers Initiative, and other firms have quietly distanced themselves from ClimateAction 100+.
These moves are disappointing for those who believed the financial industry was ready to move to focus on the wider imperative of combating climate change. Public commitments from banks and fund managers can help shift the broader economy toward sustainability, largely by steering capital away from high-emission sectors or investing in new technologies to help transform the economy.
When major players roll back their pledges, however, it suggests that cutting carbon may still be viewed as expendable if it conflicts with immediate business objectives and profitability goals.
Underlying reasons for the retreat
Part of this backtracking relates to the genuine challenges and costs of achieving net-zero goals. Membership in alliances like the NZBA requires rigorous disclosures of carbon footprints, setting demanding interim targets for 2030 and 2050, and then detailing how those targets will be reached. These requirements are far from trivial. They can involve significant internal restructuring and may compel banks to rethink or reduce their lending to carbon-intensive projects.
If shareholders or boards perceive these constraints as a risk to near or medium-term profitability, it becomes tempting to loosen or abandon commitments altogether.
Meanwhile, fund managers who had aligned with ClimateAction 100+—an investor-led effort to demand stronger climate strategies from the most heavily polluting companies—also face mounting pressures. Shareholders and clients sometimes focus on short-term returns, and if there is any sense that pressuring oil, gas, or heavy industry to decarbonize, or excluding them from portfolios might limit returns, fund managers can come under fire.
US political turbulence
The political climate in the US has added yet another layer of uncertainty. Some Republican lawmakers and state governments have launched sharp critiques of climate- conscious investing, branding it “woke capitalism.” Several states have gone so far as to bar public pension funds from factoring environmental, social, and governance (ESG)
considerations into investment decisions, arguing that doing so is a form of political bias against traditional energy sources.
While this demonstrates a clear misunderstanding of the intent of ESG integration, it is having visible repercussions. JP Morgan and Morgan Stanley, for instance, have been under scrutiny for whether their net-zero plans could be seen as anticompetitive or harmful to the fossil fuel industry.
This political pushback makes it more difficult for banks and asset managers to maintain ambitious climate goals, as they weigh the legal and reputational risks of persisting with strong ESG policies.
Greenwashing crackdowns
Regulatory bodies worldwide have also turned up the heat on inflated climate claims. ASIC, for example, now imposes fines and legal action on entities caught overstating their sustainability credentials. While ensuring honesty in sustainability disclosures is crucial— investors and consumers deserve accurate information —this kind of scrutiny can have unintended consequences.
Institutions that once declared ambitious targets might resort to vaguer, less measurable language to avoid running afoul of regulators. The net result can be a dilution of real goals, blurring the line between genuine ambition and cautious under-promise.
Australia’s new reporting rules
Despite these challenges, there are positive developments. Australia has just rolled out mandatory climate reporting requirements for companies above certain thresholds. These rules force businesses to publicly disclose data on carbon emissions, climate risks, and mitigation strategies.
Although many companies and their advisors initially worry about compliance costs, mandatory disclosure makes it far easier to compare sustainability performance and to differentiate genuine climate leaders from mere opportunists.
Over time, mandatory reporting should help investors spot which companies are truly committed to reducing carbon footprints and which ones are simply paying lip service. Although compliance can be burdensome, better transparency is a key step toward holding corporate leaders accountable.
An additional bright spot is the ongoing work on a Sustainable Finance Taxonomy, both in Australia and on the international stage. Such a taxonomy sets clear definitions for what counts as “sustainable” activity. When everyone uses the same rulebook for labelling an investment as green or climate-aligned, it makes it easier for responsible investors to funnel money into legitimate climate solutions, whether that means renewable energy projects or
efforts to improve supply-chain sustainability.
Pleasingly, on the other side of the Atlantic, leading fund managers are pressing for regulators to keep the faith on ESG. Managers and companies have been urging European regulators to keep with, rather than delay, the scheduled timetable for new ESG reporting rules.
Why this matters
The risks of climate change are anything but hypothetical. Frequent extreme weather events, disrupted supply chains, and shifting consumer expectations all point to the urgent need for comprehensive climate strategies. When financial institutions loosen their public commitments, it injects doubt about whether the finance sector can lead—rather than lag—in the transition to a lower-carbon future. This hesitation can ripple outward, weakening other climate initiatives and reducing the private sector’s appetite for meaningful changes.
These setbacks do not mark the end of climate action in finance. Mandatory reporting, if enforced diligently, will foster greater accountability, and a robust Sustainable Finance Taxonomy will help ensure that sustainability claims can be measured and verified. As the physical effects of climate change worsen, banks and asset managers may also face mounting pressure from customers, investors, and governments to accelerate the shift toward cleaner, more resilient business models.
The path ahead is far from straightforward. Political resistance, short-term profit motives, and the fear of legal complications all pose significant hurdles. Yet the urgency of climate change leaves the finance sector little choice but to adapt. Those who sustain genuine commitments to net-zero alliances and climate-focused investor groups could ultimately strengthen their reputations and better prepare for the inevitable transitions in the global economy.
Tony Adams is head of sustainable investment research at Lonsec Research.
