Sustainable finance is braced for its toughest year yet

Before most investors had even returned to the office after the Christmas break last week, it became clear that sustainable finance is in for another rough year.

On Thursday, Morgan Stanley became the latest big name to abandon the private sector’s main climate group, the Glasgow Financial Alliance for Net Zero (GFANZ).

GFANZ, as it’s more commonly known, was set up to help its 700+ members work out how to develop the right targets, accounting metrics and investment strategies to achieve their goal to become net zero by 2050.

Morgan Stanley joined CitiGroup, Bank of America and Goldman Sachs in jumping ship, without much explanation.

Not much is needed, perhaps, given that the decision comes as Donald Trump prepares to return to office as president of the US, with a clear desire to curb efforts to tackle climate change and other sustainability-related topics, such as diversity equity and inclusion.

“This new pressure from Trump has given a lot of these guys a reason to leave GFANZ,” says Bob Eccles, a visiting professor at the University of Oxford’s Saïd Business School, and chair of KKR’s sustainability expert advisory council.

But he believes some of them were just looking for an excuse. “They all signed up too quickly, and didn’t think through what this would actually mean for them,” says Eccles.

What GFANZ expected its members to do, over time, was to align their financial activities with the goals of the Paris Agreement. And that, according to the Intergovernmental Panel on Climate Change (IPCC), would require them to stop financing oil and gas projects in the US — not something most Republicans are likely to accept.

“This whole finance-centric theory of change is flawed,” says Eccles. “It’s not the role of banks and investors to get rid of fossil fuel companies.”

GFANZ seems to agree: it has responded to the departures by lowering its expectations for members, and reinventing itself as an “independent principals group, led by CEOs and leaders from financial institutions”.

It will focus on green investment opportunities instead of decarbonisation.

“GFANZ going forward will allow any financial institution working to mobilise capital and lower the barriers to financing energy transition to participate,” it said in a statement published on New Year’s Eve.

It’s a major blow for the seriousness of collaborative engagement, and it’s not the only one.

Franklin Templeton’s departure from Climate Action 100+, announced in December, is another harbinger of the trouble that lies ahead for responsible investors. The $1.5trn asset manager isn’t the first to exit CA100+ but, given its global head of sustainability invented it, it is arguably the most significant.

During her time at Californian pension fund CalPERS, Anne Simpson helped create the shareholder stewardship initiative, and remains one of its most vocal champions.

The fact she couldn’t convince her own company not to abandon it shows just how strong the will has become among many US investors to back away from their public commitments to decarbonisation ahead of Trump’s return.

It’s not surprising, given the fact that BlackRock, Vanguard and State Street are currently being sued by Republican attorneys for using their stewardship teams to encourage decarbonisation at coal companies.

The lawsuit alleges that this amounts to “anti-competitive practices” and is a sign, according to Simon Rawson, the deputy head of NGO ShareAction, that the ESG clampdown isn’t going away.

“There was some hope that, with the Republicans gaining power again at federal level, they might start to calm down at state level,” says Rawson.

“But this case suggests they’re going to continue to throw the antitrust rulebook at investors. Which means anyone who’s got any exposure to the US has a decision to make.”

EU regulation

These decisions are not new for 2025: departures and rowbacks have punctuated the past two years of sustainable finance.

What’s truly different is that Europe looks set to follow suit.

The European Union’s regulatory agenda has been a source of a lot of optimism among observers watching the pushback in the US. The introduction of laws like the Sustainable Finance Disclosures Regulation (SFDR), the EU Taxonomy and the Corporate Sustainability Reporting Directive (CSRD) have forced investors to retain sustainability as a priority regardless of what’s going on in the political cycle.

But that sense of certainty is under threat under the new European Commission.

On the same day Morgan Stanley announced it was leaving GFANZ, the German chancellor wrote to Commission president Ursula von der Leyen, telling her to delay CSRD by two years and reduce the number of issuers covered by the reporting rules.

It was the latest attack on the EU’s sustainable finance agenda, in a campaign that has already secured a commitment from von der Leyen to revise CSRD, the taxonomy and the Corporate Sustainability Due Diligence Directive (CSDDD).

She’s been clear that the revision will be about reducing the reporting burden alone. But, in order to do it, all three already-agreed laws will have to be put back on the negotiating table, and Olaf Scholtz’s letter shows that member states will use that opportunity to push for a bigger overhaul of sustainability requirements.

There is talk of SMEs being removed from CSRD’s scope, and CSDDD being destroyed completely.

Add to that the fact that the SFDR is already being reviewed, and the EU Deforestation Regulation has just been controversially delayed, and you have a European regulatory landscape that doesn’t provide any certainty at all to responsible investors, and very little hope.

“The pushback in the EU is not as brazen as it in the US,” notes Rawson. “But it’s still going to be a bleak year ahead.”

“If ever we needed asset owners to be the drivers of responsible investment, it’s in 2025,” he continued. “We need their leadership here, we need them moving mandates and holding asset managers to account,” he says, adding: “It’s absolutely the year of the asset owner.”

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