After the mass departure from the Net Zero Insurance Alliance (NZIA) in recent weeks, questions have resurfaced about the future of these climate groups and their parent, the Glasgow Financial Alliance for Net Zero (GFANZ).
Last month, Attorneys General from 20 US states wrote to members of NZIA to raise concerns about the legality of their shared net zero commitments.
“The push to force insurance companies and their clients to rapidly reduce their emissions has led not only to increased insurance costs, but also to high gas prices and higher costs for products and services across the board, resulting in record-breaking inflation and financial hardships for the residents of our states,” the letter stated.
It said that the goals of NZIA required insurers “to take specific courses of action over the next two decades”, raising “serious concerns about whether these numerous requirements square with federal law, as well as the laws of our states”.
The letter had its desired effect: SwissRe, Lloyd’s of London, Allianz and AXA were among the 10+ big names to have jumped ship as a result of the warning, leaving doubts about the future of NZIA.
In a statement published last week, GFANZ responded by saying: “These political attacks are now interfering with insurers’ independent efforts to price climate risk, which will harm policyholders, main street investors and local economies.”
It’s not the first time that one of GFANZ’s subgroups has faced questions over the legality of its ambitions. Last summer, it was the banking group that looked like it was on shaky ground when a number of its biggest names threatened to quit over concerns they would be sued for agreeing to phase out fossil fuels as part of updated rules.
A source at one of the third-sector bodies convening GFANZ, who did not want to speak on the record, said that the asset managers’ alliance was thinking hard about “what kind of commitments you can make, on whose behalf, and to what” as a result of the legal challenges.
“But those are fair and reasonable questions that will make GFANZ stronger in the long run. The idea that managers can simply commit their whole portfolios to environmental and social goals, regardless of client mandate, is nonsense,” he added. “It doesn’t deal with the realities of servicing clients.”
The Net Zero Asset Owner Alliance (NZAOA) is generally perceived to be under the least pressure from the US because it doesn’t have clients to service in the same way, and its members are mostly European pension funds over whom the US has very little power.
However, insiders say that even NZAOA has become jittery – especially after being namechecked in that letter from the Attorneys General due to the overlap in membership between the asset owner and insurer groups.
While all this bad publicity is discouraging some investors from signing up to these bodies, it’s worth noting that they still have more than 500 members between them, and there are more in the pipeline (Spain’s Pensions Caixa 30 just joined NZAOA, and IPE understands the banking alliance will announce a new name in coming weeks).
What next?
There are numerous theories about what GFANZ’s strategy should look like when it comes to surviving the current campaign by US rulemakers. Some think the whole thing is a distraction from the real work of decarbonising portfolios, and want to fold the groups and pursue net zero individually (or through less formal collaborations).
Others think closing them down would allow Republicans to claim a political win, and give investors breathing space to re-establish them under a different brand once the furore calms down. Some would rather keep the groups going, but change the way they’re run, perhaps by removing some of the commitments to shared targets, and others want simply to hunker down and weather the storm.
Those who support that final option often argue that it is simply a matter of proving that the net-zero bodies don’t fall foul of competition laws – which most lawyers say they don’t.
Most of the legal warnings so far have centred on accusations that collaborating on net zero goals puts GFANZ members in breach of competition rules around boycotting and acting in concert.
“There has been lots of talk about how we know we’re not breaking competition law, so it will be okay,” says a legal expert from one of the recently-departed insurance companies. “But you cannot use legal arguments to fight political campaigns. This has got nothing to do with the law.”
There is a risk that spending time proving GFANZ members don’t fall foul of competition law will simply result in a game of legal whack-a-mole: boycotts, for example, are also banned under discrimination rules, and new laws are regularly being introduced across the US to clamp down on ESG investing.
“People talk about ‘ESG polarisation in the US’ as if it’s two sides of the same coin, as if the anti-ESG movement is like the Republican version of Extinction Rebellion,” says the insurance source. “But they absolutely aren’t. They’re not gluing themselves to stuff, they’re subpoenaing people. They have the tools of government, not the tools of NGOs.”
Lobbying and language
And some of the companies that net zero investors fund through their portfolios are using that money to help harness those government tools. Last month, NGO InfluenceMap released research showing that the fossil fuel sector was involved in drafting and distributing the world’s first anti-ESG laws in Texas and West Virginia.
“The industry has continued to support these bills as they emerge in state legislatures across the US,” it concluded.
Fiona Reynolds, ex-chief executive officer of the Principles for Responsible Investment – one of the convening bodies behind the net zero groups – and chair of the Australian arm of UN Global Compact, says GFANZ should focus more heavily on countering that corporate lobbying in future.
“Our side of the industry spends a lot of time on policy, but not on politics – we’re not very good at that part at all,” she says. “We have to get better organised about tackling lobbyists and making sure our own arguments are properly heard.”
“I was hopeful GFANZ would be effective at that, because it brings together so many key institutions from across the entire financial system, at very senior levels, and it has big names like Mark Carney, who have better access [to government figures] than some others might.”
Reynolds also believes that “the industry’s getting a little bit lost in a debate about outcomes,” in reference to the growing appetite within GFANZ and the broader market to demonstrate the impact of ESG efforts on the real-economy.
She says that, while investors should consider their real-world impacts, the situation in US requires responsible investors to “be more deliberate in our language, and make sure we link everything we’re doing to fiduciary duty, long-term value creation, risk and financial opportunities.”
When it formally launched at COP26 in 2021, GFANZ talked of being “committed to transforming the economy for net zero” and “deliver[ing] the estimated $100 trillion of finance needed” to reach the goals of the Paris Agreement.
In last week’s statement about the NZIA departures, its rhetoric was much less lofty: it emphasised the need for insurers to be able to “manage the risks and seize the opportunities presented by the net-zero transition”.
So perhaps a return to the traditional language of finance is already happening. Only time will tell whether it will help placate the GOP.
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