Sustainable finance faces a turbulent 2025, as recent developments point to a shift away from key climate initiatives and regulations. The year has started with major financial institutions like Morgan Stanley, CitiGroup, Bank of America, and Goldman Sachs pulling out of the Glasgow Financial Alliance for Net Zero (GFANZ), a group formed to help its 700+ members set climate goals aligned with the Paris Agreement. These exits signal broader challenges for the future of sustainable finance.
Shifting Allegiances in the Wake of Political Change
Morgan Stanley’s departure from GFANZ, announced in early January, is not an isolated event. The trend has gained momentum, with other financial giants making similar moves, citing pressure from political shifts in the US, particularly with Donald Trump’s anticipated return to office. The ex-president’s clear stance against climate change efforts, alongside his broader opposition to sustainability issues like diversity, equity, and inclusion, has encouraged some financial institutions to reconsider their participation in climate-focused initiatives.
Bob Eccles, a visiting professor at Oxford University and sustainability expert, believes that these firms were searching for an excuse to leave. Many of them, he says, “signed up too quickly,” without fully understanding the financial implications of aligning with the Paris Agreement, such as reducing financing for oil and gas projects—a major sticking point in US politics.
GFANZ itself has responded to these departures by scaling back its expectations, now positioning itself as an independent group focused more on green investment opportunities than on aggressive decarbonisation efforts. This adjustment signals a shift in the climate finance landscape, highlighting a growing tension between financial interests and the global push to meet climate targets.
Backlash Against Decarbonisation Efforts
The trend of retreating from sustainability commitments is not limited to GFANZ. In December, Franklin Templeton, a major asset manager, exited the Climate Action 100+ initiative, a significant blow given that its global head of sustainability, Anne Simpson, was instrumental in founding the group. This departure reflects the increasing pressure from US Republican figures to abandon or limit efforts aimed at decarbonising industries such as coal, and the broader shift away from ESG (Environmental, Social, and Governance) goals.
The challenge for investors is clear: as climate-related lawsuits pile up, especially in the US, financial institutions are feeling the squeeze. BlackRock, Vanguard, and State Street, among others, are currently being sued by Republican attorneys for encouraging decarbonisation efforts, a move they argue constitutes anti-competitive practices.
Uncertainty in Europe’s Regulatory Landscape
While the pushback in the US has been more overt, Europe’s approach to sustainable finance is increasingly under threat. The EU has been a global leader in pushing forward sustainability regulations, such as the Sustainable Finance Disclosures Regulation (SFDR), the EU Taxonomy, and the Corporate Sustainability Reporting Directive (CSRD). These regulations were initially seen as a key way to ensure that investors prioritize sustainability, regardless of political developments.
However, recent developments indicate that the EU’s regulatory agenda is under attack. On the same day Morgan Stanley announced its exit from GFANZ, German Chancellor Olaf Scholz wrote to EU Commission President Ursula von der Leyen, urging a delay to the CSRD by two years and a reduction in the number of issuers required to comply with the reporting rules. This pressure is part of a broader campaign that aims to scale back the EU’s ambitious sustainability agenda.
Von der Leyen has already committed to revising key sustainability laws, with a focus on reducing the reporting burden. However, critics fear that this may open the door for further weakening of regulations, potentially removing small and medium-sized enterprises (SMEs) from the scope of the CSRD or even dismantling the Corporate Sustainability Due Diligence Directive (CSDDD) entirely.
The EU’s hesitations, combined with the delay of the EU Deforestation Regulation and a review of the SFDR, leave responsible investors with little clarity. The lack of consistency in Europe’s regulatory landscape could undermine the continent’s commitment to sustainability and create further uncertainty for businesses and investors.
Looking Ahead: The Role of Asset Owners
Despite the mounting challenges, some experts argue that 2025 could be a pivotal year for asset owners. Simon Rawson, deputy head of NGO ShareAction, warns that the EU pushback is not as brazen as in the US but still presents significant obstacles. He argues that asset owners must take the lead in responsible investment, moving mandates and holding asset managers accountable to sustainability goals.
“If ever we needed asset owners to be the drivers of responsible investment, it’s in 2025,” Rawson says. “We need their leadership here, we need them moving mandates and holding asset managers to account.” With increasing pressure from both the political right in the US and a regulatory retreat in Europe, the role of asset owners in pushing for meaningful, long-term sustainability remains crucial.
As the year unfolds, the battle for the future of sustainable finance will likely intensify, with many questioning whether financial institutions and policymakers can balance profit motives with the urgent need for climate action. If 2025 proves anything, it will be that the road to sustainable finance is increasingly fraught with political and financial turbulence.
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