The great climate pull-back — but is it really the end of green finance?

Over the past quarter we’ve seen a procession of household-name banks temper, defer or ditch their headline net-zero targets. HSBC has warned shareholders to expect a “re-cut” energy strategy later this year, RBC has binned its C$500 bn sustainable-finance goal, UBS has slipped its own operational net-zero date from 2025 to 2035 and Wells Fargo has torn up its flagship financed-emissions pledge altogether.

The common thread is membership — or former membership — of the UN-convened Net-Zero Banking Alliance (NZBA). Last month NZBA members quietly voted to loosen their obligation to keep portfolios on a 1.5 °C pathway, conceding it is “no longer realistic”. That move has sapped the coalition’s signalling power and, in my view, hands the narrative to regulators rather than voluntary clubs.

Investor flows confirm the mood music. Morningstar calculates that ESG and other “sustainable” funds suffered a record US $8.6 bn net outflow in Q1 25, the tenth straight quarter of withdrawals in the US and, notably, Europe’s first quarterly outflow since at least 2018 (-US $1.2 bn). Anecdotally, mandates coming across my desk in private equity are still asking for carbon metrics, but CIOs are noticeably less willing to pay an AUM premium for the badge.

Regulation is diverging, not disappearing.

• EU/UK – sticks and labels.

  • The ESMA fund-name guidelines bite on 21 May 25; funds using “sustainable” must meet minimum exclusions and allocation tests.

  • The UK’s SDR naming rules are live, with only a short “temporary flexibility” window to 2 April 25 for laggards.

  • Carbon pricing is moving the real-economy cost of capital: BloombergNEF sees EU ETS allowances topping €175 / t by 2035 if policy stays on course — effectively a shadow tax that the sell-side’s DCF models can no longer ignore.

• US – deregulation and push-back. A second Trump administration has halted clean-energy subsidies and is openly hostile to “ESG”. Banks with deep US retail or capital-markets franchises are therefore walking a tight-rope: comply with Brussels, but not spook state attorneys-general or congressional committees.

Disclosure rollback adds another wrinkle. The ISSB has floated dropping the requirement to report emissions from underwriting and other investment-banking activities, after just one year in force, citing “confusion”. That would leave a glaring blind-spot in financed-emissions data and make cross-bank comparisons harder. For analysts like me who factor facilitation risk into league-table business, that is a step backwards.

Shareholder activism is shifting from “divest” to “deploy”. At Barclays’ AGM investors commanding £1.36 tn AUM demanded a hard funding target for renewables; a similar ask went to Standard Chartered for emerging-market clean-power finance. That pivot matters: transition finance, not blanket exclusion, is where spreads and fee income could actually grow.

MY TAKE

1. Climate risk isn’t going away — it’s just being repriced. Allianz’s warning of a “climate-induced credit crunch” is not hyperbole; higher physical-risk premiums are already creeping into project-finance deals I’ve seen pitched this spring.

2. For banks, the real battleground is RWA and executive comp. The Cambridge Institute’s report argues for baking climate factors into core risk models and bonuses. I agree: until CET1 ratios are hit (positively or negatively) nothing truly changes.

3. Opportunity set:

   • EU carbon-price optionality — corporates facing €150-plus EUA costs will seek balance-sheet solutions; structured carbon-allowance forwards and transition-linked loans look under-supplied.

   • Renewables capex gap — activist pressure on UK banks could unlock fresh lending capacity; watch for green securitisations as an off-balance-sheet route.

   • Relative-value in “ESG orphans”. Quality issuers dropped from dark-green mandates (because of naming-rule hygiene, not fundamentals) may trade cheap; PE secondary buyers and crossover credit funds should screen that universe.

4. Risks:

   • Regulatory whiplash. A future US administration could swing back to pro-ESG, catching under-prepared lenders.

   • Green-washing litigation. Canada’s Competition Act tweaks that spooked RBC are a template other jurisdictions could copy.

Bottom line

The headlines suggest a retreat, but I see a rotation rather than a reversal. Voluntary alliances may fade, yet hard-wired regulation, carbon pricing and asset-owner pressure are still nudging capital towards transition assets. In portfolio terms I’m neutral on the global bank sector but overweight those with European-heavy books and demonstrable transition-finance pipelines, underweight US-centric lenders betting on a permanent policy rollback.

As ever, comments welcome — and if you’re seeing different deal-flow on the ground, drop me a line.