In early January 2025, all six of the largest U.S. banks, including Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo, withdrew from the U.N.-sponsored Net-Zero Banking Alliance (NZBA). Experts have stated that the change in political scenario and the potential shift away from ESG (Environmental, Social, and Governance) investing under a new US administration are the primary reasons behind this departure. However, this raises serious questions regarding the green and sustainable commitment of the banking industry. It also highlights the major debate on the need for mandatory net-zero policy frameworks or regulations for the banking industry. Over the past decade, these six banks funded more than US$ 2 trillion in coal-fired power plants, oil and gas drilling, and pipelines. In the US, utilities are currently under significant pressure to increase electricity production to meet the growing demand from data centres, driven by the expanding use of artificial intelligence which may, in turn, trigger a rise in the demand for fossil fuels. Even though banks are increasingly making green pledges a shadow of greenwashing is cast on their sustainable ideology when we look at their fossil fuel funding portfolio.
The Net-Zero Banking Alliance (NZBA) was established in 2021 through the UN Environment Programme Finance Initiative (UNEP-FI) and spearheaded by banks. It aims to synchronize lending, investment, and capital market operations to reach net-zero greenhouse gas emissions by 2050 or sooner. The Net-Zero Banking ideology requires banks to reduce both their operational and financed greenhouse gas emissions by net zero by 2050 meaning that either the emissions or the emissions produced by the banks (both direct and indirect) should be balanced by removing an equivalent amount of CO2 from the atmosphere. As of 2024, banks representing US $74 trillion or 41% of global banking assets have voluntarily made net-zero banking commitments to decarbonize their lending portfolios.
Pakistan’s banking industry has set upon the path of sustainable transition, but net-zero banking is still a distant destination.
A key factor that will drive action in the financial sector is the credibility and ambition of governments’ net-zero targets and policies. Just a few years ago, none of the major economies worldwide had committed to net zero, even though this goal is inherently included in the Paris Agreement. In June 2019, the UK became the first G20 nation to establish a legally binding target for net-zero emissions by 2050. This move was soon followed by similar commitments from the European Union, Japan, and South Korea, all aiming for net zero by the year 2050. In September 2020, China announced its intention to reach net zero by 2060. To support these national commitments, it is essential to develop clear plans for creating net-zero financial systems. Actions within the financial sector are crucial to complement the measures taken by governments in the real economy.
The Pakistan banking industry has set upon the path of sustainable transition, but net-zero banking is still a distant destination. Banks need to focus on the elimination of both operational and financed emissions to adopt net-zero banking. Central banks and regulatory authorities must create a comprehensive roadmap for achieving net-zero emissions, which should encompass both long-term objectives and immediate actions. This initiative should also foster collaboration and communication among central banks, regulators, and policymakers regarding net-zero strategies. Central banks and regulatory bodies, in emerging and developing economies like Pakistan, may encounter unique obstacles related to achieving net-zero targets, primarily due to their heightened vulnerability to climate change, underdeveloped institutions, and limited capacities. These challenges highlight the need for international organizations to assist the monetary and financial authorities of their member nations in aligning their policy frameworks with net-zero objectives, as well as integrating net-zero principles into their operations. The issuance of IFRS Sustainability Disclosure Standards (IFRS S1 and IFRS S2), in a phased manner, by the SECP will play an instrumental role in the attainment of net-zero banking in Pakistan.
Banks in Pakistan can learn from the successful net-zero banking journeys of global banks such as two of Sweden’s biggest banks, Handelsbanken and Swedbank. According to a report by BankTrack, Handelsbanken has not approved any new loans or underwriting to fossil fuel companies since 2019 and Swedbank slashed its lending to fossil fuel companies by 90% in the two years to mid-2024, relative to the prior two-year period. It is critical to understand the socioeconomic implications of achieving net-zero banking and the role that the financial system could play to ensure that the process is inclusive in terms of employment and regional development. The journey toward net-zero banking is both a challenge and an opportunity for Pakistan. Financial institutions must proactively set ambitious climate targets, leverage AI-driven climate tools, form strategic partnerships, integrate transparent reporting mechanisms, align their investment portfolios with net-zero goals, and support clients in their sustainability transitions. By doing so, they can drive economic growth while ensuring a greener, more resilient future.
Dr. Syeda Nazish Zahra Bukhari is working as an Assistant Professor at the University of the Punjab and Dr Syed Asim Ali Bukhari is working as SVP/Head – ESG at The Bank of Punjab.