Both, not either/or: Transition finance and net-zero commitments go hand in hand

The recent restructuring of the Glasgow Financial Alliance for Net Zero (GFANZ) raises serious concerns about the future of climate action in the finance sector. 

By Emma Thomson

Forest 500 and Tracking Lead at Global Canopy

Originally serving as an umbrella grouping for various net-zero alliances of financial institutions, GFANZ will now be led by a ‘Principals Group’ made up of specific executives within financial institutions. 

This grouping will shift its focus to mobilising transition finance – directing capital towards investments in energy transition, rather than phasing out financing for activities that do not align with the Paris Agreement. Notably, GFANZ will no longer require members to align with the Agreement’s targets.

Ensuring transition finance and net zero work together

Transition finance plays a crucial role. It provides the funding for industries that are difficult to decarbonise, such as cement and steel, as well as the shift to renewable energy. To achieve climate goals, transition finance must also go beyond just energy – for instance, it must include financing for nature restoration and recovery. 

Moreover, for transition finance to ultimately be effective, it must be accompanied by action to phase out financing for activities that worsen the climate and nature crises – including deforestation, ecosystem conversion and human rights violations. 

Unless financial institutions act to halt financial flows to these destructive activities, their own portfolios will undermine – and continue to greatly overpower – the positive impact of any transition finance they mobilise. 

Dollar for dollar, successfully protecting forests and nature is one of the most effective ways to tackle the climate crisis. The data and tools are already available for financial institutions to address their exposure to deforestation. Net-zero commitments that encompass forests are indispensable to ensuring that overall financial flows pull in the right direction.

A critical moment for finance sector action

In 2024, after a decade of the Paris Agreement, we have seen the tenth consecutive hottest year on record, marked by severe wildfires, widespread flooding and prolonged droughts. The costs of climate disruption are mounting sharply. 

With COP30 on the horizon – and host nation Brazil leaning forwards on a vision for the transition to sustainable ‘bioeconomies’ – this is a key moment for a stocktake of action on deforestation. Several of the financial institutions most exposed to deforestation risk – such as Bank of America, Citigroup, Morgan Stanley, BlackRock and Vanguard – are leaving net-zero alliances like the Net-Zero Banking Alliance, putting global goals at risk. 

Global Canopy will continue to assess financial institutions on their no-deforestation, no-conversion and associated human rights abuse commitments and implementation, as part of their net-zero targets. We will remain vigilant for any signs of lowered ambition or weakened commitments, and continue to call for strong, binding actions from the finance sector. 

If they fail to address nature loss, financiers will be faced with significant transition, compliance and systemic risks to their business models. The long term viability of the finance sector – and a liveable planet – is at risk.

This insight was originally published on the Forest 500 website.