Citi, BofA, Morgan Stanley Exiting Net-Zero Banking Alliance

Citigroup, Bank of America, and Morgan Stanley have left the Net-Zero Banking Alliance. Earlier, Goldman Sachs and Wells Fargo also left the group.

Reasons why major US banks are leaving:

• Increasing political pressure from Republican lawmakers

• Mounting scrutiny of climate-focused banking initiatives

• Desire to maintain flexibility in financing strategies

Despite leaving NZBA, these banks have emphasized their ongoing commitment to:

• Achieving net-zero emissions by 2050

• Supporting clients' transition to low-carbon economies

• Maintaining independent climate strategies

Political Context:

• Republican-led states have initiated investigations into climate banking alliances

• 11 Republican-led states filed lawsuits against asset management firms over climate actions

• Growing influence of climate change skepticism in the financial sector

Alliance Background:

• NZBA was launched in 2021 with over 140 banks from 44 countries

• Goal was to align financing activities with net-zero pathways by 2050

• Members committed to reducing greenhouse gas emissions in their portfolios

The exits signal potential challenges for collective climate initiatives in the banking sector, with institutions now pursuing more individualized approaches to sustainability.

Lending Practice Impacts

NZBA banks' shift from offering preferential financing for green upgrades may create a financing gap for companies transitioning to green operations, which alternative lenders can fill with specialized green financing products.

• Opportunity to develop specialized green lending products

• Potential to capture market share in transitional financing

• Ability to build relationships with companies that may feel abandoned by traditional banks

• Chance to establish leadership in specific green sectors where traditional banks may pull back

Credit Availability Dynamics

• Manufacturing Sector Potential: Carbon-intensive manufacturing companies may face reduced access to traditional bank financing, creating opportunities for alternative lenders

• Pricing Advantage: Potential for alternative lenders to offer more competitive rates to sectors traditionally viewed as high-risk by mainstream banks

Sector-Specific Lending Landscape

• Increased demand from industries like:

  • Heavy manufacturing

  • Energy-intensive production

  • Fossil fuel-adjacent sectors

Regulatory Considerations

Emerging ESG Compliance Landscape:

• Growing likelihood of ESG scrutiny expanding beyond traditional banking

• Proactive development of internal ESG frameworks could become a competitive differentiator

• Potential for state-level regulatory variations in climate-related lending practices

Strategic Recommendations

Competitive Positioning:

1. Develop flexible lending criteria for carbon-intensive industries

2. Create nuanced ESG assessment frameworks

3. Build expertise in sector-specific transition risk evaluation

Potential Lending Volume Impact:

• Estimated 10-15% of traditional corporate lending may be disrupted by current banking alliance exits

• 20-25% in certain regions, especially in Republican-led states

• Regional variations likely, with more conservative states potentially creating more lending opportunities

Risk Premium Considerations

Carbon Risk Pricing Dynamics:

• Average carbon risk premium currently ranges from 3-4 basis points (0.03-0.04% loan rate premium)

• For high carbon emitters, premium can increase to 7 basis points

• High carbon intensity firms (>1000 tonnes CO2 per $1M revenue) could face substantial financial penalties

Lending Strategy Recommendations

Underwriting Modifications:

• Develop nuanced carbon risk assessment framework

• Implement advanced fintech capabilities for comprehensive risk evaluation

• Create flexible lending agreements tailored to carbon-intensive sectors

Potential Lending Approach:

• Advance rates: 75-95% based on asset quality

• Focus on asset-based lending (ABL) with lower regulatory constraints

• Monetize quality assets like accounts receivable and equipment

Risk Pricing Strategy

• Base premium: 3-7 basis points

• Additional risk adjustment: 1-2% depending on:

  • Sector carbon intensity

  • Transition readiness

  • Management's decarbonization strategy

Market Opportunity Indicators:

• Traditional banks reducing exposure to carbon-intensive industries

• Increasing regulatory pressure on high-emission sectors

• Growing need for flexible, understanding capital providers

Key Differentiation Strategies:

• Develop deep industry-specific expertise

• Create tailored working capital solutions

• Build rapid, tech-enabled underwriting processes

Collateral Considerations

Valuation Approach:

• Emphasize asset-based lending

• Conduct comprehensive asset quality assessments

• Consider future transition potential in collateral valuation

Execution Recommendations:

1. Build specialized industry knowledge

2. Develop flexible, technology-driven underwriting

3. Create nuanced risk pricing models

4. Maintain agile lending structures

Critical Success Factors:

• Speed of execution

• Deep industry understanding

• Sophisticated risk assessment capabilities

Our Opinion

The big banks pulling back creates immediate opportunities in carbon-intensive sectors. We're talking about established, cash-flowing businesses that suddenly need new lending relationships. That's pure gold for alternative lenders. This is a seismic shift in the lending landscape

The political pressure angle is crucial. When big banks start bowing out of climate initiatives, it signals a major realignment in how institutional lending will approach ESG going forward. They're going to need to completely rethink their carbon-intensive sector strategies.

The bottom line here is that this is an actionable intelligence that could reshape the competitive landscape in the favor of alternative lenders.

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