In the face of regulatory reversals and Trump-era anti-climate policies, the climate finance sector is reeling. Banks and asset managers alike are walking back climate pledges and retreating from net zero alliances. Shifting political winds are fuelling a broader global greenhushing trend where firms remain silent on climate action to dodge litigation and reputational risks.
Since December 2024, a slew of banks have exited the Net Zero Banking Alliance (NZBA), a UN-backed coalition covering over 40% of global banking assets. NZBA members pledged to align financial activities with net zero emissions by 2050 to keep warming below 1.5°C and prevent the worst climate impacts. But that goal continues to slip as global temperatures rise: the NZBA is now considering weakening its commitment from a firm 1.5°C cap to a “well below 2°C” target of the Paris Agreement.
Those walking back net zero commitments often cite slow policy progress and a sluggish transition. Facing stricter regulations, most European banks are holding firm, though some are taking a wait-and-see approach. The EU’s Omnibus proposal has introduced some uncertainty on exactly what compliance burdens organizations will face, but they will undoubtedly remain stricter than those in the US, where the SEC’s climate rule has stalled. As banks and asset managers abandon voluntary coalitions at scale, the overall picture for climate finance is fragmented.
Organizations still face physical risks
Net zero walk-backs indicate a change in organizations’ climate strategy; not in the physical reality they face. Moving away from public climate targets, financial institutions are pivoting to focus on mitigating physical risks and building resilience. According to an MSCI Sustainability Institute survey, 47% of institutional investors believe climate adaptation will take centre stage, and 57% agree that climate-related physical risks are already causing economic damage. These concerns will shape boardrooms, client conversations and capital allocation strategies for lenders, investors and insurers.
Leading this shift is the insurance industry, which manages physical risk on both sides of its balance sheet. In the US alone, extreme weather events are intensifying, as wildfires ignite in unexpected places, heatwaves break records and the most devastating hurricanes since Katrina make landfall.
As climate-related risks escalate, lenders, investors and insurers need deeper insights into how extreme weather, rising sea levels and shifting climate patterns impact their assets. Many are turning to tech vendors for support: advanced physical risk modelling and geospatial data integration tools allow organizations to analyse hyper-local asset risks and broader sector-wide trends. This deeper insight helps financial institutions identify vulnerable assets, track emerging risk patterns and make data-driven decisions to protect long-term value.
The bottom line: the finance industry will always be client-centric.
Regulatory frameworks have driven many investors – especially in Europe – to focus on the environmental impact of their investments. However, it’s just as important to consider how climate change threatens existing assets from a risk mitigation and resilience standpoint. Repositioning the conversation through this lens can help shore up climate strategies against the growing scepticism towards net zero, shifting the focus from ideology to financial prudence and long-term stability.
