Should I stay or should I go? UBS’s Net-Zero Banking Alliance dilemma

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The author is Professor of Sustainable Finance at Vlerick Business School in Brussels

UBS CEO Sergio Elmotti is facing a dilemma as the bank’s future is considered in a network created to promote global climate action, but remains exposed since US President Donald Trump’s reelection.

Created in 2021, the Net-Zero Banking Alliance committed members to “align a portfolio of loans and investments that will zero emissions by 2050.” However, the voluntary sustainability initiative dropped out of favor, and several major banks left.

As a founder member, UBS is big enough to make a difference within the Alliance, a good case study to explore the benefits of staying or leaving the NZBA.

One option for UBS (rejecting comment) is to remain and play a leading role in accelerating climate transition efforts. It will then help shape the future of the Alliance. This represents around 130 banks with assets ranging from 50 to 50 to 50 in assets released from the delays caused by the departure of American banks.

Climate initiatives play a key role in managing reputational risks. While American banks face the threat of litigation against pro-climate policies, UBS can seize the opportunity to acquire climate-oriented businesses.

Growing disparities already affect decisions by clients. For example, the People’s Pension Fund has recently shifted £28 billion from State Street to Amundi and Invesco to prioritize sustainability.

Similarly, French banks will attract less household deposits if fossil fuel financing is known. By staying in the alliance, UBS could potentially establish itself as a sustainable finance leader who appeals to clients who prioritize climate-oriented investment strategies.

This could boost its reputation, attract much-needed ESG-focused capital, and strengthen its long-term relationships with institutional investors seeking alignment with global sustainability goals.

An alternative path to UBS is to follow the steps of large US, Japan and Canada banks and leave the alliance.

As Elmotti published in an interview with Bloomberg earlier this year, “the financial services industry is not a politician police officer,” stressing that government actions must be at least as effective as voluntary initiatives to ensure lasting impact. By leaving, banks will avoid putting the burden of climate transitions that should be on the government.

In fact, the business was not intended to lead the climate transition. Banks decarbonise their portfolios at a faster pace, decarbonize them at a faster pace than the risks of other economies facing profitability challenges, marginalized assets and client exhaustion.

In response, UBS has already delayed zero targets for a decade, due to the move to acquiring credits Switzerland and the updated definition of “net zero targets” outlined in the European Union’s delegated rules 2023/2772.

Increased policy uncertainty and limited effectiveness are important factors that could encourage UBS to quit the coalition. This highlights the fundamental issues regarding sustainability goals. By focusing on regulatory thresholds and voluntary commitments, there is a risk of neglecting deeper, more complex sustainability challenges.

Goodheart’s legal maxim states that “observed statistical regularities tend to collapse upon pressure for control purposes.” In other words, when proxy measurements are employed as targets, they often lose their effectiveness as a measure and become the main focus.

By choosing to leave, UBS was able to instead decide to pursue a more focused, targeted sustainability strategy and adopt a more practical approach to climate commitment.

The energy transition is urgently needed to raise funds, and banks play a key role in actively shaping and supporting viable pathways for decarbonization. A practical approach may mean that UBS can take steps towards climate resilience and adaptation.

The NZBA may have been a good idea when the interests of banks, governments and regulators matched, but it may be too expensive to maintain. However, collective action remains essential to fostering meaningful change, and leaving the coalition could risk undermining efforts that impact global climate policy.

Voluntary sustainability initiatives like the NZBA may provide a strategic response to growing market segmentation driven by climate-conscious client preferences.

On the other hand, is this simply a case of relocating Titanic deck chairs? The ultimate challenge is whether UBS can contribute meaningful action to mitigate climate change in a financially sustainable and environmentally responsible way.