Can the Net-Zero Banking Alliance retain its sole Japanese member?

Welcome back. Net zero alliances in the financial sector gained significant popularity several years ago, with variations launching in the insurance, asset management and banking sector.

But some of Wall Street’s biggest lenders left the group in a stampede that began in December — and now their Japanese peers are quitting too. What’s behind these latest exits? Read on for more.

Net zero alliances

The Japanese exodus from the NZBA

The re-election of Donald Trump sent the major Wall Street banks rushing for the exit of the Net-Zero Banking Alliance (NZBA). Most of their Japanese peers have now followed suit.

In the past month, five of the six Japanese members of the NZBA, through which many of the biggest global lenders committed to support the goals of the Paris agreement, have left the group. The latest was Mizuho Financial Group, which confirmed its departure last week. Of the Japanese institutions that joined the alliance following its 2021 launch, only Sumitomo Mitsui Trust Group (SMTG) remains.

Activists have viewed this trend with alarm, given that Japanese banks had accounted for more than a quarter of the NZBA’s entire Asian membership.

“Asia stands at the front lines when it comes to fossil fuel development . . . if the market receives a message that Japanese banks are weakening their climate change commitments, that is extremely worrisome,” said Eri Watanabe, the Japan energy finance campaigner at Market Forces.

Attracting more business from the US “was probably the driver” of the exodus, said Michael Makdad, senior equity analyst at Morningstar. “In order to be in the US, they had to adapt to US priorities,” he added. 

The chief executive of Sumitomo Mitsui Financial Group, for example, cited US expansion as a key strategic priority in an interview in January, weeks before SMFG became the first Japanese lender to quit the alliance. (Despite their similar names, SMFG and SMTG are separate businesses.)

Another contributing factor is that under the Trump administration, the US has been pushing Japan and other Asian countries such as South Korea to purchase and invest in Alaskan liquefied natural gas projects. In late March, the Alaskan governor and other American officials wrapped up an almost two-week-long trip to Japan, South Korea and Taiwan.

As Ken Koyama, chief economist and senior managing director at the Institute of Energy Economics, Japan (IEEJ), told me: 

It’s possible that having the megabanks of Japan in the alliance would have been a major constraint for Japanese energy companies seeking financing for projects

But while the advent of the Trump administration accelerated the emphasis on fossil fuel development, that shift was already set in motion after Russia began its full-scale invasion of Ukraine in 2022, said Koyama. As a resource-poor country, “fossil fuels were always a critical part of helping Japan safeguard its energy security and stable electricity supply,” he explained. 

“While Japan followed suit with other developed nations in working towards net zero goals, it knew all too well the importance of having a stable supply of fossil fuels,” he said.

This dynamic was clear even before the recent departures from the NZBA. Japanese banks ranked among the top 12 financiers of fossil fuels globally, according to the annual Banking on Climate Chaos report, produced by a coalition of non-profit groups. “Even when they were in the alliance, Japanese banks were not aligned with the NZBA’s requirements,” Watanabe said.

Looking ahead, Koyama, Watanabe and Makdad all expect that it is a matter of time until the last remaining Japanese alliance member leaves the group. “We are aware of the withdrawals by other companies,” a spokesperson for SMTG told me. “As of April 7, no decision has been made in regards to a withdrawal,” they said.

Whether this trend will spread to other alliance members in Asia remains to be seen. The NZBA now has 18 Asian members, including seven from South Korea, three from Singapore and one from China.

The group’s chances of retaining those banks — and even attracting others — may be boosted by its possible easing of membership rules. NZBA members are currently considering a proposal that would remove the requirement for banks to align their assets with the Paris agreement goal of limiting warming to 1.5C. Meanwhile, the departure of these Japanese lenders looks like a damaging loss. (Kaori Yoshida, Nikkei)

Smart reads

Gut punch US clean energy companies are reeling from the impact of Donald Trump’s new tariffs.

Street fight High-tech competition is intensifying in China’s electric car industry.

Recasting the narrative “In the ethical arms industry, we don’t sell weapons, we sell freedom,” suggests FT readers’ favourite public relations guru, Rutherford Hall.