Summary
- The U.S. Federal Reserve's rejection of Basel climate disclosures and banks exiting net-zero alliances highlight trend toward more capital attraction to the space in the U.S.
- European banks may leave net zero alliances as major U.S. and Canadian banks exit, exposing weaknesses in voluntary climate alliances.
- The rapid growth of AI is fueling significant investments in data centers and energy infrastructure, with private equity and institutional investors driving deals worth billions to meet rising demand for processing power and reliable energy.
U.S. Capital Allocators Return to the Middle
The U.S. Federal Reserve and other regulators have declined to back a global framework proposed by the Basel Committee requiring banks to disclose climate risks, leaving the initiative uncertain. While the Basel framework aims to address climate-related financial risks through detailed disclosures, U.S. resistance reflects broader skepticism toward international climate efforts. Additionally, a slew of major U.S. lenders have pulled out of respective net zero-industry alliances.
PEP Insight & Recommendation:
With 2025 officially kicked off, a felt sense of pragmatism is returning to the U.S. financial system. The confluence of major U.S. lenders exiting the Net-Zero Banking Alliance (NZBA) and more recently the Fed refusing to endorse the Basel Committee’s proposal for mandatory climate risk disclosures for banks signals a return to the middle in how capital flows to the energy industry in the U.S. Additionally, major U.S. assetmanagers, including JPMorgan, State Street, and Goldman Sachs, have left the green investing group Climate Action 100+. What we see now is a cross Atlantic divergence in energy financing and investing requirements in North America and Europe. While European regulators, led by the European Central Bank (ECB), enforce strict climate disclosure requirements aligning with the Paris Agreement, U.S. regulators are taking the position that climate-related mandates exceed their jurisdiction and should fall under voluntary disclosures. Some obvious exceptions remain for U.S. public energy companies such as the SEC’s climate reporting mandate, but by and large these are common sense developments for the continuation of financing and investing in oil and gas projects.
Likewise, many U.S. corporates are moving in kind. A sector agnostic trend of U.S. public companies leaving behind or dramatically scaling back their net zero and climate targets has only grown since 2024. The realization that we’re quickly approaching 2030, a benchmark year for privately set climate goals, many of which are likely to be missed, corporates and asset managers are plausibly (and correctly) adding up that net zero targets by 2050 will not be achievable. The return to the pragmatic middle is clear - missed revenue and cash flow targets come with consequences while missed carbon emissions typically don't. For example, Microsoft, one of the most ambitious climate setting corporates, recently shared that its emissions are now 30% above its baseline in 2020 and announced that it would spend $80b this year building energy intensive data centers likely driving emissions higher. This ensures that for Microsoft, balancing bottom line growth with climate targets, for some fun wordplay, is unsustainable.
These developments are particularly pointed as such initiatives like the NZBA, Basel Committee’s climate proposal and others (SBTi) like it explicitly call for the cessation of an entire industry in a ‘mere’ 25 years, by 2050. These positions remain incredibly harmful to an industry that is integral to rising standards of living, national security, and economic prosperity. Arbitrarily restricting capital flows to marginally reduce emissions in already low emissions economies across Europe and North America, in fact, works in contradiction to climate policy proponents.
U.S. energy companies should collectively breathe a sigh of relief. However, this doesn’t mean the industry is out of the woods. While these are positive developments, sustainability disclosure remains table stakes on a handful of levels for energy companies. As mentioned, the SEC’s climate proposal disclosure remains in effect, California effectively introduced climate reporting obligations for most large businesses in the U.S., and well-funded NGO’s advocating against fossil fuels over the long-term leverage advanced technology as well as data capabilities to monitor emissions and influence regulatory frameworks. Partnerships and initiatives like the Super Emitter Program allow these groups to detect and report large emission events, thereby pushing for stricter environmental compliance and maintaining pressure on the fossil fuel industry, particularly at the state level.
EU Banks Re-Think Net Zero
European banks are reconsidering their membership in the Net-Zero Banking Alliance (NZBA) following the exit of major U.S. banks like JPMorgan, Citigroup, and Goldman Sachs, as well as four of Canada’s largest lenders. These departures have raised concerns about the future of the alliance, with U.S. banks citing legal and regulatory pressures, including antitrust concerns. The NZBA, previously part of the Glasgow Financial Alliance for Net Zero (GFANZ), has faced difficulties in maintaining cohesion, with leadership meetings delayed due to scheduling conflicts and other challenges. Meanwhile, the Net Zero Asset Managers initiative, a related group, has announced it will pause implementation and reporting of membership criteria, further highlighting the strain on voluntary climate coalitions. European banks have indicated they may leave the NZBA unless its rules are softened to address these concerns.
The struggles of the NZBA and GFANZ reflect broader issues with voluntary climate alliances. Critics argue that these groups often lack enforceable standards and have become increasingly fragmented. GFANZ, which initially aimed to create a financial system capable of supporting the transition to net zero, recently announced it would pivot to focus on green investments rather than serving as an umbrella for net-zero initiatives. Leadership changes, such as the departure of former Bank of England Governor Mark Carney, and diminishing participation by key institutions have further weakened the alliances. As uncertainty grows around the future of these coalitions, banks like Deutsche Bank, UBS, and HSBC have remained silent, while the NZBA works to redefine its priorities and address member concerns to preserve its relevance. – FT
Data Center Demand
The rapid expansion of artificial intelligence (AI) is driving a surge in investments in data centers and their supporting energy infrastructure, with estimates of required funding ranging from $1 trillion to over $2 trillion in the next five years. Private equity firms, including Blackstone, DigitalBridge, and StonePeak, are acquiring and developing data centers to meet the growing demand for processing power, with deals like Blackstone's $24 billion acquisition of AirTrunk and StonePeak’s partnership with CoreSite to build a Denver facility highlighting the trend. These investments are supported by Wall Street financiers, who favor data centers due to long-term leases that ensure steady returns, fueling both investment-grade debt and leveraged loans.
Simultaneously, the need for reliable energy to power these facilities has made gas-fired power plants attractive targets. Blackstone recently acquired the 774-megawatt Potomac Energy Center near Virginia's data center hub for around $1 billion, emphasizing its efficiency and strategic location. This follows Constellation Energy’s $16.4 billion purchase of Calpine’s predominantly gas-fired fleet, underscoring the appeal of consistent power generation assets. As AI-driven data center demand continues to rise, private equity and institutional investors are expected to play a key role in funding the infrastructure necessary to support the AI boom, blending energy and technology investments to secure long-term gains.– Bloomberg, Reuters
Regardless of how you feel about ESG, the general consensus is that the regulatory attempts to codify it will most likely not wane anytime soon. The high-level term “ESG” is increasingly becoming more polarizing, but the importance of the underlying material data remains intact. Whatever the challenges may be, the PEP Consulting & Advocacy team partners to help clients navigate what everyone generally considers choppy and resource-intensive waters.
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