Banks have been told to sharply reduce their exposure to fossil fuels under a new international net zero standard unveiled on Thursday, signalling a tougher phase in climate regulation for the financial sector. The guidelines aim to align lending and investment practices with 1.5°C global warming targets, forcing banks to prioritise green financing and phase out support for high-emitting industries.
Tighter benchmarks from global regulators
The standard, issued by the UN-backed Glasgow Financial Alliance for Net Zero (GFANZ), sets detailed expectations for how banks must shift their portfolios away from fossil fuels. Financial institutions are expected to publish science-based transition plans, disclose their exposure to carbon-intensive sectors, and demonstrate measurable progress in reducing emissions linked to their financing activities.
While voluntary in nature, the guidelines are designed to feed into national regulators and investor pressure campaigns, making them a de facto benchmark for climate compliance in banking. Institutions that fail to align may face reputational damage, shareholder backlash, and ultimately regulatory intervention.
End of the line for new oil and gas lending
Among the most controversial provisions is a call for banks to end new financing for coal projects immediately, and to begin winding down oil and gas lending unless clients present credible decarbonisation plans. This echoes recommendations from the International Energy Agency, which has said there is no room for new fossil fuel development if net zero by 2050 is to be achieved.
Some banks — particularly in Europe — have already begun reducing fossil fuel exposure, but the new standard will raise the bar globally, creating pressure on major US, Asian and Middle Eastern lenders to follow suit.
Sector divided over pace and practicality
While green groups welcomed the move as overdue, industry leaders warned that the transition must be balanced with energy security and economic stability. The Institute of International Finance, representing major banks, said in a statement that “a one-size-fits-all approach risks unintended consequences in emerging markets where energy needs remain acute.”
Developing economies, heavily reliant on coal or oil exports, have voiced concern that rapid financial withdrawal could choke off development funding and destabilise national budgets. The guidelines suggest banks engage in “responsible transition financing” rather than abrupt divestment — but critics argue this leaves room for continued fossil financing under vague terms.
Investors demand accountability
Institutional investors are likely to use the new framework as leverage in climate-focused shareholder resolutions and proxy battles. Pension funds and sovereign wealth funds are increasingly demanding that banks report progress on net zero commitments with the same rigour applied to financial performance.
The update comes as scrutiny intensifies on financial institutions’ climate promises. A recent report found that many net zero pledges lacked credible action, with fossil fuel financing remaining near record levels. Under the new standard, banks will need to show not only intent but real reductions in financed emissions, sector by sector.
Global banking at a turning point
The new rules mark a shift from aspiration to enforcement in climate finance. With climate risk now seen as a financial risk, banks are under growing pressure to adapt their business models or face structural penalties. While the transition will not be smooth, analysts agree that the financial sector’s alignment with net zero is no longer optional — it is becoming a core condition of licence to operate.
REFH – Newshub, 25 July 2025
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