Why "financial cakeism" could derail our net zero future

As the world confronts the escalating impacts of climate change, financial institutions find themselves at a crossroads, balancing immediate financial returns with the urgent need to address long-term climate risks. The 2025 South Pole net zero report, which surveyed sustainability decision-makers at 350 global financial firms, sheds light on a troubling trend dubbed "financial cakeism"— the desire to maintain existing fossil fuel investments while publicly championing sustainability.

The dilemma of "financial cakeism"

One of the most alarming findings from the report is that three-quarters of financial institutions have no plans to reduce their exposure to fossil fuels over the next decade. This lack of action is largely due to an uncertain political and regulatory landscape, which discourages long-term commitments to decarbonisation. Despite this, nearly 80% of these institutions claim to prefer financing companies with clear climate transition plans. This contradiction highlights the tension between short-term profit motives and the long-term imperative of sustainability.

Regulatory uncertainty and the need for clear guidance

The absence of clear regulation and industry guidance is a significant barrier to achieving net zero emissions. According to the report, 47% of surveyed institutions cite unclear regulation as a major obstacle, particularly in the wake of a new political climate. This uncertainty creates an environment where incentives for decarbonisation are minimal, despite the growing recognition of climate risk as a financial risk.

In Europe, for example, despite the presence of leading governing bodies providing detailed net zero guidance, 58% of financial institutions still report a lack of clear industry guidance. This underscores the complexity and challenges in adapting to evolving regulatory frameworks and implementation timelines.

Transitioning to low-carbon investments

The report indicates that financial institutions are increasingly directing capital towards climate-conscious companies. Nearly half (44%) plan to increase their exposure to green assets, and almost 80% are more inclined to finance companies with clear climate transition plans over those without. This trend is more pronounced in financial hubs and among larger institutions, which are more likely to engage with portfolio companies on decarbonisation efforts.

Financial institutions are keen to support companies with climate transition plans, as these plans are becoming essential for accessing finance. The attractiveness of such plans is evident, with 77% of financial institutions finding portfolio companies more appealing if they have such plans. This preference is driven by the need to manage climate risks and position themselves as long-term, sustainable investors.

Engagement over divestment

Rather than reducing exposure to fossil fuels, financial institutions are prioritising engagement with portfolio companies to support their transition to net zero. Only 28% of institutions plan to reduce fossil fuel exposure as one of their decarbonisation tactics over the next decade. Instead, the focus is on increasing exposure to green assets and companies with climate transition plans.

This approach is particularly evident among larger financial institutions, which are more likely to engage with portfolio companies on decarbonisation. The report suggests that engagement, rather than divestment, is seen as a more effective strategy to drive climate action and support the transition of heavy industry players.

Conservative communication strategies

In response to increasing scrutiny, financial institutions are adopting more conservative communication strategies regarding their climate commitments. Over half of the institutions are increasing communications on their net zero strategies, but 27% are making more conservative claims to avoid accusations of greenwashing or greenhushing.

This cautious approach is influenced by the complex landscape of regulatory pressures, political uncertainties, and the slow pace of decarbonisation in the real economy. Financial institutions are navigating these challenges by aligning more closely with regulations and focusing on transparency in their climate reporting.

The role of financial institutions in accelerating the transition

As the world moves towards a low-carbon future, financial institutions play a pivotal role in accelerating the transition. The report emphasises the need for clear regulatory frameworks and industry guidance to support financial institutions in their decarbonisation efforts. By directing capital towards sustainable investments and engaging with portfolio companies, financial institutions can drive meaningful climate action and manage financial risks associated with climate change.

The 2025 South Pole net zero report underscores the urgency of addressing climate risks and the critical role financial institutions play in the transition to a sustainable future. As they navigate the complexities of "financial cakeism," these institutions must balance immediate financial considerations with the long-term imperatives of climate action. Through clear regulatory support and strategic engagement, financial institutions can lead the way in achieving a resilient, low-carbon economy.

It is imperative that we, as stakeholders, demand transparency and action from financial institutions. By advocating for clear regulatory frameworks and supporting institutions that prioritise sustainability, we can collectively drive meaningful climate action and secure a sustainable future for all.

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