As the governing bodies of global capital flows, financial institutions have a huge responsibility in funding the transition to a low carbon economy. Namely, by investing in climate mitigation and adaptation measures, financial institutions have the capacity to alleviate the worst effects of climate change.
Banks, asset managers, and other financial entities are not only responsible for the Greenhouse gas (GHG) emissions created from their day-to-day activities in branches and offices. They are also accountable for their financed emissions - The emissions related to loans, underwriting, investments, and any other financial services.
Financed Emissions: Why They Matter
Emissions from financial services matter because they finance a considerable portion of global GHG emissions. A recent report from Sierra Club found that the 18 largest US banks and asset managers were responsible for financing the equivalent of 1.968 billion tons of CO₂-eq in 2020. This would make the US financial sector the 5th largest global emitter if it were a country, just behind Russia.
More specifically, financed emissions matter because they account for over 700 times more than direct emissions of financial institutions’ overall GHG inventory. Unfortunately, though, a mere 25% of organizations actually measure them. Therefore, most financial institutions measure less than a quarter of 1% of their overall emissions.
This leaves a huge blind spot in the global emissions accounting sheet. It also means that the financial institutions responsible for financing the emissions are entirely unaccountable.
Unaccounted financed emissions put the global climate at risk while exposing financiers to reputational and financial risks. Alternatively, when financed emissions are properly accounted for, they give banks and asset managers an understanding of their products’ and services’ climate costs.
Since the Paris Agreement - a global pact to keep global heating to within 1.5C - the world’s 60 largest commercial and investment banks invested $3.8 trillion into the fossil fuel industry. Fossil fuel financing was, in fact, more prevalent in 2020 than in 2016.
2021, however, was the first year that banks earned more fees arranging green-related bond sales and loans than they did helping fossil-fuel companies. This begs the question: Are financial institutions beginning to realize that the future is green and using their capital accordingly?
Measuring Financed Emissions
To reduce financed emissions, institutions must first measure and disclose them. Unfortunately, financed emissions are notoriously difficult to measure, leaving much of them unreported or misreported.
The difficulty lies in the sheer amount of data involved. Large banks or investment groups have millions of customers, many financial products, and data collection and calculations for each product’s financed emissions must be performed. The accounting process for each loan, investment, or debt is conducted over two parts:
Estimating the total carbon footprint of any activity within a loan, investment, or financial service.
Allocating that carbon footprint to the bank through a shared attribution calculation.
Luckily, a growing number of guidelines, methodologies, and tools are being developed to expedite this process.
The first standard developed in 1998, the Greenhouse Gas Protocol (GHGP), is the most well-known and widely used. Under the GHGP Scope 3 category 15: investments is the section of the GHGP that pertains to financed emissions. However, from a financed emissions perspective, this remained a slightly underdeveloped level of detail.
In 2019, type: entry-hyperlink id: 5oo4Zoy0HmuaeOIpkc5cwx was created in response to a growing need for fully accountable and comparable financed emissions calculations. PCAF was developed specifically for financed emissions accounting methodologies. The PCAF framework provides formulas for allocating the carbon impacts for transactions in eight major asset classes, ensuring that the calculations of financed emissions are comparable across the whole finance industry.
The Right Tools For The Job
Like financial accounting, carbon accounting needs the right tools to measure emissions accurately. Typically, carbon accounting has been performed on complicated spreadsheets by consultants (a lengthy and costly process). However, the recent development of Climate Management and Accountant Platforms (CMAPs) has enabled businesses to measure their financed emissions at a fraction of the time and cost.
CMAPs have been developed as a tool to perform carbon accounting in a completely software-based environment, which anyone can use without previous experience.
CMAPs have codified the most effective carbon accounting methodologies, including the GHGP and PCAF, to calculate financed emissions. As a result, CMAPs give banks and asset managers the ability to ensure accountability with transparent emissions data.
The finance world seems as if they are fixing their financed emissions problem. The world’s largest financial institutions signed up to The Glasgow Financial Alliance for Net Zero (GFANZ) - Aligning $135 trillion to net zero emissions by 2050. Nevertheless, pledges without action could be another case of greenwashing.
If ambitious carbon reduction goals are to be met, and we are to mitigate the worst of climate change, financed emissions must be measured and disclosed. Financial institutions of the world must be held accountable for their investments and the emissions they contribute to.
If you would like to better understand the carbon accounting process, check out our Carbon Accounting 101 blog.
© 2022 Persefoni AI Inc. All rights reserved. This presentation is the exclusive property of Persefoni and may not be copied or distributed, in whole or in part, without the express permission of Persefoni. Persefoni is the leading Climate Management & Accounting Platform (CMAP). The company’s Software-as-a-Service solutions enable enterprises and financial institutions to meet stakeholder and regulatory climate disclosure requirements with the highest degrees of trust, transparency, and ease. As the ERP of Carbon, the Persefoni platform provides users a single source of carbon truth across their organization, enabling them to manage their carbon transactions and inventory with the same rigor and confidence as their financial transactions.
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