Financed emissions are the latest challenge for banks in the face of climate change

Banks are facing strong demands to measure the carbon footprint of their financing activities, but few currently have a full accounting of these emissions, according to a new study.

At major banks around the world, so-called financed emissions account for at least 95% of global emissions, but they remain underreported due to difficulties in calculating and disclosing the complex environmental measure, the consultancy Bain & Company.

Financed emissions are attracting more and more attention, with corporate clients of banks demanding increasingly detailed emissions information to meet their climate commitments. The first two emissions scopes, which include direct and indirect greenhouse gas emissions, have become more common in disclosures, while banks have been slower to report scope 3 emissions.

“Banks are under pressure and facing increasing scrutiny, not only of their Scope 3 funded emissions, but to respond to calls for increasingly specific commitments and actions that demonstrate momentum to actually reduce these measures,” said Michael Kochan, a Bain partner who co-authored the report.

Of the 45 major banks that Bain surveyed — 15 each from Asia Pacific, Europe, and North America — 65% have pledged to achieve net zero emissions by 2050. Nearly half of the banks have agreed to share publicly the 2030 intermediate objectives, but only for certain sectors.

Slightly more than half of the banks declared none of their financed issues. And those who made disclosures only provided information about the carbon-intensive electric power and fossil fuel industries, according to the Bain report.

As new emissions reporting standards take time to pass, the funded emissions category is reaching an “inflection point,” said John Hodges, a partner in the firm’s climate change and sustainability services group. Ernst & Young consultancy.

“The next five years are where adoption will really kick off,” Hodges said. “The will and the commitment are there. This real action has only just begun.

Banks face two challenges in reporting data on funded emissions. One is the lack of standardized guidelines for measuring data, and the other is that the data available has “little granularity for large parts of their portfolio,” according to the Bain report.

The study compared the “reliability” of carbon footprints reported by five banks in sectors including energy, metals, autos and mortgages, based on standards provided by the Partnership for Carbon Accounting Financials.

Emissions can “vary more than double in either direction, depending on the granularity of available data and associated methodology,” according to the report.

Kochan said banks are “building the plane on the fly” to meet growing demands for disclosure of funded shows.

“Banks have made net zero commitments even as guidance on how they might account for funded issuance in different parts of their loan portfolios is still being worked out,” Kochan said.

Organizations such as the Partnership for Carbon Accounting Financials and the Greenhouse Gas Protocol have published best practice guidelines for companies to assess their emissions profiles. But these organizations are also trying to keep up with changing demands for climate disclosure.

The greenhouse gas protocol is currently revising its guidelines for reporting Scope 3 funded emissions as part of the “evolution” of climate disclosures, said Pankaj Bhatia, director of the organization. .

Banks are also “struggling with the challenge of creating value from the transition to net-zero funded issuance,” the Bain study authors wrote.

Bain calculated the projected value of three loan portfolio strategies based on the speed of emissions reduction to show “the need for more adaptable strategies that can help banks plan for the long term,” Kochan said.

The analysis modeled the evolution of profits between 2021 and 2050. It found that banks that reduced their funded emissions the most could see their profits increase by up to 30%. The slowest strategy predicted losses of between 10% and 20%.

“Our view is that passive strategies alone will be insufficient to meet the net zero commitments that most banks are currently taking,” Bain’s Kochan said. “Gradually greening the sectors to which banks lend will not be enough for them to meet their 2050 and interim targets.”

As the scale of funded emissions is better understood, the role that banks will play in helping their corporate clients meet their climate commitments is also coming under greater scrutiny. Some shareholders continue to push for a broader range of disclosures, and the U.S. Securities and Exchange Commission is considering new rules to make certain levels of reporting mandatory.

Shareholders already decide whether companies should disclose more information about their shows, often by vetoing disclosure proposals, said Richard Morrison, senior fellow at the Competitive Enterprise Institute, a libertarian think tank.

“Investors have market power and can use it to demand things from companies and asset managers,” Morrison said. “If the demand for this information is not constant enough for investors to produce it, the risk may not be as great as some financial institutions lead us to believe.”

Ben Cushing, campaign manager at the Sierra Club, an environmental advocacy group, argued that banks must be held accountable for meeting the climate goals to which they have committed.

“We’ve had years of methodological development to help banks and financial institutions understand how to measure and report their funded emissions,” Cushing said. “There are fewer and fewer excuses for this kind of measurement and disclosure not to happen consistently.”

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