A financed emissions standard for banks
President Biden wasted no time after his inauguration creating the “greatest team ever assembled inside the White House to fight global warming” and announcing an aggressive “whole government” approach to change climate. Biden should order government agencies to calculate the costs of global warming on society, throwing the glove to the measurement of greenhouse gas emissions linked to financial investments.
Coincidentally, just two weeks after Biden’s election, the Partnership for Carbon Financial Accounting (PCAF) launched the world’s first greenhouse gas emissions accounting and reporting standard for the financial sector.
By using this standard, financial institutions of all kinds, including banks, asset owners and managers, will be able to more effectively measure and report their emissions from the loans and investments they have made. My firm acts as the CFP secretariat and provided technical support for the development and implementation of the new standard.
The importance of the new PCAF standard in tackling the climate crisis and achieving a carbon-free society cannot be overstated. It has often been said that “you cannot manage what you cannot measure”. This is especially true in the financial sector. Almost all transactions – from individual residential mortgages to commercial real estate loans, financing of power generation projects, equity and debt deals – have potential implications for GHG emissions.
The CFP Standard is a response to the growing global recognition that financial institutions play a key role in shaping the future of our planet by (1) setting climate goals for lending and investing activities and ( 2) reallocating resources to support the transformation of renewable energies. Like the Science Based Targets initiative (SBTi) said:
Financial institutions are the lifeblood to enable the rapid and unprecedented economic transformation necessary to achieve the goals of the Paris Agreement. Through their loans and investments, financial institutions have the power to redirect capital to the sustainable technologies and solutions of the future and to the companies that are doing the most to prepare for a net zero emissions economy.
In pursuit of this goal, more than 90 financial institutions in 34 countries, including ABN AMRO, AIMco, APG, Banco Bradesco, Bank of America, Citibank, CTBC Financial Holdings, Lloyds Banking Group, Federated Hermes, FirstRand Group and TD Bank Group , are aligned with the CFP effort. representing nearly $ 19 trillion in total assets, these institutions and many others, large and small, are committed to measuring and reporting the GHG emissions associated with their lending and investment programs.
GHG accounting request
To appreciate the potential value of the CFP standard, one must consider the growing global demand for GHG accounting and reporting by financial institutions.
Mark Carney, the United Nations special envoy for climate action and finance, recently proposed a set of priorities for the private financial sector to accelerate its efforts towards the goals of the Paris Agreement and the Convention. -United Nations Framework on Climate Change. The four priorities cited in Mr Carney’s report are climate-related financial reporting, climate risk management, by seeking to make the energy transition opportunities profitable and by mobilizing capital resources. Priority is the key to everyone else, as stated in the Carney report: “Financial institutions will increasingly be called upon to disclose their own net-zero alignment and show how clients’ money is invested. “
Likewise, the Task Force on Climate-related Disclosures (TCFD) underlined in its Status report 2020 the importance of transparency and comparability in the reporting of financial institutions. Calls for increased climate disclosure are now being heard from many sides. Financial institutions responsible for $ 150 trillion in assets have expressed support for TCFD. Banks, insurers, pension funds and asset managers with balance sheets of $ 139 trillion demand TCFD-aligned climate information from the companies in which they invest.
Regulators and government entities around the world are echoing the private sector’s demand for improved climate reporting by financial institutions. More recently, in November 2020, the US Federal Reserve for the first time cited climate change as one of the risks listed in its semi-annual financial stability report. The report noted:
The Federal Reserve is evaluating and investing in ways to deepen its understanding of the full extent of the implications of climate change for markets, financial exposures, and the interconnections between markets and financial institutions. It will monitor and assess the financial system for vulnerabilities related to climate change through its financial stability framework. Additionally, Federal Reserve supervisors expect banks to put in place systems that appropriately identify, measure, control, and monitor all of their material risks, which many banks are likely to face. extend to climate risks.
Goal setting by financial institutions
Calls for better accounting of GHGs by the financial sector have not gone unanswered. A growing number of institutions have announced targets for net-zero financed issuance by 2050, including the 30 institutional investors of the Net-Zero Asset Owner Alliance, Barclays, HSBC, Morgan Stanley, ABN AMRO and TD Bank.
As a technical partner, my firm has developed with the partners of the Science Based Targets (SBT) initiative their framework for defining objectives for the financial sector. The measurement of loans and investments linked to emissions is an important step in this framework. This is a requirement for the application of the sectoral decarbonisation approach (SDA) that we developed for the SBT initiative in 2015.
Given the considerable differences between the types of financial institutions, the nature of their loans and investments, and the GHG implications of these activities, a uniform and transparent reporting standard is an essential first step towards decarbonizing the global economy. .
We also recognize that the industry must embark on a larger journey towards a net zero future. Achieving this will require a range of actions, including setting goals, assessing risk, measuring progress and reallocating capital. In particular, more needs to be done to optimize lending and investment opportunities and to develop financial products and services that advance society’s energy transition. With the launch of the PCAF standard, the financial sector has acquired an important tool that will provide a benchmark for this journey.
Giel Linthorst is Executive Director of the Partnership for Carbon Accounting Financials (PCAF) and Head of Energy, Sustainability and Infrastructure at Guidehouse, a global consulting firm.