Many global financial institutions have been slow to address climate change but that’s changing, perhaps faster than you think, thanks to various net-zero commitments, a growing number of specific initiatives, and a new global harmonized accounting standard for measuring financed emissions.
Most banks, asset managers, and other financial institutions used to view climate change as a challenge for others to deal with, because most actual emissions come from their corporate clients and customers. The conventional wisdom was that financial players had limited influence over the rational—though perhaps short-sighted—economic decisions of others. But that is changing fast as it becomes ever clearer that climate change is a rapidly growing risk to the bottom line.
The 2019 bankruptcy filing by one of the nation’s biggest utility companies, California’s PG&E, after devastating wildfires, is just one of a growing list of natural disasters linked to climate change that have forced financial industry leaders to re-assess.
Global and national political pressure, such as President Biden’s climate change summit April 21, is also growing. Biden addressed the role of U.S financial institutions in fomenting change by investing in clean energy and reducing emissions as the U.S. plans how to meet its 2030 Paris Climate Agreement emissions target.
Last month, Treasury Secretary Janet Yellen said climate change is an “existential threat” to the country’s financial stability. A group of large U.S. corporations recently announced their support of a proposed 50% reduction in carbon emissions by 2030, on the way to a net-zero emissions by 2050, in line with the Paris Agreement. And April 21, Mark Carney, former governor of the Bank of England, launched the Glasgow Financial Alliance for Net Zero with the world’s biggest banks, asset owners, asset managers, and insurers.
But until fairly recently, many banks and other financial institutions had acted as if they weren’t part of this “real economy” problem and believed they had no major role to play in fomenting change. They didn’t feel the risks because they weren’t affecting their bottom line, yet.
The other challenge was how to measure their indirect impact on climate change, so-called financed emissions. The financial services industry resisted early efforts to quantify and account for these emissions because, they claimed, there was a lot of double-counting. They were worried that if a money manager invested in an oil company, the emissions of all of the cars that used gas produced by the company would be attributed to that investment, along with the actual emissions by the oil company itself.
The Partnership for Carbon Accounting Financials’ (PCAF)global standard to measure and report financed emissions solves this problem by taking a bottom-up approach to measurement starting with six asset classes: listed equity and corporate bonds; business loans and unlisted equity; project finance; commercial real estate; mortgages; and motor vehicle loans.
For each asset class, financial institutions calculate the annual carbon emissions produced by the company or project they have invested in. The next step is to calculate the percentage of the total value of the project that the investment or loan represents and multiply that by the annual carbon emissions to come up with the portion a financial institution is responsible for. If you own a 20% share of a company’s value, 20% of its annual emissions are attributable to you.
PCAF’s membership has ballooned since early 2019 from a handful of founding institutions to 115 global financial institutions today. Financial assets held by members have grown more than eight-fold over the same period to nearly $30 trillion. New members this year include HSBC, Deutsche Bank, PNC Financial Services, RBC and ScotiaBank. Now we’re aiming to expand our membership to 250 financial institutions by the end of next year.
Members agree to start using the standard within three years to report their share of financed emissions. They aren’t required to report a set percentage of these holdings.
However, once they start reporting anything, I believe societal, political, economic, regulatory, and even peer pressure will push them to report more, and more quickly. PCAF member Lloyd’s Bank, for example, started reporting that covered about 70% of their portfolio within seven months of joining.
Of course, there’s still plenty of work left to be done. The PCAF standard is just a start to enable financial institutions to start their journey toward net-zero. PCAF’s recently published global landscape of initiative, methods, and tools shows all next steps for the financial sector to combat climate change. There’s no excuse for being behind the eight-ball.
Use the table here to chart growth in financial assets of PCAF members over time.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
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