Financial services groups feature prominently in the FT-Statista ranking of Europe’s Climate Leaders, based on their reductions in emissions from direct operations and energy use between 2014 and 2019.
But banks and asset managers are under growing pressure to calculate and reduce carbon emissions across their portfolios — a hugely complex task that involves measuring the impact on climate change of everything from small business loans to global shareholdings. And an assessment based on the emissions enabled by their investing, lending and underwriting would look quite different.
These so-called “financed emissions” tend to be much larger, in aggregate, than the emissions from a bank or asset manager’s direct operations or energy consumption, yet they are still not widely measured or reported.
Wolfgang Kuhn, director of financial sector strategies at ShareAction, a charity that promotes responsible investment, says this must change, as assessing the overall impact “boils down to what responsible investing really is”.
Investors have tended to focus largely on the climate-related risks to their bottom lines, but analysing financed emissions is about acknowledging “how you as a bank cause climate change”, he argues.
Measurement of financed emissions — and supply chain emissions more broadly — has come under the spotlight with the proliferation of corporate climate pledges in the past year, and the ensuing debate about what is considered meaningful. Although supply chain emissions can be significant, tracking them can be fiendishly difficult.
Total financed emissions from financial institutions were, on average, more than 700 times greater than their operational emissions, based on data from 84 organisations that collectively managed $27tn in assets, according to an April report from the non-profit Carbon Disclosure Project, an advocate for environmental transparency.
Those institutions, however, represented only a quarter of the 332 banks, asset managers and insurers surveyed; the remainder did not disclose financed emissions data.
Calculating a portfolio’s carbon footprint requires granular information about the companies in it. The analysis — for which several methodologies exist — will be different for each asset class and often takes into account the size of the holding an institution has in each company.
Farnam Bidgoli, head of environmental, social and governance solutions for Europe, the Middle East and Africa at HSBC, says banks face “a very real and big challenge” in calculating their financed emissions.
She says the biggest hurdle is the lack of data, since not all of the thousands of bank portfolio companies have information about their own emissions. HSBC plans to set sectoral financed emissions targets consistent with achieving net zero by 2050.
Many institutions have started by homing in on a handful of carbon-
intensive sectors. Barclays, the UK bank, said last year that it would start by calculating its financed emissions in the energy and power sectors. Earlier this year, it said it would extend this work to cover cement, steel and aluminium.
Barclays’ aim is to reduce its power portfolio’s emissions intensity (emissions relative to revenue) by 30 per cent, and its energy portfolio’s absolute emissions by 15 per cent, by 2025. It will publish cement, steel and aluminium targets in 2022.
However, even where institutions have financed emissions data, there is a lack of consensus around appropriately ambitious targets — and how to achieve them.
“How do you set your targets in relation to [financed emissions]?” asks Eric Pedersen, head of responsible investments at Nordea Asset Management in Denmark. He also questions how targets affect investors’ “freedom” to calibrate their portfolios. Nordea does not report its financed emissions.
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Cynthia Cummis, a member of the steering committee at the Science Based Targets initiative, a coalition of environmental research groups, says organisations should set detailed sector-specific targets for absolute financed emissions and emissions intensity.
Reducing portfolio emissions might mean institutions have to divest from carbon-intensive sectors — something many green groups have called for. But many money managers argue that heavily polluting companies would find financing elsewhere and that a better strategy is to steer them towards becoming greener.
Leonie Schreve, global head of sustainable finance at Dutch bank ING, believes banks have a key role in helping other companies reduce their emissions. Clients with “no appetite” for change will face “consequences over time”, she says. ING has set emissions intensity targets for some sectors but does not yet have absolute financed emissions targets.
ShareAction’s Kuhn says impressive-sounding pledges and promises to help clients transition often lack detail. “Banks will say they’ll engage with their clients and support them in their transition to net zero — that sounds good, but what does it mean?” he asks. “Are you going to give them deadlines, criteria? What is it that you want them to do?”
In 2014, the Greenhouse Gas Protocol, the global standards body, began working on a methodology for measuring portfolio emissions, but “there was a lot of reluctance from financial institutions to use it”, according to Cummis, who was involved in the effort. “I don’t think financial institutions felt any pressure to report,” she says.
Since then, investor and regulatory pressure has intensified. Even so, “it is going to take time for banks to have these comprehensive climate targets”, Cummis reckons. Crucially, there is “not yet a common definition of net zero for a portfolio”.
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