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Greenhouse gas accounting: cutting carbon in finance

Paul Young Paul Young

The financial sector is increasingly focused on climate risk management and disclosures. Paul Young looks at greenhouse gas accounting, the Net-zero Banking Alliance and how firms can help meet the requirements of the Paris Agreement.

As COP 26 draws closer, the news continues to be dominated by the climate change agenda, with frequent updates for firms across all industries. In the financial sector, this includes a new green-house gas (GHG) accounting and reporting standard, and the emergence of the UN-convened Net-Zero Banking Alliance. We take a closer look at each initiative, their intended goals and how they support existing approaches to reduce climate change.

The Greenhouse gas accounting and reporting standard

The industry-led Partnership for Carbon Accounting Financials (PCAF) was established in 2015, and consists of financial institutions from around the globe. It recently published a set of standards to help firms monitor their GHG accounting, which covers all direct or indirect GHG emissions in a given financial year. This includes financed emissions, which are GHG outputs from third party activities that are funded by a financial institution’s loans or other investment.

Tracking financed emissions will support firms to reduce their carbon activity, and help the sector achieve the goals of the Paris Agreement: limiting the rise in global temperature to 2oC above pre-industrial levels.

To develop a plan for achieving these goals, consider these four key steps:

1 Measure and disclose greenhouse gas emissions

Double materiality is a key concept for the sector. It looks at both the financial risks caused by climate change, and an individual firm’s contribution to it. The GHG accounting and reporting standard predominantly focuses on the latter, by providing tools to measure the carbon emissions associated with investments and other products. This is also good for disclosures, which often suffer from a lack of quantifiable data, increasing the risk of greenwashing. In the long term, the GHG accounting and reporting standard will help the market transition to a green economy and reduce investment into activities that will contribute to climate change.

2 Setting targets

Financed emissions are essential to help firms measure and reduce their environmental and climate impact. But, working out the emissions will not be easy and the standard provides detailed methodology for six asset classes, including listed equity and corporate bonds, mortgages, project finance, and motor vehicle loans. This includes data quality scoring — the standard recommends a minimum disclosure threshold, with a comply or explain approach. Firms can publish their GHG accounts in line with their financial accounting periods, helping to monitor progress to date, run effective scenario analysis, and set appropriate targets.

3 Developing a strategy

A standardised approach will help firms fulfil their climate risk strategy while meeting key regulatory requirements, such as ESG and financial disclosures, the latter in line with the Taskforce for Climate-related Financial Disclosures (TCFD) guidance. Greater transparency will also improve accountability, with added scrutiny from all stakeholders helping to keep businesses on track with their announced goals. The standard’s use of science-based targets and additional reporting to the Carbon Disclosure Project will help firms develop new products in line with a realistic strategy for contributing to a net-zero economy.

4 Taking action

The standards will help PCAF identify hotspots where firms are continuing high GHG emissions through their lending and investment activity. This information can help firms target specific asset groups to reduce GHG emissions, feeding back into measurement and disclosures processes, informing future targets and strategic goals. This will ultimately improve funding and investment for green initiatives, supporting sustainable finance in the long term.

Adherence to the GHG accounting and reporting standard is voluntary, but more firms are adopting it and committing to tracking and reducing financed emissions.

The net-zero Banking Alliance

The Net-zero Banking Alliance follows a similar vein and aims for all member banks’ loans and investments to support net-zero carbon emissions by 2050. As a relatively new initiative, participating banks must sign a commitment statement outlining their ambition to:

  • Aligning their lending and investment portfolios to achieve net-zero GHG emissions by 2050
  • Set targets for 2030 and 2050 within 18 months, with five-year milestones from 2030
  • Assess priority sectors and quick wins for the 2030 targets, with additional targets to be set over the next 3 years
  • Publish annual emissions and disclose ongoing progress. Consider the role of GHG offset to support wider goals

United Nations guidelines

The UN environmental programme provides guidelines for climate target setting. The recommended approach is outlined in four strands:

1 Disclose long-term and intermediate targets

This should include scope 1, 2 and 3 emissions. Target years and base years must be included for transparency, and all targets should be supported by an action plan within 12 months.

2 Establish a baseline for emissions, annually measuring and reporting on financed emissions

This relies on relevant GHG reporting guidelines and protocols, such as the PCAF’s greenhouse gas accounting and reporting standard. Banks should consider the scope of the relevant asset classes, sector coverage, and appropriate metrics to be used.

3 Use science-based scenarios to set targets

This will ensure the scenarios are credible, and do not rely too heavily on negative emissions technology. Banks must be transparent about the scenarios used, the provider and any underlying assumptions.

4 Regularly review targets to reflect current scientific approaches and scenarios

The review should happen at least every five years. Targets must be relevant, up to date, and approved at the most senior level.

Collectively, the GHG accounting standards and the Net-Zero Banking Alliance signify a significant shift towards reducing GHG emissions across lending and investment portfolios. Most importantly, they reflect effective metrics for firms to track these emissions, set measurable targets, and actively contribute to the Paris Agreement goals. Over time, similar initiatives will continue to emerge and it’s essential for financial institutions to make use of all available tools and resources to curb climate change and effectively manage the associated risks.

Contact Paul Young for more information about greenhouse gas accounting.

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