Banks should be engaged on indirect CO2 emissions
Five questions to Andrea Baranes, senior analist at Fondazione Finanza Etica, Italian member of SfC.
On 12 October, SfC’s founding member Fondazione Finanza Etica presented the “Fifth Report on Ethical and Value-Based Finance in Europe” at the European Parliament in Brussels.
A session was dedicated to the measurement and disclosure of GHG emissions associated with financial institutions’ loans and investments. An issue on which there is still much room for improvement for shareholder engagement.
On 12 October, SfC’s founding member Fondazione Finanza Etica presented the “Fifth Report on Ethical and Value-Based Finance in Europe” at the European Parliament in Brussels.
A session was dedicated to the measurement and disclosure of GHG emissions associated with financial institutions’ loans and investments. An issue on which there is still much room for improvement for shareholder engagement.
Andrea, why do you consider emissions’ disclosure by listed banks as insufficient?
Because they are still pretty much focussed on “Scope 1” and “Scope 2” emissions, generated by the heating systems or electricity consumption in their offices. Most banks are still not disclosing “Scope 3” emissions, namely indirect emissions generated by their loans and investment portfolios.
Why is this a problem?
Millions of euros in loans are granted to polluting industries, coal-fired power plants, and oil well drilling, but they are simply not factored into the tally of greenhouse gas emissions. It is as if the financed activities live a life of their own, and no longer have anything to do with the banks. However, without the banks, the power plants would not have been built and oil wells would not have been drilled. Since the Paris Climate Agreement (2015) until today, banks have continued to invest more than 4.6 trillion dollars in the fossil fuel sector. That is equal to 2.1 billion per day up to 2021, with no downward trend, or any assessment of the impact of loans and investments on greenhouse gas emissions.
How can banks improve their emissions disclosure?
A good practice to follow in the banking sector are ethical and value based banks, such as Banca Etica in Italy or SfC member ABS in Switzerland. In 2020 they were among the first in the world to publish reports on the indirect greenhouse gas emissions generated by their loans and investments according to the PCAF Standard (Partnership for Carbon Accounting Financials). Today, more than 300 financial institutions with over 81 trillion dollars in assets are adopting the PCAF Standard. Among them are Danske Bank, Deutsche Bank, Nordea, Erste Group and Santander.
What could investors do to improve emissions disclosure by banks?
Most global systemically important banks (G-SIBs) are still missing in the list of financial institutions that measure and disclose “Scope 3” emissions according to the PCAF Standard. Among them are Credit Suisse, Credit Agricole, ING, Société Générale and Unicredit. While some G-SIBs, such as Barclays, just “committed” to disclose but haven’t yet. Investors should start engaging banks, asking to adopt the PCAF or other, comparable standards to measure and disclose emissions generated by their loans and investments. At the same time, they should monitor banks that are already adopting the standard, to assess the quality of their disclosure.
Why is measuring and disclosing “Scope 3” emissions so important for banks?
Measuring and disclose “Scope 3” emissions loans and investments is a first step towards defining emission reduction strategies with clear targets. Indeed, this is at the heart of a new approach to banking and finance with the aim of alignment with the climate goals set by the Paris Agreement. By measuring emissions generated by a portfolio of loans or investments, financial institutions can perform scenario analyses, set targets, take action, and disclose their progress. There is no way around the disclosure of comprehensive “Scope 3” emissions if banks wish to become carbon neutral by 2050, as they claim.