The Elephant in the Room: Understanding and Tackling Financed Emissions
Financed emissions are a critical yet often overlooked aspect of corporate sustainability. While most discussions focus on Scope 1, 2, and 3 emissions—direct and indirect greenhouse gas emissions a company is responsible for—financed emissions represent the greenhouse gas emissions linked to the projects and entities an organization funds through investments, loans, or other financial instruments.
For example, when a bank provides financing to a coal power plant, the emissions from that plant are considered the bank’s financed emissions. This is a significant source of emissions that, until recently, has been largely invisible in the broader conversation about corporate climate responsibility. However, as the urgency of climate action grows, it’s clear that addressing financed emissions is no longer optional—it’s a critical responsibility.
In the journey to net zero, what we choose to finance today will shape the climate of tomorrow.
Our portfolios shape the planet. Aligning finance with climate goals begins with confronting financed emissions.
Why Do Financed Emissions Matter?
The scale of financed emissions can be staggering. For many financial institutions, these emissions far outweigh their direct operational emissions. Ignoring them creates an incomplete and misleading view of a company's true environmental impact. As stakeholders—investors, customers, and regulators—become more climate-conscious, transparency around financed emissions is vital for: Moreover, as stakeholders – investors, customers, and regulators – become increasingly climate-conscious, transparency around financed emissions is crucial for:
- Accurate Risk Assessment: Financial institutions with exposure to high-emitting assets face significant risks as the world shifts to a low-carbon economy. By understanding financed emissions, they can better assess and manage these risks, leading to more informed decision-making.
- Enhanced Reputation: Demonstrating a commitment to measuring and reducing financed emissions showcases genuine climate leadership and builds trust with stakeholders. Conversely, a lack of transparency can lead to reputational damage and accusations of greenwashing.
- Driving Real-World Impact: By strategically allocating capital towards sustainable projects and engaging with investees to decarbonize, financial institutions can play a pivotal role in accelerating the transition to a net-zero future.
- Meeting Regulatory Expectations: Regulatory scrutiny around climate-related financial disclosures is increasing globally. Understanding and reporting on financed emissions will likely become a mandatory requirement in many jurisdictions.
The Challenge of Measurement
Measuring financed emissions is complex. It requires access to reliable emissions data from investees and the application of various methodologies, such as those developed by the Partnership for Carbon Accounting Financials (PCAF). Challenges include data availability, data quality, and the need for consistent and standardized approaches.
Taking Action: A Path Forward
Despite the complexities, taking action on financed emissions is essential. Here are some key steps organizations can take:
- Understand and Measure: Begin by understanding the different categories of financed emissions and adopting a recognized methodology to measure your portfolio's carbon footprint.
- Set Ambitious Targets: Based on your baseline assessment, set science-based targets for reducing your financed emissions in alignment with global climate goals.
- Engage with Investees: Actively engage with the companies you finance to encourage them to set their own emissions reduction targets and transition towards more sustainable practices.
- Integrate Climate Considerations: Embed climate-related risks and opportunities into your investment and lending decisions.
- Increase Sustainable Finance: Scale up investments in green and sustainable projects and assets.
- Be Transparent: Disclose your financed emissions and progress towards your targets transparently to stakeholders.
The Future of Finance is Sustainable
Addressing financed emissions is not just an environmental imperative; it's a fundamental shift in how we understand and manage financial risk and opportunity. By acknowledging and actively working to reduce the carbon footprint of our financial activities, we can unlock the transformative power of finance to build a more sustainable and resilient future for all.