Banks are facing loud demands to measure the carbon footprints of their financing activities, but few of them currently have a full accounting of those emissions, according to a new study.
At large banks around the globe, so-called financed emissions account for at least 95% of overall emissions, but they remain underreported because of challenges in calculating and disclosing the complex environmental metric, the consulting firm Bain found.
Financed emissions have been drawing more attention as banks’ corporate clients request increasingly detailed information about emissions to meet climate commitments. The first two scopes of emissions, which include direct and indirect greenhouse gas emissions, have become more common in disclosures, while banks have been slower to report Scope 3 emissions.
“Banks are under pressure and face growing scrutiny, not just of their Scope 3 financed emissions, but to answer calls for increasingly specific commitments and actions that demonstrate momentum to actually reduce those measurements,” said Michael Kochan, a Bain partner who co-wrote the report.
Of the 45 large banks that Bain reviewed — 15 each from the Asia-Pacific, European and North American regions — 65% have made commitments to reach net-zero emissions by 2050. Nearly half of the banks have agreed to publicly share 2030 interim targets, but only for certain sectors.
Just over half of the banks have not reported any of their financed emissions. And those that have made disclosures have only provided information about the carbon-intensive electric power and fossil-fuels industries, according to the Bain report.
While new emissions reporting standards take time to gain adoption, the financed emissions category is reaching an “inflection point,” said John Hodges, a partner in the climate change and sustainability services group at the consulting firm Ernst & Young.
“The next five years is where the uptake will really get going,” Hodges said. “The willingness and commitment is there. That actual doing is just starting.”
Banks face two challenges in reporting financed emissions data. One is a lack of standardized guidelines to measure data, and the other is that the available data has “little granularity for large shares of their portfolio,” according to the Bain report.
The study compared the “reliability” of five banks’ reported carbon footprints in industries including power, metallurgy, automobiles and home mortgages, based on standards provided by the Partnership for Carbon Accounting Financials.
Emissions can “vary by more than twofold in either direction, depending on the granularity of data available and the associated methodology,” the report found.
Kochan said that banks are “building the plane on the fly” to meet increasing demands for financed emissions disclosures.
“Banks have been making net-zero commitments even as the guidance for how they might account for financed emissions across different parts of their loan portfolios is still being defined,” Kochan said.
Organizations like the Partnership for Carbon Accounting Financials and Greenhouse Gas Protocol have released best-practice guidelines for companies to assess their emissions profiles. But these organizations are also trying to keep up with evolving demands on climate disclosures.
Greenhouse Gas Protocol is currently reviewing its guidelines for reporting Scope 3 financed emissions as “part of the evolution” of climate disclosures, said Pankaj Bhatia, the organization’s director.
Banks are also “wrestling with the challenge of creating value from the transition to net-zero financed emissions,” the authors of the Bain study wrote.
Bain calculated the projected value of three loan portfolio strategies based on the speed of reducing emissions to show “the need for more adaptable strategies that can help banks plan for the long term,” Kochan said.
The analysis modeled how profits could change between 2021 and 2050. It found that banks that reduced their financed emissions the most could see profits grow by up to 30%. The slowest-moving strategy had projected losses of between 10% and 20%.
“Our view is that passive strategies alone are going to be insufficient to deliver on net-zero commitments that most banks are now making,” Bain’s Kochan said. “The gradual greening of the sectors to which banks lend is not going to be enough for them to hit their 2050 and interim targets.”
As the scale of financed emissions becomes better understood, the role that banks will play in helping their business clients meet climate commitments is also coming under greater scrutiny. Some shareholders are continuing to push for wider ranges of disclosures, and the U.S. Securities and Exchange Commission is weighing new rules to make some levels of reporting mandatory.
Sustainable finance activists argue in a new report that big companies are underreporting their emissions because they aren’t accounting for what banks do with their deposits. The findings add to a debate over how to measure firms’ contributions to climate change.
Shareholders are already deciding whether companies should disclose more information about their emissions, often by vetoing proposals for more disclosure, said Richard Morrison, a senior fellow at the Competitive Enterprise Institute, a libertarian think tank.
“Investors have market power and can use that to demand things from companies and asset managers,” Morrison said. “If demand for this information is not consistent enough for investors to produce it, maybe the risk isn’t as big as some financial institutions are leading us to believe.”
Ben Cushing, campaign manager at the Sierra Club, an environmental advocacy group, argued that banks must be held accountable for meeting the climate goals to which they’ve committed.
“We have had years of methodological development to help banks and financial institutions understand how to measure and report their financed emissions,” Cushing said. “There is increasingly little excuse for this type of measurement and disclosure not to be happening consistently."
