22 March 2023
Organizations in the financial services industry still have a lot of obstacles to overcome before they can establish a baseline for their emissions.
Financial institutions are quickly getting involved in the effort to lead and assist the shift to a low-carbon planet. Unsurprisingly, there is a lot of interest in the developing methodologies, tools, and approaches they will utilize to calculate the emissions intensity of their lending and investment activities. A concrete first step in establishing trust that financial institutions are incorporating climate change into their primary business of providing capital is assessing financed emissions.
On average, greenhouse gas emissions (GHG) from lending, underwriting, and investment operations are more than 700 times greater than direct emissions from financial institutions. Therefore a financial organization will likely start here to get a basic understanding of its carbon impact. The current level of sponsored emissions will serve as the baseline for monitoring progress and directing funding toward those making promises like net zero by 2050 or other carbon reduction goals, such as those put out by the various net zero coalitions.
Organizations in the financial services industry still have a lot of obstacles to overcome before they can establish a baseline for their emissions. In some sections of the business, emissions data is frequently inconsistent or lacking, while it could be completely absent in others. Nevertheless, certain asset classes do not have a carbon accounting standard, while others are only conceptually related to emissions (for example, student loans). In order to construct portfolio selection and management methods that are aligned to company climate goals while managing overall growth and risk priorities, they will build on this rough framework and incorporate estimates on the rates of future global decarbonization.
This is not a one-time activity. A company should anticipate working closely with the businesses it does business with—both lending to and investing in—as it advances toward its own goals in order to help manage adjustments to lower emissions.
Determining The Level Of Action Required
How can a company decide what amount of activity is necessary to meet its decarbonization goals? The question that looms over many companies is this. A financial services company can use a variety of portfolio management strategies to carry out its decarbonization objective once it has made the commitment to do so and established an emissions baseline.
One might get a sense of how quickly changes are required to achieve climate targets by, for example, projecting a decarbonization curve per industry and asset class using the emissions data from the portfolio. It is anticipated that some asset classes and sectors will decarbonize more quickly than others. The Science Based Targets initiative (SBTi) provides recommendations outlining probable trajectory for emissions reductions by sector through time to 2050 for net-zero targets particularly.
Anticipate to find holes in the predictions of decarbonization rates that have been made thus far. One of the top GHG emitting sectors, oil and gas, is not one of the six sectors for which SBTi has created trajectory models.
Key Considerations To Reduce Company’s Carbon Emissions
Including Financial Results In The Emissions Objectives
Think about maximizing the emissions-reduction aim based on pertinent financial metrics like risk-adjusted return or term matching. By doing this, managers are better able to link the financial results of portfolio decisions to their financial performance. Companies are even able to gain understanding of the hidden costs associated with achieving the decarbonization goals, and find ways to balance the trade-offs with conventional financial management goals.
Draw Conclusions On Growth Rate And Runoff
Anticipate runoff rates and portfolio growth to be key factors in reaching a decarbonization goal. Each one may significantly alter inventories of funded emissions. Managers might discover that, with careful study, expansion in high-emitting sectors can still be matched with growth in carbon-neutral assets to meet an overall decarbonization aim. Similar to this, strategies for fixed term assets should take carbonization gains from asset runoff into account.
Modify Strategies In Light Of The Rate Of Decarbonization
The push for a funded emissions target also takes into account assumptions about the rate at which the globe (including the securities and loans of portfolio firms) decarbonizes. Portfolio managers can evaluate different decarbonization pathways to create tracking techniques that compare actual emissions with the target. When faced with the reality of progress against stated promises, having a plan for a number of emission routes opens the door for swift action.
Collaborate With Portfolio Businesses
One of the best methods for a financial institution to lower its financed emissions footprint is by working directly with clients and portfolio firms. Many organizations, like Temasek, support this strategy and collaboration with these businesses might enable less intensive portfolio management to meet emissions targets.
Further Encouragement To Reduce Carbon Emissions By Finance Teams
The finance team can play a crucial role in reducing a company’s carbon emissions by:
Developing and implementing a carbon accounting system: The finance team can work with sustainability and operations teams to create a robust carbon accounting system that tracks and reports the company’s greenhouse gas emissions. This system can help identify the major sources of emissions and set targets for reduction.
Financing and investing in low-carbon projects: The finance team can help identify and invest in low-carbon projects, such as renewable energy and energy efficiency initiatives. By providing financing for these projects, the finance team can help the company reduce its carbon emissions and save money on energy costs.
Internal carbon pricing: The finance team can implement an internal carbon price, which assigns a financial cost to each ton of greenhouse gas emissions. This can incentivize business units to reduce their emissions by providing a financial penalty for exceeding emissions targets and a financial reward for reducing emissions.
Encouraging sustainable procurement: The finance team can work with procurement teams to prioritize suppliers that have sustainable practices and low-carbon footprints. This can help reduce the company’s carbon emissions and improve its environmental impact.
Reporting and disclosure: The finance team can ensure that the company’s carbon emissions are accurately reported and disclosed in financial statements and sustainability reports. This can provide transparency to stakeholders and demonstrate the company’s commitment to reducing its carbon footprint.
Overall, the finance team can play a critical role in reducing a company’s carbon emissions by integrating sustainability into financial decision-making and helping to identify opportunities for carbon reduction across the organization.