In a recent development, banks involved in developing global standards for accounting carbon emissions in bond or stock sale underwriting have voted in favor of excluding a significant portion of these emissions from their own carbon footprint. This decision, supported by most banks in the industry working group, sparked discord among environmental advocates who argue that banks should take full responsibility for emissions generated by activities financed through bonds and stock sales, much like they do with loans.
According to sources familiar with the matter, almost half of the financing provided by the six largest U.S. banks to top fossil fuel companies between 2016 and 2022 came from capital markets, not direct lending. This highlights the importance of accurate carbon accounting for these emissions, as it will impact the banks’ targets of becoming carbon-neutral. Major lenders have pledged to achieve net-zero emissions by 2050 and have set interim targets for this decade.
Divided Perspectives on Emission Attribution
Banks with substantial capital markets operations in the working group argue that they should only assume responsibility for 33% of the emissions from activities financed through bonds and stock sales. They contend that they lack control over the borrowers, unlike in the case of loans. Additionally, these banks express concern that capital market-related emissions could overshadow lending-related emissions. Advocates for a lower accounting threshold argue that taking 100% responsibility for emissions would lead to double-counting across the financial system, as bond and stock investors would also account for some emissions in their carbon footprints.
While most banks in the working group support the 33% threshold, at least two dissenting banks argue for a 100% responsibility. The final decision rests with the Partnership for Carbon Accounting Financials (PCAF), an association seeking to standardize carbon accounting across the industry.
A Non-Mandatory Accounting Standard
It’s essential to note that the accounting standard decided upon will not be mandatory. PCAF formed the working group with major banks, hoping that other financial institutions would follow the adopted standard.
The PCAF board will ultimately decide whether to adopt the 33% accounting share for capital markets. However, no final decision has been made yet. The working group has faced delays in publishing PCAF’s final methodology due to disagreements over the appropriate accounting threshold.
Criticism and Concerns
The 33% weighting for emissions has received criticism from ShareAction, a campaign group, claiming that it was arbitrarily chosen. ShareAction’s research manager, Xavier Lerin, urges PCAF to provide transparent and unbiased guidance for assessing banks’ climate risks and impacts.
Furthermore, there is uncertainty about whether banks will be required to combine their capital market-related emissions and lending-related emissions into a single target or keep them separate. This potential dual approach to accounting could pose challenges, as different standards may need to be applied.
The Road to Net-Zero Targets
The Science Based Targets initiative, an entity supported by the United Nations and environmental groups, is concurrently developing net-zero standards. This initiative will also address whether banks should have separate or combined targets for their emissions.
In conclusion, banks’ efforts to develop global standards for carbon emission accounting have generated significant debate and divided opinions. The decisions made will significantly impact the banks’ carbon neutrality targets and demonstrate their commitment to addressing climate change. The final word rests with PCAF’s board, and the industry awaits the outcome with bated breath.