Carbon accounting on the capital markets needs a bottom line
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Carbon accounting on the capital markets needs a bottom line

If banks want the positive PR associated with facilitating sustainable finance, they need to admit to facilitating dirty finance too.


Whenever banks tell me they wouldn’t worry about something if they were me, it is usually a good sign that it is indeed worth looking at. And lately, I have been told not to worry about facilitated emissions in banking.

Facilitated emissions are carbon emissions tied to off-balance sheet activities of banks, unlike financed emissions, which are linked to banks’ lending activities.

Discussions around how to properly quantify them are at an impasse. Market-led initiatives – run by banks but subject to pressure from non-governmental organizations (NGOs) and investors – are struggling to reach a consensus on what the correct allocation of responsibilities should be.

The process of accounting for facilitated emissions is especially difficult because of the temporary association the bank has had with the transactions in question.

Some banks are challenging the lack of differentiation between conventional underwriting and sustainable underwriting as a fundamental flaw in the proposed methodology. Others will be concerned by the high volatility and double-counting issues that could arise.

But really, this current debate misses the point: the financial sector cannot have it both ways.

More standards

In the world of carbon accounting, the Partnership for Carbon Accounting Financials (PCAF) is the authority figure. Its greenhouse gas (GHG) standard for the accounting and reporting of financed emissions has become the norm for financial services companies around the globe, covering asset classes including listed equity, corporate bonds, project finance, sovereign debt and mortgages.

The PCAF’s methodology for reporting GHG emissions associated with capital markets transactions was expected at the beginning of this year. While they wait, banks are split between those who say that they will hang on for PCAF before integrating facilitated emissions in their sustainability reporting, and those deciding what works best for them pre-emptively.

Standard Chartered, for example, states: “As a member, we are actively involved in the development of the PCAF methodology and guidelines for facilitated emissions disclosures. The final methodology is not yet available. Once published, we intend to report on our facilitated emissions.”

Similarly, HSBC said that it will “update our targets and baselines to include both on-balance sheet and off-balance sheet activities following the publication of the industry standard for capital markets methodology by [PCAF]”.

Meanwhile, Barclays – co-chair of the PCAF working group on capital markets – includes capital markets financing arranged for clients within the scope of its BlueTrack methodology for quantifying emissions linked to its financing activities.

If carbon accounting methodologies were used properly, then all emissions should be accounted for somewhere down the line

For capital markets financing, Barclays uses the amount arranged over the past 12 months prior to the reporting date, pro-rated by league table credit if there were several banks in the syndicate. Barclays is allocated 33% of the pro-rated financing amount, with the remaining proportion allocated to investors. The bank then accounts for the emissions associated with that 33%.

And then you’ll find the global banking watchdog ShareAction calling for a methodology that includes 100% weighting for the emissions facilitated via capital markets transactions because anything less would be misleading.

Some banks like NatWest also advocate for this weighting for corporate bond estimations.

Others reject the process entirely.

At the core of the banks’ defence on this matter is the question of attribution. If facilitated emissions are one form of Scope 3 emissions for banks, they are also – and perhaps more directly – Scope 3 emissions for investors.

And if carbon accounting methodologies were used properly by all actors within the financial sector, then all emissions should be accounted for somewhere down the line.

In this carbon accounting scenario, there would inevitably be a large amount of double counting if the reporting is done all the way down supply chains.

Some lenders argue that facilitated emissions reporting is just muddying the waters and that emissions should be linked to capital so that it gives a clear image of who is responsible for what. In other words, it shouldn’t matter that – as Rainforest Action Network points out in its Banking on Climate Chaos 2023 report – underwriting bonds and equities accounted for 36% of all fossil fuel financing in 2022, because that capital is ultimately coming from investors, and they are the ones who should be accounting for that environmental footprint.

So why should it be down to banks to report these?

Well maybe because their shareholders – who happen to be investors themselves – need to report on their Scope 1, 2 and 3, and are looking for more information on just how much pollution banks are actually responsible for.

To ignore origination and advisory activities, which represent a big portion of banks’ business, would skew any current reporting being done by the banks.

Where's the bottom line?

Beyond this tired debate about whose job is it to report, the question remains about how to share the burden. And to figure that out, we could start by looking at these banks’ own sustainable finance frameworks.

While there may have been some reluctance to report on facilitated emissions, so far banks have had no issue claiming their share of the glory for having facilitated green and sustainable transactions on the capital markets.

In December 2022, Barclays announced a new target to facilitate $1 trillion of sustainable and transition financing by the end of 2030. The bank says its framework covers “a range of financing activities including debt and equity capital markets, corporate lending, trade finance and consumer lending”.

For most capital markets products, it adopts a proportional bookrunner share as the accounting basis.

Similarly, Citi applies league table credit to determine how much of the sustainable capital markets transactions it facilitates counts towards its sustainable finance goal.

But at some point, there needs to be a bottom line.

If banks are including the capital market transactions that they have facilitated in their methodology to report the progress they are making towards a sustainable finance goal, then they should also account for the emissions linked to their transactions.

Of course, the counter argument could be no reporting at all, not for facilitated carbon emissions nor for facilitated carbon avoidance. But if the reputational incentive that comes with being able to boast about sustainable capital markets transactions disappears, that could jeopardise any momentum in sustainable finance currently seen in the market.

And if we accept the general consensus that we are going to need to mobilise institutional capital flowing from investors to fund the transition of our global economy, banks will continue to be relevant.

In Europe, the debate around how to report on facilitated emissions will become even more important if the region starts to move towards a US-like scenario where capital markets funding overtakes balance-sheet funding, as some senior bankers suggest.

And in that case, the idea that the facilitated emissions debate is not worth looking into because financed emissions are already being reported and cover the largest part of banking emissions anyway completely falls apart.

So maybe we should worry about it. I definitely am.

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