Yann Louvel, Climate and Energy Campaign Coordinator, BankTrack
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What must happen
BankTrack calls upon private sector banks to measure and report all Greenhouse Gas (GHG) emissions associated with all their financial services. See 'A Challenging Climate 2.0 - What banks must do to combate climate change'. This page provides guidance to banks on how to start.
The accurate public accounting of climate impacts is essential for managing and reducing GHG emissions in a transparent and accountable manner. Most banks are already measuring their own direct carbon footprint, but they should also measure and report on the emissions associated with the financial services they provide to their clients: termed “financed emissions”. These are indeed by far larger than banks' "direct emissions". Such accounting should be done on both a business-unit and portfolio-wide basis to enable stringent target setting and more effective management of climate impacts.
Milieudefensie (Friends of the Earth Netherlands) published in 2009 the report "Carbon Footprinting of Financed Emissions - Existing Methodologies, a Review and Recommendations". This study provides an overview and comparison of seven existing methodologies and their characteristics.
2° investing initiative published in 2013 the report "From financed emissions to long-term investing metrics - State-of-the-art review of GHG emissions accounting for the financial sector". This study provides an overview and comparison of ten existing methodologies and their characteristics.
Kepler Cheuvreux published in 2015 the report "Carbon Compass - Investor guide to carbon footprinting". This study provides a guide through current and developing carbon assessment tools.
L'ORSE, l'ADEME, l'Association Bilan Carbone (ABC) and la Caisse des Dépôts, with the technical expertise of Carbone 4, have published the methodological guide "Understanding the issues around quantifying GHG emissions in the financial sector" in June 2016 with the participation of around twenty French financial institutions, NGOs and experts. The purpose of this guide is to assist a wide range of players in the financial sector (banks, insurers, asset managers) in measuring their direct and indirect GHG emissions. It offers an overview of the issues, identifies and analyses a range of existing tools and methodologies and provides examples of good practice.
The following methodologies can indeed already be used by banks for their different banking activities, from project finance to asset management through retail banking:
- Credit Agricole methodology for lending portfolio: the 'P9XCA' methodology was developed in 2011 by Antoine Rose, PhD student from the Paris based Sustainability Chair for Crédit Agricole CIB. It covers commitments to non financial companies and sovereign issuers. Credit Agricole publishes its financed emissions every year in its annual report.
- Bank of America methodology for utilities portfolio: the "Utilities Portfolio Emissions Reduction Methodology" describes the methodology used by Bank of America to calculate its emissions reduction commitment for its utilities portfolio. 2007
- AFD Carbon Footprint for project finance: simplified analysis tool developed by the French Development Agency to calculate emissions from development projects, also focusing on their vulnerability to climate change. The aim is to allow managers of projects financed by AFD to analyse their carbon content and to enhance project content by integrating climate change. On this topic it also worth mentionning the EIB induced GHG foortprint methodology and the EBRD one. January 2007
- ATEPF's methodology for retail banking: climate label initiative of the Association for the Transparency and Labelling of Financial Products mentioning the carbon intensity of the activities financed by retail banking products. June 2008
- envIMPACT for asset management: Inrate methodology (Switzerland) including scopes 1,2 and 3 of the GHG protocol, the best by far. This is the methodology picked up in the ATEPF's methodology above. It modelizes the GHG emissions of companies over the entire value chain of their products and services. Investors can calculate the carbon footprint of their investments, build low-carbon portfolios or reduce the carbon intensity of existing portfolios.
Twelve Dutch financial institutions – the Platform for Carbon Accounting Financials (PCAF) – have agreed to work together to jointly develop open source methodologies to measure the carbon footprint of their investments and loans. By measuring and disclosing this information they expect to develop more effective strategies that help contribute to a low carbon society, in the hope that other institutions will follow suit.
PCAF was launched via a Dutch Carbon Pledge calling on the negotiators at the Paris Climate Summit in 2015 to take on board the role that investors and financial institutions can play in delivering an essential shift to a low carbon economy. If it’s successful the group will create a more transparent approach to assessing the carbon footprint for stakeholders inside and outside the Dutch financial industry.
PCAF has published a progress report in May 2017, summarizing the results of the working groups on ‘mortgages’, ‘listed equity’, ‘project finance’ and ‘government bonds’. The report proposes ‘work in progress’ methodologies to calculate financed emissions of these asset classes. it has been distributed to a number of institutions for peer-review. PCAF is planning to add a chapter on corporate loans in their final report in October 2017.
Measuring financed emissions is only a first step; the next logical step is for every bank to establish sufficiently ambitious portfolio and business-unit reduction targets for their financed emissions.
GHG pollution reduction targets are fast becoming standard practice in many industries. While many companies have used the Kyoto Protocol and then the Paris Agreement benchmarks as a corporate target, it is clear that to continue to use Kyoto-scale or Paris-scale emissions reductions will not be sufficient to keep climate change way below 2°C above pre-industrial levels. To achieve the dramatic emission reductions associated with reaching this level, it is imperative that short and medium-term reduction targets of companies and banks are sufficiently ambitious to make substantial progress.
Existing reduction targets
- Bank of America, for example, assesses and reports on greenhouse gas emissions from its utilities portfolio. This is a useful start, but at a minimum should be extended to other GHG intensive sectors such as transportation, manufacturing and agriculture, and to overall portfolio impacts. In 2004, Bank of America committed to "reducing the emissions rate for companies in its utility portfolio 7% by 2008".
- Dexia commited in 2008 that the CO2 intensity of its portfolio of power generation assets debt in excess of to USD 10 million and financed in any given year would be less than 0.6 tons of CO2/MWh reducing by 3.5% per year from 2005. It is Dexia policy to remain 30% below the above-stated intensity target of its portfolio of power generation assets. Dexia will thus evaluate on a regular basis the CO2 intensity of its portfolio so as to insure the respect of this target.
- The United States Overseas Private Investment Corporation (OPIC) has pledged in 2010 to adopt an annual emissions cap and to reduce GHG pollution in its portfolio of projects by 30 percent in the next 10 years.
- More recently, Westpac’s climate policy from April 2017 aims to reduce the emissions intensity of its power generation portfolio to 0.30 tCO2e/MWh by 2020.
All banks should establish similar annual reduction targets to ensure progress towards longer-term stringent reduction objectives.
To get practical, Milieudefensie has also published a special guide "A climate strategy for Banks: Know your financed emissions" in 2009 to assist banks in taking the first steps towards measuring their financed emissions.