Financial services firms continue to set net zero operations goals (or similar carbon related claims) to address climate change as part of their overall commitment to environmental, social, and governance (ESG) issues. However, at least half a dozen U.S. financial services firms have gone a step further.
Several banks have announced net zero financing goals. Meaning, not only will they actively manage the carbon emissions associated with their own operations, but they’ll also work to mitigate the carbon impact of the money they lend or invest.
This is a bold declaration, one that is challenging to prove. While companies may, with confidence measure emissions of the properties they own or lease, assessing emissions linked to investments and establishing the veracity of any related emission claims from others is a far more complex and challenging exercise. The ability to evidence and defend those calculations is likely to become an area of increasing focus for investors and regulators alike.
What truly reduces the carbon footprint?
While it is true that projects such as wind farms do not add to the global carbon footprint during their operational phase, absent a corresponding retirement of fossil-fuel powered generations assets, the project does not, on its own, reduce total global emissions. Put simply, zero plus one still equals one, not zero. Some asset managers employing a credits and debits approach to portfolio level carbon accounting have already faced criticism tied to the use of avoided emissions, and been forced to walk back their portfolio level carbon emissions claims.1
Many firms are beginning to declare net zero (or similar) objectives but setting target dates decades in the future. This approach may provide firms with time to sort out the details later and to allow for novel emission reduction solutions to be developed and commercialized, both of which can make compliance with stated objectives easier. However, one of America’s largest banks recently announced that it will publish details of its financed emissions by 2023.2 This disclosure timeline creates an accelerated baseline against which other firms may be judged. It is increasingly likely that financial services firms setting net zero (or similar) financing targets, will be expected to set near-term dates to disclose the details of their current state, as well as provide details of their roadmap to achieve their stated net zero ambitions.
What can be done right now?
International organizations such as the Partnership for Carbon Accounting Financials (PCAF) are beginning to develop guidelines for measuring and reporting on investment-related emissions. These guidelines are still evolving, and individual firms have broad leeway to assess and calculate their associated emissions leveraging these calculation and reporting guides. While these guidelines continue to develop, financial services firms can take three actions today.
- Review past statements for defensibility.
Firms should review their current and prior period proxy statement materials, annual reports, and other information in the public domain, to reconfirm the provided data and underlying process support the stated climate-related claims and disclosures. Concurrently, companies should ask themselves who inside the firm can attest to the completeness and accuracy of the climate related statements? If it’s difficult to name a senior executive, this may represent a gap that needs to be addressed. Companies increasingly need to be prepared to bring credible, complete, and accurate data to market, even if it requires a combination of caveats, clarifying assumptions, and/or enhancements to the underlying data and associated aggregation process to provide sufficient comfort over the data’s accuracy.
- Set a goal to understand the current state of data and attribution.
Before announcing a tangible goal to achieve either operational net zero or financing net zero (or similar), financial firms should first set an interim goal to determine their current emissions. to achieve this goal, they will need to understand the following:
- What source data is available?
- Is the data based on invoice / meter reads or equally credible sources?
- Does the data include estimates?
- If so, how were those estimates derived and validated?
- What assumptions were made to calculate emission?
- Are there data lineage or data quality concerns? If so, can they be remediated?
- What material data is missing altogether? Can the data be sourced or replaced?
For example, to achieve a net-zero financing commitment, a nationwide mortgage holder must capture or estimate the emissions of its financed homes. The data must have sufficient granularity to capture or calculate emissions from homes of varying sizes, ages, and geographies. These data points, along with many others, will be needed to assess and report on the emissions footprint of the company’s mortgage portfolio.
In parallel, firms need to determine their emissions tracking and attribution strategy, both for activities that increase and decrease the company’s footprint. Questions include:
- How will the company adopt a framework(s) like the GHG Protocol and PCAF to assess the carbon impacts, both positive and negative, of their financing activities?
- Can sequestered carbon be utilized to reduce the company’s footprint?
- What ranges and estimates are integrated into the emissions calculations, and how were those estimates derived?
- Will the company seek third-party validation over its GHG emissions?
- Finance, risk, and the business should work together on the net zero strategy.
Once a robust emissions current state is established, firms are better positioned to map out their emission tracking and reporting strategy. The strategy (and underlying processes) should articulate the required data points, availability of actual data, requirement to use estimates, and the methodologies to collect, aggregate, and calculate associated emissions. This strategy must also capture the high-impact levers to drive a successful transition to a low and, ultimately, net zero carbon future.
The company must also consider how the strategy will inform and enable a changing focus in its business model.
- When and how will the firm limit or exit high carbon businesses?
- How will the determination to exit high carbon business be made?
- What additional information is required from counterparties to understand their carbon / emissions impacts?
- And what constraints can the company place on the use of funds?
The answers to these questions can increase the cost of doing business and limit the potential scope of investments. As such, decisions to modify investment and financing strategies must be aligned with the company’s net-zero business model, but done with careful eye towards the competition.
The impact of net zero strategy implementation on the executive leadership team
As we discuss in The Federal Agenda 2021 blog series, the effort to define and defend a net zero (or similar) roadmap falls to multiple functional units within the company, from finance and risk to technology and investor relations, but ultimate rests with executive management. It has also created new demands on executives, including those we cover in “The evolution of ESG and the Chief Sustainability Officer.”
However, through a pragmatic approach to operational strategy and portfolio management coupled with cross-functional coordination, financial firms are tackling the challenges of the rapidly changing ESG regulatory and investor landscape.
- Bloomberg Green. “Mark Carney Walks Back Brookfield Net-Zero Claim After Criticism.” February 25, 2021.
- Bank of America. “Bank of America Announces Actions to Achieve Net Zero Greenhouse Gas Emissions before 2050.” February 11, 2021.