‘Financed Emissions’ Take the Spotlight as Banks Slowly Begin Reporting Climate Risk
Canadian banks and insurance companies are finding themselves singled out as major players in the effort to get climate change under control, after analysis by the non-profit Carbon Disclosure Project (CDP) concluded that financial institutions’ investments, loans, and underwriting activities account for 700 times more climate impact than the direct emissions from their operations.
“‘Financed emissions’ are the next front in the war against climate change,” declares Jeffrey Jones, a veteran mergers and acquisitions reporter with the Globe and Mail, in an opinion piece this week. “More and more financial institutions are taking stock of the greenhouse gases that emanate from projects and companies built and operated on the funds that they lend and capital they help raise.”
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The CDP’s research “shows the volumes are immense, and efforts to deal with the problem are still inadequate for keeping global temperature gains to less than 1.5 to 2°C, as spelled out in the Paris Agreement on climate,” Jones adds. Far from controlling the emissions from their lending and asset management activities, only a fraction of the 332 institutions in the CDP survey even report them.
That means the results of the study “were striking yet incomplete,” Bloomberg Green writes. “Only 25% of the companies reported financed emissions, and among those that did, most reported on less than 50% of their portfolios, thereby obscuring the true impact of their financing activities.”
Even so, across a group of institutions with combined assets worth US$109 trillion, “reported financed emissions totaled 1.04 gigatons of CO2, or about 3% of global emissions in 2020,” the U.S. news agency adds. “The true figure is likely significantly higher.”
CDP also concluded that “many banks and asset managers are underestimating climate-related risks,” Bloomberg says. “While 41% of firms said they identify direct operational climate-related risks, such as physical damage to their operations, 65% don’t report climate credit risks, such as borrowers’ defaults on loan repayments. Meanwhile, 74% don’t identify market risks, including stranded assets and financial asset price devaluation, as the economy transitions to net-zero.”
Those gaps matter a great deal because “the financial services sector is critical to achieving a net-zero carbon future,” Emily Kreps, CDP’s global director of capital markets, told Bloomberg. “The real economy transition will require a massive amount of capital directed at decarbonizing the economy and enhancing resilience, which only the finance sector can facilitate and provide.”
Jones says the gap in reporting is “a little surprising, given how political and business leaders have discussed over the past year the financial world’s role in efforts to extract the carbon from the global economy. Trillions of dollars will be needed to meet net-zero goals over the next three decades, and properly tallying emissions is crucial to understanding the challenge.”
He notes that a group of 160 financial institutions, led by former Bank of Canada governor Mark Carney, formed the Glasgow Financial Alliance for Net Zero last month, aiming to set short- and long-term emission goals consistent with climate science. But so far, Canadian participation in the initiative has been a tad underwhelming.
“Canadian financial institutions have spent the past several months announcing goals to get to net-zero, and pledging to tally greenhouse gases tied to their lending,” Jones writes. But “with the exception of one, Vancouver City Savings Credit Union, Canadian institutions were conspicuous by their absence in the launch of the Glasgow group.”
Kreps said eight Canadian banks, including all of the country’s Big Five, have been doing some form of emissions disclosure for a decade, and 17 Canadian banks and other financial institutions responded to the CDP survey. But none of that reporting has apparently deterred the Big Five from investing US$559 billion in fossil fuel projects in the five years since the Paris Agreement was signed, according to this year’s Banking on Climate Chaos report.
“In no case is CDP or, ideally, most of the people in the climate world, out to destroy economies,” Kreps told Jones, in what was no doubt an unintentional contrast with the banks’ fossil investment activities. “It’s about saying, how do you get the companies to transition to business models that will become sustainable in a changing physical and regulatory environment?”
She added that “this is where financial institutions have a significant role to play. Measuring their exposure is important, but then also understanding how the exposure can be transitioned over time.”