Banks Participating in Carbon Accounting Standards Face Controversy Over Their Footprint
A group of banks working together to establish global standards for accounting carbon emissions in bond or stock sale underwriting have voted to exclude a majority of these emissions from their own carbon footprint. This decision has sparked controversy, as many environmental advocates argue that banks should take full responsibility for the emissions generated by activities financed through bonds and stock sales, as they already do with loans.
The plan, backed by a majority of banks in the working group, seeks to exclude two-thirds of the emissions linked to their capital markets businesses from being attributed to them in carbon accounting. This move has raised concerns among environmental advocates about banks shirking their responsibilities and failing to account for their contributions to climate change.
According to the environmental group Sierra Club, nearly half of the financing provided by the six largest U.S. banks for top fossil fuel companies between 2016 and 2022 came from capital markets, rather than direct lending. This highlights the significant role that banks play in funding activities that contribute to carbon emissions.
The accounting of these emissions by banks will directly impact their targets for becoming carbon-neutral. Major lenders have committed to reducing their emissions to zero on a net basis by 2050 and have set interim targets for this decade. However, if the majority’s decision to exclude a significant portion of the emissions from their carbon footprint stands, achieving these targets may become more challenging.
Banks with substantial capital markets operations argue that they should only be held responsible for 33% of the emissions generated by activities financed through bonds and stock sales. They argue that they do not have the same level of control over borrowers as they do with loans. Additionally, banks are concerned that the capital market-related emissions could overshadow their lending-related emissions.
Those advocating for a lower accounting threshold argue that assuming full responsibility for all emissions would lead to double-counting across the financial system. They claim that bond and stock investors will also account for some of the emissions generated by financing activities in their carbon footprints.
While the majority of banks support the 33% accounting threshold, at least two members of the working group dissent, with one advocating for 100% responsibility. Ultimately, the Partnership for Carbon Accounting Financials (PCAF), an association of banks seeking to harmonize carbon accounting, will decide whether to adopt the 33% threshold for capital markets. However, the decision-making process has been delayed due to disagreements among the members.
The final methodology and accounting standard adopted by PCAF will greatly impact how banks measure and report their carbon emissions. The hope is that other banks will follow the standard established by PCAF to ensure consistency across the industry.
Campaign group ShareAction has criticized the 33% weighting, claiming it was arbitrarily chosen. They emphasize the need for transparent and unbiased assessments of banks’ climate risks and impacts to effectively address the climate crisis.
Furthermore, the question remains whether banks will have to combine their capital market-related emissions and lending-related emissions into a single target or treat them separately. This issue could present challenges if banks have different accounting approaches but are expected to meet a single carbon reduction target.
The Science Based Targets initiative, backed by the United Nations and environmental groups, is in the process of developing net-zero standards. These standards will determine whether banks should have different or combined targets. Their guidance will be crucial in establishing a clear path for banks to follow in their efforts to reduce carbon emissions.
In conclusion, the decision by banks to exclude a majority of carbon emissions from their own footprint has ignited controversy. With the banking industry playing a significant role in financing activities linked to greenhouse gas emissions, there is a growing demand for full accountability. As banks work towards becoming carbon-neutral, resolving these issues and establishing clear accounting standards will be crucial to effectively address the challenges posed by climate change.
