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Net zero banking – How can banks address financed emissions?

Despite the global commitment to achieving net zero emissions by 2050, financial institutions, including banks, are still lagging behind in aligning their activities with climate transition objectives. Recent assessments highlight the substantial exposure of financial institutions' portfolios to transition risks and their insufficient alignment with sustainability goals.

In 2023, it was revealed that significant portions of securities portfolios held by financial players across Europe were heavily invested in sectors directly impacted by climate policies, such as transportation and fossil fuels. France, for instance, saw investments totaling 940 billion euros in these sectors, highlighting the urgent need for realignment with sustainability objectives.

Despite a growing global awareness, investment funds continue to allocate resources to carbon intensive sectors, posing a barrier to sustainable finance efforts worldwide. Moreover, while commitments to global accords like the Paris Agreement are widespread, there often exists a gap between rhetoric and tangible action.

Critiques from regulatory bodies, such as the Cour des Comptes in France, and central banks, like the Banque de France, underscore the urgent need for financial institutions to reevaluate their portfolios and align them with a net zero economy.

Why is addressing financed emissions important for banks?

Addressing their portfolio carbon footprint is crucial for banks striving to reach net zero carbon emissions. Here's why:

  • Financial risks: Failure to address financed emissions exposes banks to significant financial risks, including stranded assets and devaluation of high-emission investments. As the transition to a low-carbon economy accelerates, investments in carbon-intensive industries may become economically unviable, leading to financial losses.

  • Regulatory compliance: Regulatory bodies are increasingly imposing requirements on financial institutions to disclose and mitigate climate-related risks, including portfolio greenhouse gas emissions. Banks that fail to comply with regulatory standards may face penalties and reputational damage.

  • Investor preferences: Investors are increasingly integrating environmental, social, and governance (ESG) factors into their investment decisions, and favouring responsible banking. Banks that fail to address their emissions may face divestment or reduced investment from ESG-conscious investors, impacting their access to capital and long-term sustainability.

  • Long-term viability: Addressing their carbon footprint is essential for banks' long-term viability and resilience in a rapidly changing world. By aligning their activities with sustainability goals, banks can future-proof their business models, mitigate risks, and seize opportunities arising from the transition to a low-carbon economy.

How can banks estimate the emissions of their loan portfolio?

Estimating their emissions is a fundamental step for banks in understanding their exposure to climate-related risks and opportunities. The Partnership for Carbon Accounting Financials' (PCAF) Global GHG Accounting and Reporting Standard on Financed Emissions provides a comprehensive framework for calculating emissions associated with investments across various asset classes.

Banks must first establish a robust emissions baseline, which serves as the starting point for measuring change and addressing practical considerations. Key criteria for building this baseline include:

  • Sector and asset class coverage: Prioritize heavy-emitting sectors such as oil and gas, power generation, automotive, and mining, gradually expanding to cover all relevant sectors. Consider various asset classes like equities, bonds, loans, and real estate to ensure a comprehensive view of the portfolio.

  • Emission scope: Include direct (Scope 1), indirect (Scope 2), and material indirect emissions (Scope 3) where applicable.

  • Time period: Use the latest available data with a one-year lag, noting trends affecting target setting.

Mapping your portfolio

To effectively address emissions within your portfolio, it's crucial to create a clear map, considering various aspects such as loan books, equities, bonds, and more. This comprehensive mapping allows for a structured approach, enabling the prioritization of high-impact areas that contribute significantly to emissions. Collaborate closely with asset managers and investment professionals to gain detailed insights into the underlying assets and entities within different portfolios. By delving into specific portfolios like loan books, equities, and bonds, you can tailor your decarbonization strategies more precisely to each asset class, ensuring a more effective and nuanced approach across your entire portfolio.

Collecting the right data

Improve the accuracy of your emissions evaluation with a step-by-step strategy. Start by looking at your whole portfolio by industry to spot sectors with higher emissions. Then, go deeper into each sector, focusing on major emitters or loans. Follow the Pareto principle—begin with 4 or 5 key sectors, set specific goals, and then zoom in on individual emitters. This approach is widely used by banks which are part of the Net Zero Banking Alliance (NZBA), which is a group of the world's largest banks committed to financing ambitious climate action to transition the real economy to net-zero emissions by 2050, in line with the Paris Climate goals.

Acquiring accurate data

Acquiring accurate data on the underlying assets of your loan book is a crucial step in comprehending your portfolio's environmental impact. Leveraging tools like PCAF, which details how to calculate the attribution factor based on financial data and the carbon footprint of underlying assets, aids in estimating the carbon emissions of your portfolio companies. However, it's essential to note that banks often begin with sector-based revenue estimates, leading to potential inaccuracies in setting precise decarbonization targets due to limited data granularity. These data-driven insights empower you to make informed decisions and drive positive change within your portfolio.

How can banks set the right targets?

Setting collaborative emission reduction targets is a crucial step towards a net zero future for banks, providing clear goals for portfolio companies and suppliers to work towards while facilitating progress measurement. Utilizing science-based targets (SBTs) aligned with the Paris Agreement offers a reliable framework for setting ambitious yet achievable objectives. It's advisable to establish separate targets for Scope 1, 2, and 3 emissions, either absolute or intensity-based. The Financial Sector Science-Based Targets Guidance by SBTi empowers financial institutions, including banks, investors, insurance companies, and pension funds, to align their lending and investment activities with the Paris Climate Agreement. This guidance outlines steps for establishing comprehensive headline targets, setting targets for individual asset classes, and detailing actions to achieve these targets effectively.

How can banks drive the net zero transition?

In the pursuit of decarbonization, the banking sector can lead the way by leveraging capital resources and close corporate ties to encourage companies in their lending and investment portfolios to substantially reduce greenhouse gas emissions. Transitioning into trusted advisors and partners in their customers' journey to net zero enables banks to gain a competitive edge, fostering a stronger, more diverse, and resilient business.

Key strategies

  • Collaborate on Net Zero Transition: Work closely with corporate customers, providing expertise, services, resources, and finance to facilitate their transition to net zero. This requires a fundamental shift in how banks interact with clients, emphasizing trust-building, sharing best practices, and assisting in ESG data gathering, analysis, and reporting.

  • Train Employees: Equip relationship managers with climate science expertise, turning them into 'climate advisors' capable of guiding corporate customers through the decarbonization process. By empowering employees with a deep understanding of climate-related challenges, banks can effectively drive sustainable practices within their organizations and among their clientele.

Implementing climate risk assessments

To embed net-zero commitments into operations, banks need to consider their commercial execution, credit operations, and management reporting. Several practices are essential:

  • Embedding Targets: Integrate targets into credit policies, data, and incentives, ensuring alignment with emissions targets and incentivizing bankers accordingly.

  • Measuring and Reporting: Measure, report, disclose, and adjust emissions data, considering regulatory requirements and evolving investor expectations.

  • Optimizing the Balance Sheet: Optimize the balance sheet for emissions, explicitly considering the trade-off between emissions, financial objectives, and risk constraints.

  • Sectoral Leadership: Exercise sectoral leadership in must-win sectors by collaborating with industry to develop solutions and standards, such as the Poseidon Principles in maritime shipping finance.

By implementing these strategies, banks can effectively drive the transition to a net zero global economy, aligning their operations with sustainability goals while fostering collaboration with clients and stakeholders.

How Sweep can help

With Sweep, you can: 

  • Easily gather all your financed emissions data in one place.

  • Track and monitor carbon metrics among your portfolio companies.

  • Set collaborative, strategic sustainability targets.

  • Comply with SFDR and many other standards in weeks, not months.

  • Share education resources from our Sweep School on a wealth of sustainability topics. 

Despite the global commitment to achieving net zero emissions by 2050, financial institutions, including banks, are still lagging behind in aligning their activities with climate transition objectives. Recent assessments highlight the substantial exposure of financial institutions' portfolios to transition risks and their insufficient alignment with sustainability goals.

In 2023, it was revealed that significant portions of securities portfolios held by financial players across Europe were heavily invested in sectors directly impacted by climate policies, such as transportation and fossil fuels. France, for instance, saw investments totaling 940 billion euros in these sectors, highlighting the urgent need for realignment with sustainability objectives.

Despite a growing global awareness, investment funds continue to allocate resources to carbon intensive sectors, posing a barrier to sustainable finance efforts worldwide. Moreover, while commitments to global accords like the Paris Agreement are widespread, there often exists a gap between rhetoric and tangible action.

Critiques from regulatory bodies, such as the Cour des Comptes in France, and central banks, like the Banque de France, underscore the urgent need for financial institutions to reevaluate their portfolios and align them with a net zero economy.

Why is addressing financed emissions important for banks?

Addressing their portfolio carbon footprint is crucial for banks striving to reach net zero carbon emissions. Here's why:

  • Financial risks: Failure to address financed emissions exposes banks to significant financial risks, including stranded assets and devaluation of high-emission investments. As the transition to a low-carbon economy accelerates, investments in carbon-intensive industries may become economically unviable, leading to financial losses.

  • Regulatory compliance: Regulatory bodies are increasingly imposing requirements on financial institutions to disclose and mitigate climate-related risks, including portfolio greenhouse gas emissions. Banks that fail to comply with regulatory standards may face penalties and reputational damage.

  • Investor preferences: Investors are increasingly integrating environmental, social, and governance (ESG) factors into their investment decisions, and favouring responsible banking. Banks that fail to address their emissions may face divestment or reduced investment from ESG-conscious investors, impacting their access to capital and long-term sustainability.

  • Long-term viability: Addressing their carbon footprint is essential for banks' long-term viability and resilience in a rapidly changing world. By aligning their activities with sustainability goals, banks can future-proof their business models, mitigate risks, and seize opportunities arising from the transition to a low-carbon economy.

How can banks estimate the emissions of their loan portfolio?

Estimating their emissions is a fundamental step for banks in understanding their exposure to climate-related risks and opportunities. The Partnership for Carbon Accounting Financials' (PCAF) Global GHG Accounting and Reporting Standard on Financed Emissions provides a comprehensive framework for calculating emissions associated with investments across various asset classes.

Banks must first establish a robust emissions baseline, which serves as the starting point for measuring change and addressing practical considerations. Key criteria for building this baseline include:

  • Sector and asset class coverage: Prioritize heavy-emitting sectors such as oil and gas, power generation, automotive, and mining, gradually expanding to cover all relevant sectors. Consider various asset classes like equities, bonds, loans, and real estate to ensure a comprehensive view of the portfolio.

  • Emission scope: Include direct (Scope 1), indirect (Scope 2), and material indirect emissions (Scope 3) where applicable.

  • Time period: Use the latest available data with a one-year lag, noting trends affecting target setting.

Mapping your portfolio

To effectively address emissions within your portfolio, it's crucial to create a clear map, considering various aspects such as loan books, equities, bonds, and more. This comprehensive mapping allows for a structured approach, enabling the prioritization of high-impact areas that contribute significantly to emissions. Collaborate closely with asset managers and investment professionals to gain detailed insights into the underlying assets and entities within different portfolios. By delving into specific portfolios like loan books, equities, and bonds, you can tailor your decarbonization strategies more precisely to each asset class, ensuring a more effective and nuanced approach across your entire portfolio.

Collecting the right data

Improve the accuracy of your emissions evaluation with a step-by-step strategy. Start by looking at your whole portfolio by industry to spot sectors with higher emissions. Then, go deeper into each sector, focusing on major emitters or loans. Follow the Pareto principle—begin with 4 or 5 key sectors, set specific goals, and then zoom in on individual emitters. This approach is widely used by banks which are part of the Net Zero Banking Alliance (NZBA), which is a group of the world's largest banks committed to financing ambitious climate action to transition the real economy to net-zero emissions by 2050, in line with the Paris Climate goals.

Acquiring accurate data

Acquiring accurate data on the underlying assets of your loan book is a crucial step in comprehending your portfolio's environmental impact. Leveraging tools like PCAF, which details how to calculate the attribution factor based on financial data and the carbon footprint of underlying assets, aids in estimating the carbon emissions of your portfolio companies. However, it's essential to note that banks often begin with sector-based revenue estimates, leading to potential inaccuracies in setting precise decarbonization targets due to limited data granularity. These data-driven insights empower you to make informed decisions and drive positive change within your portfolio.

How can banks set the right targets?

Setting collaborative emission reduction targets is a crucial step towards a net zero future for banks, providing clear goals for portfolio companies and suppliers to work towards while facilitating progress measurement. Utilizing science-based targets (SBTs) aligned with the Paris Agreement offers a reliable framework for setting ambitious yet achievable objectives. It's advisable to establish separate targets for Scope 1, 2, and 3 emissions, either absolute or intensity-based. The Financial Sector Science-Based Targets Guidance by SBTi empowers financial institutions, including banks, investors, insurance companies, and pension funds, to align their lending and investment activities with the Paris Climate Agreement. This guidance outlines steps for establishing comprehensive headline targets, setting targets for individual asset classes, and detailing actions to achieve these targets effectively.

How can banks drive the net zero transition?

In the pursuit of decarbonization, the banking sector can lead the way by leveraging capital resources and close corporate ties to encourage companies in their lending and investment portfolios to substantially reduce greenhouse gas emissions. Transitioning into trusted advisors and partners in their customers' journey to net zero enables banks to gain a competitive edge, fostering a stronger, more diverse, and resilient business.

Key strategies

  • Collaborate on Net Zero Transition: Work closely with corporate customers, providing expertise, services, resources, and finance to facilitate their transition to net zero. This requires a fundamental shift in how banks interact with clients, emphasizing trust-building, sharing best practices, and assisting in ESG data gathering, analysis, and reporting.

  • Train Employees: Equip relationship managers with climate science expertise, turning them into 'climate advisors' capable of guiding corporate customers through the decarbonization process. By empowering employees with a deep understanding of climate-related challenges, banks can effectively drive sustainable practices within their organizations and among their clientele.

Implementing climate risk assessments

To embed net-zero commitments into operations, banks need to consider their commercial execution, credit operations, and management reporting. Several practices are essential:

  • Embedding Targets: Integrate targets into credit policies, data, and incentives, ensuring alignment with emissions targets and incentivizing bankers accordingly.

  • Measuring and Reporting: Measure, report, disclose, and adjust emissions data, considering regulatory requirements and evolving investor expectations.

  • Optimizing the Balance Sheet: Optimize the balance sheet for emissions, explicitly considering the trade-off between emissions, financial objectives, and risk constraints.

  • Sectoral Leadership: Exercise sectoral leadership in must-win sectors by collaborating with industry to develop solutions and standards, such as the Poseidon Principles in maritime shipping finance.

By implementing these strategies, banks can effectively drive the transition to a net zero global economy, aligning their operations with sustainability goals while fostering collaboration with clients and stakeholders.

How Sweep can help

With Sweep, you can: 

  • Easily gather all your financed emissions data in one place.

  • Track and monitor carbon metrics among your portfolio companies.

  • Set collaborative, strategic sustainability targets.

  • Comply with SFDR and many other standards in weeks, not months.

  • Share education resources from our Sweep School on a wealth of sustainability topics. 

Find out more. 

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