President Biden wasted no time after his inauguration in creating the “largest team ever assembled inside the White House to tackle global warming” and announcing an aggressive “all of government” approach to climate change. Biden is expected to order government agencies to calculate the costs of global warming upon society, throwing down a gauntlet on measuring greenhouse gas emissions linked to financial investments.
Coincidentally, just two weeks after Biden was elected, the Partnership for Carbon Accounting Financials (PCAF) launched the first Global Greenhouse Gas Emissions Accounting and Reporting Standard for the Financial Industry.
Utilizing this standard, financial institutions of all kinds — including banks, asset owners, and managers — will be able to more effectively measure and report their emissions stemming from loans and investments they have made. My firm serveas as the Secretariat of PCAF and has provided technical support for developing and implementing the new standard.
The significance of the new PCAF standard in addressing the climate crisis and achieving a decarbonized society cannot be overstated. It has often been said that “You can’t manage what you can’t measure.” This is especially true in the financial sector. Nearly every transaction — from individual residential mortgages to commercial real estate loans, to electricity generation project finance, to equity and debt offerings — has potential implications for GHG emissions.
The PCAF Standard is a response to the growing worldwide recognition that financial institutions play a key role in shaping the future of our planet by (1) setting climate targets for loan and investment activities and (2) reallocating resources to support renewable energy transformation. As the Science Based Targets initiative (SBTi) has stated:
Financial institutions are the vital link in enabling the rapid and unprecedented economic transformation needed to meet the goals of the Paris Agreement. Through their lending and investing, financial institutions have the power to redirect capital to the sustainable technologies and solutions of the future and to the companies doing the most to prepare for a net-zero emissions economy.
In the furtherance of this objective, more than 90 financial institutions in 34 countries, including ABN AMRO, AIMco, APG, Banco Bradesco, Bank of America, Citibank, CTBC Financial Holdings, Lloyds Banking Group, Federated Hermes, FirstRand Group, and TD Bank Group, are aligned with the PCAF effort. Representing nearly $19 trillion in total assets, these and many other large and small institutions have committed to measuring and reporting GHG emissions associated with their lending and investment programs.
To appreciate the potential value of the PCAF Standard, one must examine the growing global demand for GHG accounting and reporting by financial institutions.
Mark Carney, the UN Special Envoy for climate action and finance, recently proposed a set of priorities to enable the private finance sector to accelerate efforts toward the Paris Agreement’s goals and the UN Framework Convention on Climate Change. The four priorities cited in Mr. Carney’s report are climate-related financial reporting, climate risk management, pursuing returns from energy transition opportunities, and mobilizing capital resources. The priority is the key to all the others, as the Carney report states: “Financial institutions will increasingly be expected to disclose their own alignment to net-zero and show how clients’ money is invested.”
Similarly, the Task Force on Climate-related Disclosures (TCFD) emphasized in its 2020 Status Report the importance of transparency and comparability in financial institutions’ reporting. Calls for enhanced climate disclosure are now being heard from many quarters. Financial institutions responsible for assets of $150 trillion have expressed support for the TCFD. Banks, insurers, pension funds, and asset managers with balance sheets of $139 trillion are demanding TCFD-aligned climate disclosures from the companies they invest in.
Regulators and governmental entities worldwide echo the private sector’s demand for improved climate reporting by financial institutions. Most recently, in November 2020, the U.S. Federal Reserve for the first time cited climate change among risks enumerated in its biannual financial stability report. The report noted:
The Federal Reserve is evaluating and investing in ways to deepen its understanding of the full scope of implications of climate change for markets, financial exposures, and interconnections between markets and financial institutions. It will monitor and assess the financial system for vulnerabilities related to climate change through its financial stability framework. Moreover, Federal Reserve supervisors expect banks to have systems in place that appropriately identify, measure, control, and monitor all of their material risks, which for many banks are likely to extend to climate risks.
The calls for enhanced GHG accounting by the financial sector have not gone unheeded. A growing number of institutions have announced targets for net-zero financed emissions by 2050, including the 30 institutional investors of the Net-Zero Asset Owner Alliance, Barclays, HSBC, Morgan Stanley, ABN AMRO, and TD Bank.
As a technical partner, my firm developed with the partners of the Science Based Targets (SBT) initiative their target-setting framework for the financial sector. Measuring emissions-related loans and investments is an important step in this framework. It is a requirement for applying the Sector Decarbonization Approach (SDA) that we developed for the SBT initiative in 2015.
Given the considerable differences in the types of financial institutions, the nature of their loans and investments, and the GHG implications of those activities, a uniform and transparent reporting standard is an essential first step toward decarbonizing the global economy.
We also recognize that the industry must embark on a broader journey toward a net-zero future. Getting there will require an entire spectrum of actions — including setting targets, assessing risks, measuring progress, and reallocating capital. In particular, more must be done to optimize lending and investment opportunities and to develop financial products and services that advance society’s energy transition. With the PCAF Standard launch, the financial industry has gained an important tool that will provide a signpost for that journey.
Giel Linthorst is executive director of the Partnership for Carbon Accounting Financials (PCAF) and a director in the Energy, Sustainability, and Infrastructure segment at Guidehouse, a global consultancy.