Green vs Greed: Banks' carbon commitments under scrutiny

In a significant move towards tackling climate change, banks worldwide are working to develop global standards for accounting carbon emissions in bond or stock sale underwriting. However, recent deliberations within an industry working group have shown discord over how much these emissions banks should attribute to their carbon footprint.

According to sources cited by Reuters, the majority of banks in the working group recently backed a plan to exclude two-thirds of the emissions linked to their capital markets businesses from being attributed to them in carbon accounting. This decision has raised concerns among environmental advocates, who argue that banks should assume full responsibility for emissions generated by activities financed through bonds and stock sales, similar to their current practice with loans.

Fossil fuel companies under scrutiny

The role of capital markets in financing fossil fuel companies has been under scrutiny, with the environmental group Sierra Club revealing that almost half of the financing provided by the six biggest U.S. banks for top fossil fuel companies between 2016 and 2022 came from capital markets rather than direct lending. The accounting of these emissions will significantly impact banks' efforts to become carbon-neutral, as major lenders have pledged to achieve net-zero emissions by 2050, with interim targets set for this decade.

Banks with significant capital markets operations have argued that they should only be accountable for 33 per cent of emissions from activities financed through bonds and stock sales. They claim they lack control over borrowers, unlike with loans, and are concerned that capital market-related emissions could overshadow lending-related emissions.

On the other hand, advocates for a stricter accounting threshold, including at least two dissenting members within the working group, have advocated for a 100 per cent responsibility assumption. However, those supporting the 33 per cent threshold argue that assuming full responsibility would lead to double-counting across the financial system, as bond and stock investors would also account for some emissions in their own carbon footprints.

The accounting standard being discussed is not mandatory. Still, the Partnership for Carbon Accounting Financials (PCAF), an association of banks seeking to harmonise carbon accounting, formed the working group hoping others would adopt the emerging standard.

The final decision on whether to adopt the 33 per cent accounting share for capital markets rests with PCAF's board, but it is unclear if a decision has been made yet. Delays in the publication of PCAF's final methodology have been attributed to disagreements over the appropriate accounting threshold.

Campaign group ShareAction expressed concerns that the 33 per cent weighting was arbitrary and called on PCAF to publish guidance that ensures a transparent and unbiased assessment of banks' climate risks and impacts.

Looking ahead, the question remains whether banks will be required to combine their capital market-related emissions and lending-related emissions into a single target or treat them separately. This challenge may be addressed by the Science Based Targets initiative, backed by the United Nations and environmental groups, which is developing net-zero standards, including whether banks should have different or combined targets.

(With Inputs from Reuters)