In a recent development, banks involved in establishing global standards for accounting carbon emissions in bond or stock sale underwriting have made a decision that could potentially exclude a significant portion of these emissions from their own carbon footprint. The decision, supported by the majority of banks in the working group, would result in two-thirds of the emissions linked to their capital markets businesses not being attributed to them in carbon accounting.
This move has sparked a debate between banks and environmental advocates who argue that banks should take full responsibility for the emissions generated by activities financed through bonds and stock sales, just as they do with loans. The environmental group Sierra Club revealed that nearly half of the financing provided by the six largest US banks for top fossil fuel companies came from capital markets between 2016 and 2022.
The way banks account for these emissions will impact their goals of achieving carbon neutrality. Major lenders have committed to becoming net-zero by 2050, with interim targets set for this decade. Banks with significant capital markets operations in the working group contended that they should only assume responsibility for 33% of the emissions from activities financed through bonds and stock sales. They argued that they lack control over the borrowers, unlike loans. Additionally, banks voiced concerns that capital market-related emissions could overshadow their lending-related emissions.
Proponents of a lower accounting threshold suggest that assuming responsibility for 100% of the emissions would result in double-counting across the financial system because bond and stock investors would also account for some of the emissions in their own carbon footprints. While the majority of banks in the working group supported the 33% threshold, at least two dissented, with one advocating for 100%.
It is important to note that the accounting standard will not be mandatory. The Partnership for Carbon Accounting Financials (PCAF), an association of banks aiming to standardize carbon accounting across the industry, formed the working group with hopes of influencing others to adopt the final standard.
PCAF’s board will have the final say on whether to adopt the 33% accounting share for capital markets. Despite no decision being made yet, it appears unlikely that the board will override the working group’s recommendation. The working group comprises Morgan Stanley, Barclays, Bank of America, Citigroup, HSBC, BNP Paribas, NatWest, and Standard Chartered. Most officials from these banks either declined to comment or did not respond to requests for comment.
ShareAction, a campaign group, criticized the 33% weighting, suggesting that it lacks a solid basis. They urged PCAF to publish guidance that enables a transparent and unbiased assessment of banks’ climate risks and impacts. Additionally, it remains uncertain whether banks will need to consolidate capital market-related emissions and lending-related emissions into a single target or keep them separate, presenting a potential challenge.
The Science Based Targets initiative, supported by the United Nations and environmental groups, is currently developing net-zero standards that will address whether banks should have combined or separate targets.
Overall, the decision made by the banks involved in establishing global standards for accounting carbon emissions has stirred debate, illustrating the complexities and differences in opinions surrounding the responsibility of the banking industry in addressing climate change.
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