G7 banks’ financed emissions exceed those of several member countries combined

May 21, 2024|Written by

More than 2.7bn tonnes of carbon emissions can be attributed to the major banks of G7 countries via their loans, according to a new report – more than the emissions of Germany, France, the UK and Italy put together.

“Numbers like this really should be an important concern for key decision makers and financial regulators,” said Daniela Finamore, a finance and climate campaigner at ReCommon, the campaign group that compiled the report.

Released just ahead of this week’s meeting of G7 finance ministers in Italy, Finamore expressed hope that the report would fuel “higher ambitions” among the Group of Seven major industrialised economies for regulatory action to accelerate the decarbonisation of banks’ portfolios.

The study attempts to calculate the “financed emissions” stemming from the commercial credit exposure and residential mortgages of 29 major banks in the G7 countries (Canada, France, Germany, Italy, Japan, the UK and the US) in 2022.

It also makes numerous recommendations for the G7, G20, Financial Stability Board and the Basel Committee on Banking Supervision (BCBS). The recommendations extend beyond financed emissions to argue for a broader greening of the financial system, through measures such as revising the BCBS’ systemic risk buffer to address the systemic nature of climate change, and incorporating climate science into the scenarios used by the Network for Greening the Financial System’s scenarios.

Campaigners see measures of financed emissions – those resulting from the activities funded by banks’ loans and investments – as a means of highlighting the extent to which financial institutions are really making good on their public commitments to invest more sustainably.

However, they also point to a lack of data that makes accurate estimates of financed emissions extremely difficult.

Financed emissions figure likely to be underestimated

The ReCommon report used the carbon accounting methodology of the Partnership for Carbon Accounting Financials (PCAF), which calculates the indirect, or scope 3, emissions of each bank across various economic sectors.

The authors of the ReCommon report stressed that their figures should not be seen as conclusive, but they added that they were likely a significant underestimate of the true extent of banks’ financed emissions.

Data on borrowers’ scope 3 emissions is not available for most sectors, meaning the researchers mostly had to rely on sector and country-level aggregations of financial data for their calculations. The figures also do not incorporate the emissions associated with banks’ asset management, securities underwriting and advisory services.

Ilmi Granoff, a senior fellow at the Sabin Center for Climate Change Law and adjunct research Scholar at Columbia Law School, said it would be a mistake to see financed emissions as a metric that captures all the ways in which financial activities are connected to borrowers’ greenhouse gas-emitting activities.

“There are probably better ways to assess progress,” said Granoff, who published a working paper earlier this month on the issue. “I think measuring the alignment of capital investment with an expected or desired decarbonisation path is a better approach.”

Granoff argued that more attention to individual sectors and business lines could be more helpful than aggregate data across banks’ portfolios, with more focus on the extent to which bank financing is “actually enabling capital expenditures for greenhouse gas-emitting operations and products themselves”.

For her part, Finamore called on banks to systematically report both absolute emissions and intensity metrics – the concentration of emissions per unit of output – in order to allow for a better understanding on how much progress they are really making in decarbonising their portfolios. Only half of the banks assessed in the exercise currently disclose absolute emissions data.

The report’s recommendations include changes to the pillars of the Basel Framework, including addressing the reliance of Pillar 1 requirements on “corporate external credit ratings that do not adequately reflect climate and environmental risks”.

It also calls for changes to Pillar 1 and Pillar 3 regarding the modelling approaches to both capital requirements and scenario analysis, which rely on backward-looking data.

“It is time to be ambitious in terms of the precautionary approach of financial regulation. It is crucial,” Finamore told Green Central Banking.

“We are seeing every day the consequences of the impact of climate change, and this must absolutely be taken into consideration in the financial system, to increase the capacity of the financial system to absorb shocks related to climate change.”

This page was last updated May 21, 2024

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