Accenture’s June 2023 report, ‘Banking for Net Zero’, found that more than 95% of the average bank’s overall greenhouse gas (GHG) emissions are attributable to their suppliers and contractors.
Designated as ‘Scope 3’ emissions by the GHG Protocol (which provides accounting standards for GHGs), they are indirect emissions that occur in the upstream and downstream activities of an organisation. There are 15 distinct reporting categories in Scope 3, including purchased goods and services, business travel, employee commuting, waste disposal, use of sold products, transportation and distribution, investments, and leased assets and franchises.
While most of the world’s largest banks have committed to reaching net-zero carbon emissions by 2050, less than 5% are on track with regards to for Scope 3 emissions, according to Accenture.
“Measuring and reducing these emissions clearly comes with greater challenges, given the lack of direct control,” states the report. “Yet, this is exactly what is at the heart of banks’ potential role as stewards of an economy-wide transition [to net zero] by their customers, and it is the part of the challenge that requires a big acceleration by most banks.”
Peter Beardshaw, global financial services sustainability lead at Accenture, says by stepping up efforts to curb Scope 3 emissions, banks “could advance their quest to become sustainable organisations. They’d move closer to reducing their carbon footprint to net zero. Greater co-operation with suppliers and contractors might also enable banks to share cost savings and to capitalise on new business opportunities.”
The GHG Protocol has noted that until recently, companies have focused on Scope 1 emissions (direct emissions from owned or controlled sources) and Scope 2 (indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the reporting company). Increasingly, says the organisation, companies understand the need to account for GHG emissions along their value chains and product portfolios to comprehensively manage GHG-related risks and opportunities.
Wai-Shin Chan, head of the Climate Change Centre and environmental, social and governance (ESG) research at HSBC, described Scope 3 emissions as “the elephant in the room when it comes to climate change” in a July 2022 research note. In HSBC’s view, he added, Scope 3 emissions are a useful indicator for examining climate risk and the true climate ambition of companies.
“They enable investors to assess the exposure companies may have to carbon-intensive activities within value chains and products. Higher Scope 3 emissions might come with higher transition risks in the future that could impact asset values and operating costs if not acknowledged and addressed,” he says. “We think investors should ask for more Scope 3 disclosures, as well as scrutinise these disclosures to a higher degree.”
Disclosure challenges
However, understanding, tracking and reporting on Scope 3 emissions is fraught with difficulties. The Financial Stability Board (FSB) outlined the challenges financial institutions face in measuring and reducing Scope 3 emissions in its October 2023 Progress Report on Climate-Related Disclosures. In it, the FSB summarised the existing problems inherent in calculating GHG emissions — in particular Scope 3.
The FSB noted a lack of detailed measurement methodologies, including calculating GHG emissions across consolidated entities. The difficulties in calculating GHG emissions, in particular Scope 3, may be more pronounced for smaller companies, and, as a consequence, additional support and guidance may be required, it said.
A significant challenge for those responsible for climate-related disclosures lies in assessing the reliability of climate-related information, said the FSB. “The existing data sets may be immature, and estimates in sustainability reporting may require significant judgment and often have a high degree of estimation uncertainty.”
Moorad Choudhry, author of The Principles of Banking, says the measurement of Scope 3 emissions is a “non-trivial task”, made complex by the multiplicity of suppliers that banks deal with, the availability of Scope 3 data and the diversity of the financial industry. “At present, banks seek out specialist consultants and use proxy databases, while the larger, systemically important banks are building specialist teams to get a handle on their emissions,” says Mr Groot.
“Banks come in many different shapes and sizes, and they are not all moving at the same pace,” he adds. “Often a bank will need a regulatory, governmental or consumer driver to act. In some countries, banks are very aware that consumers are laying more stress on ESG-related issues.”
Martijn Groot, chief marketing officer at data integration company Alveo, says that while banks are not measuring Scope 3 emissions “very well”, they are not alone. While this “requires fairly straightforward information”, he explains “suppliers may not be collating the information or it is not where they want it to be. A lot of nudging — rather than forcing — is taking place to get companies to comply with Scope 3 requirements, but I think that nudging may become more forceful in the future.”
Like Mr Choudhry, Mr Groot notes that banks have a diverse range of suppliers. The larger multinational companies have investor relations and sustainability departments that can compile emissions data. Additionally, carbon dioxide (CO2) emission disclosures are often included in annual reports. However, small and medium-sized enterprises face relatively higher costs to get such information in similar order.
ESG data should not be siloed, says Mr Groot, but integrated into financial reporting as a “normal part of business”. Describing ESG data as “another lens through which to look at a company”, he adds that it is a less mature area and many companies are only just starting out on disclosures. Banks are falling back on proxy databases, such as Morningstar, benchmarks and expert opinion “for want of anything else”.
Supporting the supply chain
Mr Groot agrees with Accenture’s Mr Beardshaw that banks could carve out a role for themselves in helping their customers and suppliers to get a handle on emissions data. “Banks already have large compliance departments to deal with know your customer and anti-money laundering regulations — the business cost of compliance at banks is huge,” he says.
“This is a good reason for banks to consider automating data collection from corporate clients for reporting, to get a better view of their customers and suppliers and to ultimately sell more loans to help clients in their transition to net zero. It should be seen as a business opportunity, rather than tick-box regulatory reporting.”
Banks already have large compliance departments to deal with know your customer and anti-money laundering regulations.
To reduce Scope 3 emissions, financial institutions must get an idea of who among their suppliers are high carbon emitters and find alternative suppliers, says Mr Choudhry. If an alternative is not available, banks must talk to their suppliers and potentially help them to reduce their emissions.
“Banks do not have the same relationships and ties with suppliers as they do with clients, who they may have banked for decades,” he says. “Deciding to cut off high-emitting clients is a much more difficult decision to make. Cutting off suppliers is less of an emotional issue for banks.”
However, banks should give suppliers a “glide path” of 12–36 months to reduce their emissions, he adds, warning that banks should not take knee-jerk actions when reducing their Scope 3 emissions. “This can be done as a partnership, with a bank helping a supplier to formulate a transition path to lower emissions,” Mr Choudhry says.
Making progress
Some banks are already moving ahead on tracking Scope 3 emissions and, as a result, forging their own path and leading from the front. For example, ING acknowledges that Scope 3 emissions from procurement of goods and services are the “most relevant emission source for ING’s own operations”, says Sara Harding, chief procurement officer at the Dutch bank.
ING began exploring ways to incorporate Scope 3 emissions into its environmental programme this year, “to bring transparency to climate impact generated by our procurement practices and further drive emissions down from our supply chain”, she says. “At the moment, we are developing methodology and tooling to account carbon emissions for Scope 3 category 1 [purchased goods and services] aiming to integrate in our footprint in 2024.”
Furthermore, procurement is making improvements through procedures and policies to embed sustainability criteria across multiple procurement process to measure, monitor and influence sustainable practices with suppliers, Ms Harding adds.
This article is part of the Special Report: Making meaningful progress in sustainability
In October, Deutsche Bank published new net-zero targets for high-emitting industries in its corporate loan portfolio. The German lender’s transition plan outlines its strategy for carbon-intensive industry sectors financed through the bank’s €107bn corporate loan book, which accounted for financed emissions of 30.5 million tonnes of CO2 in 2022.
The bank is engaging with high-emitting clients to support and finance their transition and will “steadily” phase-out business with industries where emissions are difficult to abate, such as thermal coal, or those clients unwilling to align to the bank’s transition. To date, Deutsche Bank has cut its Scope 3 emissions by around 15% between 2019 and 2022 and has set a reduction target of 46% by 2030.
