Explainer: how HSBC is expected to disclose ‘facilitated emissions’

Banks are under increasing pressure to disclose how their financing and capital markets activities contribute to global warming. 

While they have made considerable progress regarding disclosure of their financed emissions arising from direct lending and project finance, “facilitated emissions”, or off-balance-sheet capital markets transactions — underwriting of initial public offerings, equity and bonds — have lagged significantly.

Why are facilitated emissions so important? Reporting only financed emissions does not tell the whole story about how a bank’s activities contribute to greenhouse gas emissions. While financed emissions are easier to account for because direct funding is provided, by only focusing on direct financing as opposed to underwriting an IPO, NGOs say it leaves a massive $2.7tn loophole for banks that do not include facilitated emissions from capital markets underwriting in their climate policies.

Only a handful of banks currently disclose their facilitated emissions, with many saying they were waiting on an industry standard to be developed before including them. 

With the recent news that HSBC had “caved to pressure” from investors and would start disclosing its facilitated emissions from its capital market activities, which many NGOs have described as a “hidden” pipeline of financing for fossil fuel companies, we take a look at the standard-setting organisation that developed the accounting technique HSBC is expected to use to disclose emissions from its capital market activities.

What is PCAF, and what does it do?

The standard was developed by the Partnership for Carbon Accounting Financials, which was set up by a group of Dutch banks in 2015 during the Paris climate summit.

The PCAF global core team developed the Global GHG Accounting and Reporting Standard, which covers three key areas: financed emissions (those emissions that stem from direct financing such as project financing, loans, mortgages); facilitated emissions via capital markets activities; and insurance-associated emissions.

More than 450 financial institutions representing $85.8tn in total assets have committed to measure and disclose the GHG emissions associated with their portfolio of loans and investments using PCAF’s standard. 

So far, according to data published on PCAF’s website, 165 have actually disclosed using the standard. PCAF signatories are required to disclose using the PCAF standard within three years of committing to the initiative. Thereafter, they must disclose annually. 

Which banks are disclosing more

Angélica Afanador, executive director of PCAF, says this time lag is to allow for the regional advancement gap in GHG accounting and to enable equitable participation around the world. Moreover, the implementation of the standard includes a phase of measurement prior to public disclosure, which many PCAF signatories are currently carrying out. She hopes to see an increase in the number of bank disclosures in the spring during the annual reporting period.

Latin American banks have a higher rate of disclosure than Europe and North America, which, Afanador says, might sound surprising given that Europe and North America are traditionally positioned as leaders in this space. 

However, when you look at the detail behind why LatAm has a higher rate of disclosure than Europe and North America – it’s because more of some of its largest Fis in the region are particularly far along in their disclosure journey, she says,

“It is incredibly important that the international financial sector approaches the challenge of carbon accounting as collaboratively as possible,” says Afanador. “It’s essential that more advanced markets and regions are able to continue at pace, while countries that are just starting on this path have a viable access point.”

Will PCAF's standards be effective?

PCAF’s standard for capture capital market activities, published in December, was one of the body's most anticipated releases. It was not met with as much fanfare as PCAF perhaps hoped, as NGOs said it did not go far enough.

Their main bone of contention was that it only required financial institutions to report their facilitated emissions over a single reporting year, and banks would only have to account for 33 per cent of their emissions linked to their capital market business. Banks can optionally disclose 100% of their facilitated emissions, but this has to be reported separately, and their rationale for doing so clearly disclosed. 

ShareAction, an NGO focusing on responsible investment, argued that the standard had been watered down as a result of pressure from some of PCAF’s members, who argued there were challenges in accounting for their full share.

Responding to the criticisms, Afanador says standard development is a complex process and it is natural that different perspectives occur during the process. 

“In terms of the rationale behind the 33 per cent weighting, it’s important to understand that a financial institution’s role in arranging capital markets activities is distinct from its role as a lender and provider of capital to a company,” she explains.

Because of this, she says PCAF includes a “weighting” factor to the facilitated emissions calculation to help distinguish between two types of emissions: facilitated emissions and financed emissions.

“A unit of facilitated emissions is not equal to a unit of financed emissions [or insurance-associated emissions] given that no direct funding is provided by the financial institution to the company producing emissions in the real economy; combined with the very short-term role facilitators have in their roles as arrangers,” says Afanador.

Is the 33 per cent weighting too low?

Afanador says several factors were considered when determining the appropriate weighting to be used for facilitated emissions. The primary one was the Basel Committee on Banking Supervision’s assessments of global systemically important banks. The committee assigns percentage weightings for the relative importance of certain key activities that banks undertake. These activities include underwritten transactions in debt and equity markets (which includes arranging debt and equity capital market instruments) and total exposures (which includes loans).

To ensure consistency in facilitated emissions reporting, Afanador says, PCAF decided on a 33 per cent weighting for all capital market issuances in the scope of the facilitated emissions standard. This, she says, equals the highest weighted relative importance of underwriting activities versus balance sheet exposure, according to the Basel Committee on Banking Supervision’s Basel Framework since the G-Sib assessment reports began in 2012. 

Why the two-year development time for the standard?

Afanador says the final facilitated emissions standard represents a methodology that goes further than any guidance that preceded it. “The standard allows financial institutions to begin consistently reporting on the [indirect] impact of their capital markets activities, which are considered ‘optional’ by the GHG Protocol [an international body developing GHG accounting standards] and have therefore been excluded by many actors in the industry to date.”

Standards development is a complex process, but Afanador says PCAF has already identified areas for further exploratory work based on feedback from the body’s signatories about topics and areas where they are in greatest need of support.

Priority areas for PCAF methodology development in 2024 include: transition finance and green finance; fluctuations in absolute GHG inventory (resulting from changes over time to the financial attribution metrics, such as enterprise value including cash); additional insurance products; and securitised and structured products.

“These priorities reflect the areas where the financial industry requires the greatest and most urgent support,” says Afanador. When you are developing standards, how do you balance the different interests of banks?

PCAF’s core team — 15 experts from “significant banks”, investors and insurance companies — has already begun to formulate working groups made up of PCAF signatories for each of these priority areas, which will begin to work on exact parameters for development.

United Bank for Africa recently became the first west African bank to be admitted to the global core team.

Given that PCAF is an industry-led initiative, some have raised concerns about its ability to resist lobbying by particular banks to water down standards. Afanador says its governance ensures it has diversity across working groups, which are committed to following the key accounting principles of PCAF and the GHG Protocol. It also engages with stakeholders and holds public consultations as methodologies are developed.

“It’s natural that during the development of such highly technical and complex methodologies, differences in opinion may occur. As such, we have a governance process to follow in the case that consensus across the working group is not reached,” she says.