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After years of “contentious debate”, and what NGOs called “analysis paralysis”, the Partnership for Carbon Accounting Financials (PCAF) has published its long-awaited industry-wide Facilitated Emissions Standard for banks’ disclosures of capital markets financing of carbon-intensive sectors such as fossil fuels. Non-governmental organisations (NGOs) welcomed the new standard saying it was long overdue, but some believe it does not go far enough.
Facilitated emissions stem from off-balance-sheet capital market activities such as underwriting of initial public offerings, equity and bonds, but banks say these transactions are more difficult to account for and report on than financed emissions which stem from direct financing or lending to projects such as a new oil or gas pipeline, for example.
Many bank’s fossil fuel exclusion policies only apply to lending, which NGOs say leaves a massive $2.7tn loophole for banks that do not include capital markets underwriting in their climate policies.
As The Banker reported in November, some banks, such as NatWest, report 100% of their facilitated emissions, while Barclays has a 33% weighting. However, according to ShareAction, Barclays only counts 33% of its share in a deal, whereas it counts 100% of its share in a deal when it counts towards its green finance target. Many banks have held back on reporting on their facilitated emissions until an industry-wide standard was agreed.
While three major US banks that are PCAF signatories (Bank of America, Citi and Morgan Stanley) count all of their underwriting activities in their sustainable finance targets, according to US environmental grassroots organisation Sierra Club, they have yet to include underwriting in their emissions reductions targets. “Essentially, these banks are taking credit for their facilitation of clean energy, while avoiding blame for their facilitation of fossil fuels,” it argues.
In July 2023, the Sierra Club’s Fossil-Free Finance campaign released a report on the role of big US banks in capital markets, revealing a “hidden pipeline” for fossil fuel financing through the banks’ underwriting of bonds and equities.
So why has it taken so long for PCAF, which is a global partnership of more than 450 financial institutions, to develop a standard for facilitated emissions? It first published a discussion paper in November 2021, which looked at key design choices in developing a methodology for the accounting of facilitated emissions. However, the main reason for the standard’s delay, according to NGOs, was banks disagreeing on what exposure or weighting to give a facilitated emission transaction.
According to ShareAction, which focuses on responsible investment, some of PCAF’s members were pushing to water down a key aspect of the standard — the weighting applied to capital markets volumes — arguing there are challenges in accounting for their full share.
Mixed reactions to the new PCAF standard on facilitated emissions
In the end, PCAF settled on requiring financial institutions to report their facilitated emissions using a 33% weighting factor which needs to be disclosed clearly in their public reports. To determine the percentage weighting of GHG emissions, PCAF published a public consultation paper in October 2022.
The core focus of the Facilitated Emissions Standard is the “aggregated GHG emissions emitted and facilitated over the reporting year by the financial institution itself or its facilitated parties”.
The standard only covers the primary issuance (debt or equity-based investments, preferred shares) of capital markets instruments and syndicated loans. It also offers banks the option to additionally report facilitated emissions without any weighting, in other words at 100%, as long as this is reported separately with a clear rationale.
The Facilitated Emissions Standard is based on the GHG Protocol standards for corporate reporting developed by the World Business Council for Sustainable Development. According to the standard’s methodology, a “financial institution’s share of facilitated emissions shall be proportional to the share of its exposure relative to the total value of the intended borrower or investee”.
“Capital markets represent a significant portion of global capital flows, yet, until now, there has been no standardised approach to account for their climate impact,” says Angélica Afanador, executive director of PCAF. “This Facilitated Emissions Standard marks a significant milestone in enhancing transparency within the financial sector, adding more depth and granularity to disclosures that will guide financial institutions toward informed climate action.”
Ms Afanador said the publication of the standard represents a determination to minimise delay towards much-needed progress on climate. However, NGOs say PCAF has just given banks a “get-out-of-transparency-free card” by allowing them to under-report their climate impact by two-thirds for years to come.
“While we strongly welcome PCAF encouraging banks to go further, the guidelines published today are further proof that voluntary climate initiatives cannot deliver what is needed for people and planet,” says Jeanne Martin, head of the banking programme at ShareAction.
“It’s time for governments to step in and introduce mandatory requirements for banks to report on their full contribution to the climate crisis.”
Lucie Pinson, executive director at French NGO Reclaim Finance, says the banks that developed the PCAF methodology ensured that the PCAF standard measures only part of the true emissions impact of their capital markets activities.
“It counts the emissions from companies receiving new capital for only one year, whereas the infusion of money may be financing fossil fuel projects that lead to decades of future emissions,” she explains. “The banks’ insistence that they only report a third of each year’s facilitated emissions is a puerile and doomed effort to downplay their impact. To get the actual one-year emissions analysts can and will simply multiply by three what the banks report. That maths is not hard.”
Ms Pinson says the new facilitated emissions methodology attributes corporate emissions to banks using the same “problematic formula” used for financed emissions because it is based on the stock market value of public corporations, which means that facilitated emissions numbers will fluctuate widely according to clients’ market capitalisation, independently of their volume of emissions or the value of underwriting deals.
However, some banks’ disclosure choices differ from PCAF guidance. JPMorgan, for example, says for facilitated emissions it includes 100% of its participation, on a three-year rolling average basis.
“We chose 100% of our participation as we believe it provides a more complete picture of our financing activity and how we are supporting our clients through direct lending and capital markets facilitation,” JPMorgan states in its 2023 climate report. “We use a three-year rolling average to address the significant volatility often observed with capital markets transactions, driven in part by companies typically only going to the market for additional financing every few years.”
Standardised disclosures will provide greater transparency
Despite the weaknesses of the PCAF methodology, Ms Pinson said it does at least represent a standardised method for banks to report the emissions from their capital markets activities. “All investment banks must now set 1.5°C aligned targets for 2030 for their facilitated emissions,” she says. “The Net Zero Banking Alliance must require this from banks in their new guidelines to be published next April.”
The Sierra Club says standardised disclosure of facilitated emissions will provide greater transparency and accountability for banks to set targets to reduce underwriting for fossil fuel expansion in order to implement their net-zero commitments.
“The PCAF standard provides a baseline for moving the industry forward on measuring and disclosing facilitated emissions using a transparent and consistent methodology,” says Adele Shraiman, senior campaign strategist for Sierra Club’s Fossil-Free Finance campaign. “Now, the key is for banks to set ambitious targets for reducing their facilitated emissions, and execute on strategies that will lead to actual emissions reductions in the real economy.”
However, disclosure alone will not fix the climate crisis, adds Ms Shraiman. “But reducing emissions will, and that’s where banks’ regulators, investors, customers and society should focus most on holding them accountable.”
PCAF says it is critical banks avoid “double counting”, which occurs when greenhouse gas emissions are counted more than once in the facilitated emissions calculation of one or more institutions, or across different parts of the standard.
The Facilitated Emissions Standard does not cover sovereign bonds, securitised products (including asset-backed securities), covered bonds, derivatives and M&A advisory services.
PCAF says no method exists yet to calculate the emissions associated with green bonds, but moving forward it will prioritise the development of a method covering these types of instruments.
However, due to the exclusion of green bonds, banks such as BNP Paribas are developing their own standards. In a statement, the French bank said: “Following the PCAF proposed methodology, BNP Paribas has decided to start working on our own methodology instead. One of the main limitations in the proposed methodology is the fact that the PCAF has no specific approach for green bonds.”
