Global warming is passé. With July 2023 becoming the hottest month on record, it is now the era of global boiling. Concerted global action centered on emissions and climate finance is a compelling priority to reach net-zero goals. Several banks have made net-zero commitments to align with the objectives of the Paris Agreement. It is now time to operationalise the pledge and redirect finance away from climate-harmful business activities.
Enabling the systemic change needed to achieve the goals of the Paris Agreement requires banks to align their business activities with decarbonisation pathways. A shift to sustainable finance and the development of sustainable frameworks and reporting standards that align with net-zero objectives is now a non-negotiable imperative. A fundamental step in this journey is measuring financed emissions (the greenhouse gas or GHG emissions from financial institutions’ business activities) because typically, what is not measured, cannot be managed.
Why calculate financed emissions?
A transition to net-zero is just one of the benefits — better risk, compliance, and reputation management as well as the opportunity to invest in innovative technologies and climate-positive projects are other advantages. Insights on potential climate risks associated with high-emitting industries will inform investment and lending decisions. This will help build GHG emissions-conscious lending and investment portfolios, facilitating better risk management.
Compliance with new regulations too becomes easier with seamless access to data on carbon footprint and climate risk. Disclosing financed emissions offers a quick path to demonstrating commitment to emission reduction, earning a competitive edge as well as the reputation of a sustainability-focused financial institution. New leaders will emerge in sustainable finance, who will usher in a shift from business-as-usual to climate-smart models by embracing innovative technologies and supporting industries that leave a positive environmental impact.
The bumpy road to measuring financed emissions
Calculating financed emissions is far from easy besides being an ongoing exercise. Incomplete, outdated, or inaccurate data hinder financial institutions from having an end-to-end view of financed emissions. Determining the scope and boundaries of financed emissions can be tricky in the absence of visibility into direct and indirect financing of emissions. It demands an in depth understanding of the supply and value chain of companies that the bank lends to or invests in. Tracking emissions of individual investments and arriving at a meaningful aggregate can be challenging due to the presence of multiple asset classes across sectors and geographies. Furthermore, customers often fail to share emissions data with financial institutions in a transparent manner, compromising accuracy in the calculation of financed emissions.
From theory to action
For financial institutions, defining a comprehensive strategy for measuring financed emissions is key. Such a strategy must encompass the five components of CO2 equivalent, weighted average carbon intensity (WACI), economic emission intensity, physical emission intensity, and financial impact. It will also require establishing the right systems and processes backed by AI and ML technologies.
Access to precise emissions data is crucial, and this may necessitate transparent collaboration between all internal and external stakeholders of the bank. Automating the extraction and collation of emissions data from various internal and external sources and sourcing GHG data from third party aggregators is critical. Embracing global standards such as the Partnership for Carbon Accounting Financials (PCAF) Standard can fast-track calculation. Additionally, the GHG Protocol and the UN Framework Convention on Climate Change (UNFCCC) standards can facilitate the calculation of emission factor data.
Banks must lay down interim and final targets for arresting emissions and define a process for regularly evaluating progress. Leveraging universal frameworks such as the Science Based Targets initiative (SBTi) framework can help financial institutions set carbonisation thresholds for their lending and investment activities in line with the objectives of the Paris Agreement.
With our approach, financial institutions can achieve accurate and insightful measurement of financed emissions. Identifying loans and investment portfolios where compliance with PCAF reporting norms is mandatory will become easier.
How TCS can help
The TCS BFSI Sustainability Practice offers various technology, consulting, and analytics based solutions in the sustainability domain. With the TCS solution, the measurement of financed emissions can be optimised while also cutting dependence on third party data providers. The solution delivers actionable insights, monitors and evaluates ESG performance, and provides a transparent view of ESG data, sustainability risks, and climate impact of investments and credit, to enable regulatory compliance.
Calculating financed emissions is vital to satisfy different stakeholders and ensure efficient investment and credit risk management. Most important, effective oversight of financed emissions goes hand in hand with limiting GHG emissions and checking global warming. Measuring financed emissions is complicated. But financial institutions that pick up the gauntlet and direct the flow of finance to green activities will steal a march over their peers and emerge as leaders in the net-zero transition.
Read more about overcoming challenges in ESG reporting in financial services (tcs.com).
