The battle to slash carbon emissions will be waged in large part within the loan books of the world’s banks and insurance companies. Now there are numbers that show the sheer magnitude of that fight.
“Financed emissions” are the next front in the war against climate change. More and more financial institutions are taking stock of the greenhouse gases that emanate from projects and companies built and operated on the funds that they lend and capital they help raise.
New research shows the volumes are immense, and efforts to deal with the problem are still inadequate for keeping global temperature gains to less than 1.5 to 2 C, as spelled out in the Paris Agreement on climate.
Worldwide financed emissions top a staggering 700 times that of the greenhouse gases emitted by the banks and insurers themselves, according to a new report from CDP, formerly the Carbon Disclosure Project, the body that runs the world’s environmental disclosure system for companies, cities, states and regions.
Of 332 financial institutions that responded to CDP’s survey, just a quarter of them reported emissions from their lending and asset management portfolios.
Further, fewer than 50 per cent of banks, asset owners and fund managers, and just 27 per cent of insurance companies, report corporate actions that align their portfolios with keeping the average temperature increase to 2 C or less, said the body, which works with more than 590 investors with more than US$110-trillion in assets.
This is all a little surprising, given how political and business leaders have discussed over the past year the financial world’s role in efforts to extract the carbon from the global economy. Trillions of dollars will be needed to meet net-zero goals over the next three decades, and properly tallying emissions is crucial to understanding the challenge.
CDP lauded ABN AMRO Bank NV of the Netherlands, German insurer Allianz SE, Paris-based BNP Paribas SA and Britain’s Legal & General Group PLC for adopting best practices for environmental actions.
Non-financial corporations were first to set emissions targets rooted in scientific stringency and adapting their businesses to account for climate risk, a process that has taken place over the past two decades, said Emily Kreps, CDP’s global director of capital markets and a former investment banker.
“It’s now time to look at finance because the finance sector is enabling things to be financed. They are the providers of capital to either supercharge some of these changes in the real economy or to perpetuate bad behaviour,” Ms. Kreps said from San Francisco.
This is certainly in the spotlight as countries prepare for the next United Nations climate summit in Glasgow, Scotland, in November. In April, 160 banks, insurers and fund managers formed a new group pledging to use their financial might in efforts to speed up the global transition to a net-zero emissions economy.
Led by Mark Carney, former governor of the central banks of Canada and England, and now United Nations Special Envoy on Climate Action and Finance, the signatories to what is called the Glasgow Financial Alliance for Net Zero have committed to set interim and long-term emission goals aligned with established scientific practice.
Canadian financial institutions have spent the past several months announcing goals to get to net zero, and pledging to tally greenhouse gases tied to their lending as members of an international group called the Partnership for Carbon Accounting Financials, which is developing ways to quantify financed emissions.
With the exception of one, Vancouver City Savings Credit Union, Canadian institutions were conspicuous by their absence in the launch of the Glasgow group. Yet eight, including all of the Big Five banks, have been disclosing emissions in some form for much of the past decade, Ms. Kreps said. Seventeen Canadian Banks, asset managers and insurers responded to the CDP questionnaire.
Gauging financed emissions is key as Canada is seen as an economy in transition, given the economic importance of the fossil fuel industry and the struggle it faces to deal with CO2 – this, as the country seeks to reduce greenhouse gases by as much as 45 per cent from 2005 levels by 2030, the top of Ottawa’s latest target.
“In no case is CDP or, ideally, most of the people in the climate world, out to destroy economies. It’s about saying, how do you get the companies to transition to business models that will become sustainable in a changing physical and regulatory environment?” Ms. Kreps said.
“This is where financial institutions have a significant role to play. Measuring their exposure is important, but then also understanding how the exposure can be transitioned over time.”
Jeffrey Jones writes about sustainable finance and the ESG sector for The Globe and Mail. E-mail him at jeffjones@globeandmail.com.
Jeffrey Jones