Greenhouse gas accounting, reporting, and target-setting: Current state of play for the financial sector
For many years now investors have been requesting information on climate-related governance and risks from their investees, through means such as the CDP questionnaire. More recently, financial institutions – and their emissions, climate commitments, and performance – have started coming under the microscope.
The UN Principles of Responsible Investing’s membership increased 35% between 2021 and 2022 . Additionally, over 550 companies are members of the Glasgow Financial Alliance for Net Zero. These figures indicate that many financial institutions are now more committed than ever to playing their part in the transition to net zero through sustainable investment.
The reality on the ground is somewhat different though. At the end of 2022, only 47 financial institutions had their climate goals validated by the Science-Based Targets Initiative (SBTi), and of those, only 2 were headquartered in the US. According to the Partnership for Carbon Accounting Financials (PCAF), only 107 financial institutions have reported their GHG emissions under the PCAF Standard. This represents a tiny percentage of the global financial sector.
Challenges remain but guidance is coming out rapidly
Last October the Task Force on Climate-Related Financial Disclosures (TCFD) published the results of a 2022 survey that sought to gain insights into financial institutions’ efforts to implement TCFD recommendations, including general challenges they faced in reporting climate-related information.
Through this survey, 57% of asset owner respondents and 71% of asset manager respondents cited a lack of methodologies to calculate GHG metrics as a challenge. Asset owners reported that it was the greatest challenge of all. This either suggests a lack of familiarity with the principles established by the Greenhouse Gas Protocol and PCAF, or difficulties in applying these principles to real-life financial arrangements. Different types of financial institutions may have struggled to apply the PCAF Standard as well since it was developed primarily for banks.
It was very timely then that in December 2022, PCAF launched the second edition of its GHG Accounting and Reporting Standard for the Financial Industry. This came hot on the heels of the release of the first GHG Accounting and Reporting Standard for Insurance-Associated Emissions, so PCAF guidance now covers all major sectors of the financial industry.
Those of us who work in this space are also giddy with anticipation for the release later in 2023 of the Exposure Draft of the Science-Based Target Initiative’s Net-Zero Standard for Financial Institutions. Once this Standard is published, the industry will have the required tools to accurately measure its financed emissions (using PCAF) and set appropriate targets (based on SBTi guidance).
Financial institutions play a critical role in the transition to a low-carbon economy
The latest IPCC report concluded that current financial flows fell short of the levels needed to achieve 1.5C pathway mitigation goals across all sectors and regions. Unsurprisingly, the challenge of closing the gap was the largest in developing countries, with the consequent environmental and social justice implications. According to Bloomberg, global investment in the low-carbon energy transition is now on par with investment in fossil fuel projects.
However, three times that investment is required in order for us to reach net zero by 2050.
In addition, many financial institutions have developed and are actively marketing “green” products (such as impact investing and ESG funds) or have issued “green” instruments, such as sustainability bonds. For these financial institutions, having robust science-based climate targets in place is a matter of market credibility (for more on setting credible climate goals, read our whitepaper). Money is fungible and consumers have an expectation that ESG products they invest in are not indirectly funding fossil fuel infrastructure, even indirectly. They increasingly want to know where their money sleeps at night and financial institutions need to be able to demonstrate that.
Given its size and its importance to the global economy, the financial sector must move quickly to close the gap between the status quo and alignment with a net zero future.
How 3Degrees can help your organization’s greenhouse gas accounting, reporting, and target-setting efforts:
We have supported a large number of climate leaders and financial institutions develop climate targets, create implementation plans, and select best-fit greenhouse gas accounting software to support the data collection process. In response to increasing interest from financial institutions in particular, we have developed two academies tailored to their unique needs that provide practical guidance on GHG accounting and target-setting.
With the imminent publication of the Exposure Draft of the first Net-Zero Standard for the financial sector, the SEC’s climate-related disclosure rule expected to be released in March and new regulations in the EU and the UK already in force, now is a great time to make a start on your journey to net zero. One of the many takeaways from our recent projects is that there are multiple nuances and differences between the various pieces of guidance, some of them hidden in footnotes, from which we can draw out the key takeaways for your financial organization.
Even though the Net-Zero Standard for financial institutions is still in development, the key guiding principles of the net zero concept are widely known and some of the technical criteria can be anticipated with a good degree of certainty, e.g., scope coverage and the use of carbon credits. Other reference frameworks are also available to guide companies along the way, such as the UN’s recent recommendations for companies setting net zero targets. We know from our work with clients that the target-setting process can take anywhere between 6 and 24 months from kick-off to target validation, so act now – our planet does not have time to wait.
For guidance on how to account for GHG emissions and design a credible climate strategy, get in touch today.
 PCAF “Financial Institutions Taking Action”
 TCFD 2022 Status Report
 PCAF announcement
 PCAF Insurance-Associated Emissions
 The IPCC AR6 Summary for Policymakers
 UN High-Level Expert Group on Net-Zero Commitments of Non-State Entities