Banks get carbon emissions standard they sought for stock, bond deals

By Tommy Wilkes

LONDON (Reuters) -Banks will need to account for a third of the emissions linked to their capital markets deals when they report their carbon footprint, after an industry-led standard setter launched a long-awaited methodology on Friday.

Disagreement between banks over how much of the emissions should be apportioned to them delayed a decision, considered a crucial part of making emissions reporting credible.

The Partnership for Carbon Accounting Financials (PCAF), a voluntary group joined by dozens of financial institutions, had been trying since last year to finalise the standard for facilitated emissions – those generated by underwriting-related activities such as a lender helping a company issue a bond.

Pending the methodology, banks including Citi and Morgan Stanley have excluded the emissions from their reduction targets.

Environmental groups welcomed PCAF’s new standard, although ShareAction said it was disappointed banks would only have to account for 33% of the emissions linked to their capital markets businesses.

Reuters reported in July that banks working to develop the standard had voted to exclude the other two-thirds.

“Of course it wasn’t easy. Finding the number was complex. The most important objective of PCAF was to find a harmonising methodology that all banks can use,” PCAF Executive Director Angélica Afanador told Reuters.

Under the new standard, lenders have the option of disclosing 100% of their facilitated emissions as well as the 33% weighting.

Afanador said it was important to distinguish between banks as providers of capital via a loan kept on their balance sheets, and as facilitators for capital from investors in a stock or bond deal.

Banks signed up to PCAF must already account for 100% of the emissions from any financing that is kept on balance sheet – and so must investors for the emissions generated by the stocks and bonds they own.

UNDERWRITING FOSSIL FUELS

Two thirds of U.S. bank financing for fossil fuel expansion came via underwriting stocks and bonds, Sierra Club said in a July report.

“Banks have an enormous and overlooked climate impact from underwriting investments in big polluters, and disclosure of these impacts is long overdue,” said Adele Shraiman, senior strategist for the Sierra Club’s Fossil-Free Finance campaign.

Shraiman said PCAF’s standard provided a “baseline” for the industry to measure and disclose facilitated emissions, and that banks needed to set targets for reducing them and follow through on their pledges.

Jeanne Martin, Head of the Banking Programme at ShareAction, said PCAF had given banks a “get-out-of-transparency-free card” by using a 33% weighting.

“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,” she said.

In explaining its approach, Afanador said PCAF had decided on the 33% weighting because the Basel Committee on Banking Supervision, which assesses the importance of global systemically important banks (G-SIB), previously considered balance sheet exposures such as bank lending as three times more impactful than underwriting.

Not all big banks have joined PCAF.

Some have also developed their own methodologies for facilitated emissions, including JP Morgan, Goldman Sachs, Wells Fargo and Barclays.

PCAF’s new standard is designed for emissions from the bonds and stocks that are sold to investors. If the bank puts its own capital at risk when underwriting, it is treated differently.

For daily comprehensive coverage on COP28 in your inbox, sign up for the Reuters Sustainable Switch (NYSE:) newsletter here.