Banks working to create international guidelines for accounting for carbon emissions in bond or stock sale underwriting have chosen to remove the majority of these emissions from their own carbon footprint.
The majority of the banks that make up an industry working group supported a proposal earlier this month to exempt two-thirds of the emissions associated with their capital markets activity from being ascribed to them in carbon accounting.
If sustained, the ruling would pit banks against environmental activists, many of whom believe that, as it already does with loans, the banking sector should bear full responsibility for the emissions produced by activities supported through the sale of bonds and stocks.
According to the environmental organization Sierra Club, between 2016 and 2022, almost half of the financing given by the six largest U.S. banks to major fossil fuel businesses came via capital markets as opposed to direct lending.
The way banks account for these emissions will affect how close they can come to their carbon-neutral goals. Major lenders have committed to achieving net zero emissions by 2050 and have established interim goals for this decade.
The working group heard arguments from banks with significant capital markets operations that they should only be held accountable for 33% of the emissions of activities supported by the sale of bonds and stocks since they do not have the same level of control over the borrowers as they do with loans. According to the sources, the banks have also raised concern over capital market-related emissions outpacing lending-related emissions.
The proponents of a low accounting threshold claim that accepting full responsibility for emissions would result in double counting throughout the financial system because bond and stock investors will separately account for some of the emissions produced by financing activities in their own carbon footprints.
The sources, who asked to remain anonymous since the discussions were private, claimed that while the majority of the banks in the working group supported the 33% level, at least two disagreed, with one supporting 100%.
No one will be forced to use the accounting standard. In an effort to harmonize carbon accounting throughout the sector, the Partnership for Carbon Accounting Financials (PCAF), a collection of banks, launched the working group with the participation of the big banks in the hopes that others will adopt the new standard.
The decision to implement the 33% accounting share for capital markets will now be made by PCAF’s board. Two of the sources claimed that although no decision had been made, the working group was unwilling to be overruled.
An enquiry for comment was not answered by a PCAF spokesperson.
Morgan Stanley, Barclays, Bank of America, Citigroup, HSBC, BNP Paribas, NatWest, and Standard Chartered are the other members of the working group. Requests for comments were either denied or ignored by representatives from all but two of the countries.
A representative for Barclays said the company supported PCAF’s efforts to set emissions guidelines but would not go further. A spokesman for Standard Chartered said the bank was fine with any carbon accounting level but would not elaborate.
According to the sources, PCAF had grown weary of the time and effort expended debating the appropriate figure and thought that any percentage was preferable to additional delays. Due to the differences, the publication of PCAF’s final methodology has been postponed since last year.
BUNDLING EMISSIONS
ShareAction, a campaign organization, claimed that the 33% weighting was “plucked out of thin air.”
According to Xavier Lerin, research manager at PCAF, “PCAF has a responsibility to publish guidance that enables a transparent and unbiased assessment of banks’ climate risks and impacts.”
Whether banks will have to combine their emissions connected to the capital markets and their emissions linked to lending into a single objective or separate them is not yet apparent.
Having a single target but two distinct accounting methods for the various emissions could be difficult, according to one of the sources.
It is being decided whether banks should have separate or combined aims as part of the net-zero standards being developed by the Science Based aims initiative, a separate organization endorsed by the United Nations and environmental organizations.
