The United Nations warned the world of unprecedented global warming with its 2021 report, using the words ‘code red for humanity.’ And we all know, thanks to countless disaster movies, that code red is never good.
The report stated that global temperatures may reach a 1.5 Celsius warming threshold fairly soon, and if the temperature continues to rise beyond, the ramifications may be irreversible.
Financed emissions are a big part of the problem. Financial institutions that fund projects, companies, and assets indirectly contribute to greenhouse gas (GHG) emissions. However, the awareness of the impact of such investments is increasing, thanks to the mounting pressure of regulations and changing investor sentiment. To reach the climate goals set in the Paris Climate Agreement, financed emissions must be mitigated by any means necessary.
In this article, we’ll explain financed emissions, their importance, and how stakeholders behind these emissions can use the Science-Based Targets initiative (SBTi) to do damage control. Let’s dive in!
What are financed emissions?
Financed emissions refer to the indirect GHG emissions attributed to financial institutions like banks, investment banks, and insurance companies. An important side note: these are not the emissions directly produced by these companies but the emissions produced as a result of their activities.
As per the GHG Protocol, such emissions are categorised as Scope 3 (Category 15: Investments). Simply put, the companies and assets that receive investments are directly responsible for the emissions and, by extension, the institutes that finance them.
Financial institutes primarily contribute to these Scope 3 emissions through lending, investing, and underwriting activities. These Scope 3 emissions are sometimes hundreds of times larger than the financial institution’s carbon footprint.
Let us put this into perspective for you. The global investment market was valued at $3,532 billion in 2022, and it’s expected to grow at a compound annual growth rate (CAGR – just a fancy word meaning that investments grow exponentially instead of linearly) above 7%.
It’s a large and powerful industry that contributes heavily to the emissions through their investments and loans, even if the companies themselves achieve net-zero emissions.
Science-Based Targets and their role in financed emissions
The Science-Based Targets initiative (SBTi) is a partnership between several organisations fighting to avert the serious damage of climate change, including the United Nations Global Compact (UNGC), CDP (formerly the Carbon Disclosure Project), the World Wide Fund for Nature (WWF) and the World Resources Institute (WRI).
SBTi aims to provide industries and businesses with a framework for setting ambitious yet achievable goals for limiting global warming to 1.5 degrees Celsius.
With Science-Based Targets (SBTs), companies have a clear pathway to adopt practices that reduce GHG emissions and are backed by scientific research. In other words, the targets align with the latest climate studies and the goals of the Paris Agreement.
SBTi foundations for target setting in the finance sector
Recognising the impact of the financial sector on the environment, the SBTi has developed a framework specifically targeting financed emissions and helping institutions realise net-zero ambitions. The first version of the framework was released in April 2022 and developed with the help of stakeholders from the industry.
Here’s how the SBTi framework can help financial institutes target financed emissions:
- Scope 3 classification: Determining which activities and assets qualify as Scope 3
- Target-setting: Determining the appropriate target-setting method and setting benchmarks following the goals of the Paris Climate Agreement
- Portfolio coverage: Defining the measures and the targets by assets or services, categorised by sectors, regions, or activities
The SBTi can be instrumental in recognising, defining, and setting Scope 3 targets for financial institutes. Historically, setting targets for Scope 3 emissions has been challenging, particularly for the financial sector. As these emissions are not a product of their operations, identifying, tracking, and targeting them is difficult.
The SBTi framework helps define targets for financed emissions via three key dimensions: boundary, time frame, and mitigation.
The boundary defines the scope of emissions, for example, the scope of activities and GHG coverage. The time frame defines the timeline based on impact and urgency. Lastly, mitigation defines tactics to curb emissions.
Why are financed emissions so important?
With tens of trillions of dollars in investments and assets, some of the biggest financial companies in the world are indirectly responsible for a vast amount of carbon emissions. Time to get your mind blown – banks contributed 1.04 tonnes of carbon dioxide (3% globally) in 2020 as financed emissions.
It’s a sector traditionally driven by profits, but more finance companies with billions in their portfolio are considering taking a more environment-conscious approach to their financing activities.
This is good news, but it’s important to revisit why addressing financed emissions is so important. Here are three reasons:
Climate goals are unachievable without targeting Scope 3 emissions
Global corporations’ biggest challenge to achieving net-zero emissions before 2050 is handling Scope 3 emissions. More needs to be done to achieve the goal of keeping temperature warming at 1.5 degrees Celsius. And governments and businesses can’t achieve this goal without targeting the emissions generated down the supply chain.
As the finance sector is responsible for providing capital to many of these Scope 3 companies, ensuring that investments don’t create more emissions is necessary.
It’s an effective way to implement policy across all scopes
The European Union (EU) has made the disclosure of financed emissions mandatory for finance institutes operating in the region. The United States is also mulling implementing something similar. These regulations can ensure climate policies are implemented at the supply, production, and sale stage.
Banks and other financial institutes must implement stricter controls on who they invest or loan money to based on financed emission goals.
It encourages greener startups
Every budding business needs capital, and if the requirements for getting funds are taking a greener path, they are more likely to do so. This means that more startups and existing enterprises will be pushed to think and act consciously to reduce their emissions.
How can comundo help?
For banks, insurance companies, and other financial institutes, comundo provides a reliable and easy-to-use portal to calculate emissions from their property portfolios. Whether your holdings include large shopping malls, cinemas, offices, or residences, comundo covers carbon accounting based on real data, not estimates.
It’s a plug-and-play solution that taps automation to get real-time numbers so investment companies can take actionable measures. It can also help with accurate environmental, social, and governance (ESG) reporting and satisfy government regulations.
Ryan is a senior technical content creator, helping tech businesses plan, launch, and run a successful content strategy. After an extensive academic career in engineering, he worked with dozens of tech startups and established brands to reach new clients through proven content creation strategies.