Most banks, asset managers, and other financial institutions used to view climate change as a challenge for others to deal with, because most actual emissions come from their corporate clients and customers. The conventional wisdom was that financial players had limited influence over the rational—though perhaps short-sighted—economic decisions of others. But that is changing fast as it becomes ever clearer that climate change is a rapidly growing risk to the bottom line.
In an article for Bloomberg Tax, Giel Linthorst, director in Guidehouse’s Energy, Sustainability, and Infrastructure segment, says that membership growth in the Partnership for Carbon Accounting Financials (PCAF)*, a global organization to measure and report financed emissions, is signaling transformation in how the financial sector views its role in combatting climate change.
“Until fairly recently, many banks and other financial institutions had acted as if they weren’t part of this ‘real economy’ problem and believed they had no major role to play in fomenting change,” Linthorst said. “They didn’t feel the risks because they weren’t affecting their bottom line, yet.”
The finance sector was also faced with the challenge of how to measure its indirect impact on climate change, so-called financed emissions. With the introduction of PCAF, financial institutions take a bottom-up approach to measurement starting with six asset classes: listed equity and corporate bonds, business loans and unlisted equity, project finance, commercial real estate, mortgages, and motor vehicle loans.
Linthorst explained that for each asset class, financial institutions calculate the annual carbon emissions produced by the company or project they have invested in. The next step is to calculate the percentage of the total value of the project that the investment or loan represents and multiply that by the annual carbon emissions to come up with the portion for which a financial institution is responsible.
“Of course, there’s still plenty of work left to be done,” Linthorst said. “The PCAF standard is just a start to enable financial institutions to start their journey toward net-zero.”
*Guidehouse serves as the organization's secretariat.