Financial institutions play an essential role in steering the world toward a low-carbon economy. As the world becomes increasingly aware of climate change’s adverse consequences, banks and other financial firms are stepping up their efforts to incorporate climate considerations into their core business strategies.
Calculating financed greenhouse gas (GHG) emissions — the emissions linked to companies’ financing, lending, and investment actions — allows financial institutions to demonstrate their commitment to addressing climate change and working toward a sustainable future.
In this article, we explore what’s needed to calculate a financed emissions baseline, the essential steps that companies can take after calculating their baseline, why financed emissions matter, and how these steps contribute to long-term business resilience.
Calculating a financed GHG emissions baseline
To begin, financial institutions should establish a financed emissions baseline — a starting point that quantifies an organization’s GHG emissions that are generated through its financing, lending, and investing activities.
To calculate a financed emissions baseline, organizations must pull relevant data from their portfolios, and try to fill in any gaps with third-party data.
An emissions baseline unlocks a path to setting climate targets, increases stakeholder transparency, and helps to align business strategies with climate action.
Level up financed emissions data quality
Calculating financed GHG emissions is not a one-and-done exercise. It’s an ongoing commitment to regularly reassess and refine your emissions data so you can recalculate your baseline emissions. This is important when it comes to maintaining the accuracy, reliability, and relevance of your company’s reported GHG emissions data over time.
Moreover, financial institutions need to allocate significant time and resources to collect, manage, and analyze vast sets of emissions data that originate from numerous borrower and investee sources. Organizations may therefore turn to low-quality data collection approaches that could produce an inaccurate calculation of a firm’s financed emissions baseline.
Financial institutions should focus on refining their data, prioritizing its quality, addressing gaps, and actively engaging with borrowers and investees to gather the most accurate information.
To streamline the journey of improving financed emissions data, financial institutions can collaborate and learn from existing emissions-related initiatives. Internationally accepted standards, such as the Partnership for Carbon Accounting Financials, offer standardized guidance for measuring emissions and promote consistency and accuracy in the financial sector. By adhering to these types of industry-accepted methodologies, institutions can demonstrate their progress over time and enhance the reliability of their reporting.
Determine how to use financed GHG emissions data
Financial institutions must not only gather and analyze financed emissions data — they also need to translate those insights into actionable and impactful initiatives. With an emissions baseline, financial institutions can use financed GHG emissions data in three practical ways.
Integrating financed emissions baseline information into climate-related financial reporting plays an important role in an organization’s commitment to addressing climate change. Disclosing an organization’s financed emissions baseline ensures investors and stakeholders have a clear understanding of an organization’s starting point as it sets out to assess and reduce its emissions.
Disclosing your organization’s financed emissions also ensures compliance with jurisdictional climate reporting regulations. For example, the International Sustainability Standards Board recently introduced its final standards on sustainability and climate-related financial disclosures. These require companies to report their Scope 1 and 2 (direct) emissions, as well as their Scope 3 (indirect) emissions, which includes financed GHG emissions.
After financial institutions establish a financed emissions baseline, they can take strategic and informed steps to reduce their GHG emissions.
To support the 2015 Paris Climate Agreement’s ambition of limiting global temperature rise to well below 2°C, and ideally to 1.5°C above pre-industrial levels, organizations should set net-zero emissions targets out to 2050 or sooner. Companies should also set interim targets that allow them to plan for progressing toward their net-zero commitments. These interim and net-zero targets must be ambitious, achievable, and science-based.
Inform Business Strategies
Understanding your financed emissions baseline can help your organization better define and take actions that will measurably impact your businesses and the real economy. It can also help your company to develop strategies that fit with a climate-adjusted future.
For example, financial institutions can capitalize on accurate emissions data to help support decisions that promote green investment and align their operations with a low-carbon economy. Embracing green investments, incorporating sustainable technologies, and promoting eco-friendly business practices are feasible pathways to ensure long-term business resilience.
Educate and act on financed emissions data
Financial institutions can only calculate, analyze, and act on financed emissions data if they know how to do it effectively. Organizations must therefore invest time and resources into educating their internal teams on assessing and refining this type of data. Company leaders should also consider scheduling periodic education sessions and climate competency-building programs to keep up with current industry best practices.
Importantly, companies must know how to properly execute on their climate initiatives and ensure their alignment with best practices. Setting and achieving emissions reduction targets is a complex and demanding process. Understanding what’s required for a long-term strategic climate plan will help organizations develop a comprehensive and successful roadmap.
Best practice climate management approaches
A great way to ensure financial institutions are consistently adhering to best practices is to align their strategy development with the latest sector-specific standards and norms.
Organizations can partner with industry bodies for guidance on the most relevant norms and standards that are applicable to them and their assets. The Glasgow Financial Alliance for Net Zero is an example of an industry body that actively provides guidance to financial firms that are transitioning their companies’ portfolios to net zero.
Armed with accurate information and sound knowledge, financial institutions hold the power to assess and refine data effectively, which will result in the calculation of accurate financed emissions baselines. This information feeds into target-setting, climate-related financial disclosures, and the development of business strategies that will be implemented to culminate in meaningful progress toward sustainable and responsible financial practices.
How Manifest Climate can help
Our leading Climate Risk Planning software helps companies supercharge their climate strategies. Manifest Climate’s technology is the world’s best at assessing climate disclosures and represents a single source of truth to guide your organization in the long term. Our software helps you save up to 75% of manual time and effort and up to 50% in costs. We analyze how organizations disclose their climate-related information and identify opportunities for improvement based on best practices. Our solution also provides insights into how your business’s disclosures stack up against industry peers, as well as expert takeaways on business-relevant climate trends that help your leaders make better decisions.