Financed emissions refer to the carbon emissions tied to an individual’s or organization’s investments. With climate change becoming an urgent issue, the spotlight has turned to the financial sector and its influence on the problem. Many financial institutions back companies with substantial carbon footprints, especially in the energy and power sectors. As a result, these institutions bear indirect responsibility for the greenhouse gases released by the companies they invest in.
By redirecting investments, financial institutions can either accelerate or slow down global efforts to combat climate change.
When a financial institution invests in a company, it powers that company’s growth and operations. The goal is simple: the investor expects a financial return. But if the company is a significant greenhouse gas emitter, the institution indirectly shares responsibility for those emissions.
These emissions, linked to the investment, are called financed emissions. They reveal the often-overlooked environmental costs of financial choices. Recognizing financed emissions is essential, as it determines how investment decisions shape the global climate. It brings into focus how our financial activities directly affect the rise in greenhouse gas levels, making investors part of the climate equation.
The EU Green Deal, SEBI’s BRSR Core in India, TCFD, and SBTi are driving a significant shift towards greater transparency and accountability for companies’ climate-related impacts. The EU Green Deal, for example, sets ambitious goals for climate neutrality, while SEBI’s BRSR Core mandates sustainability reporting for listed companies in India. The TCFD provides a framework for companies to disclose climate-related financial information, including governance, strategy, risk management, and metrics. Meanwhile, the SBTi helps companies set ambitious emissions reduction targets aligned with the Paris Agreement. These initiatives are collectively increasing regulatory pressure on companies to address climate change, enhancing transparency for investors, and driving a transition towards more sustainable business practices.
Financed emissions fall into two categories: operational and value chain emissions. Operational emissions include direct emissions from a company’s activities like factories, transportation, and energy use. Value chain emissions cover indirect emissions from the supply chain, such as material production, goods transportation, and waste disposal. Both types contribute to a company’s carbon footprint.
The Global GHG Accounting and Reporting Standard for the Financial Industry identifies six key asset classes within financed emissions. These include listed equity, corporate bonds, business loans, unlisted equity, project finance, real estate mortgages, and vehicle loans. This standard helps financial institutions accurately report emissions tied to their financing activities, ensuring a clear view of their greenhouse gas impact.
Financed emissions refer to the greenhouse gas (GHG) emissions linked to investments, loans, or insurance provided by various entities. The main sources include:
These financial activities collectively exacerbate climate change by supporting industries that generate significant GHG emissions.
Organizations encounter several challenges when reporting their financed emissions. These issues arise from task complexity, lack of standard methods, and difficulties with data collection and analysis.
To overcome these challenges, firms need standardized methods, better data quality, and stronger internal resources. Collaboration with regulators and industry groups is crucial for accurate emissions reporting.
Organizations involved in financing or insuring high-emission activities are increasingly expected to report their financed emissions. The key entities include:
Reporting financed emissions is crucial for transparency and accountability, helping stakeholders understand the climate impact of financial decisions. Regulatory bodies and climate-focused initiatives, like the Task Force on Climate-related Financial Disclosures (TCFD), increasingly require such disclosures to align with global climate goals.
Reporting financed emissions is essential for fostering transparency and accountability in the financial sector’s role in climate change. As banks, insurers, asset managers, and corporations continue to fund high-emission activities, tracking and disclosing their impact becomes crucial for aligning with global climate goals. By reporting financed emissions, these entities can not only mitigate their environmental footprint but also contribute to a broader shift toward sustainable investments and responsible financial practices. This accountability is key to driving systemic change in the fight against climate change.
Discover how Sprih’s solutions can revolutionize your approach to Scope 3 emissions management. Businesses can Measure, Benchmark, Plan, Report, and Exchange, taking a holistic approach to sustainability to stand out in the market. This improves access to customers and drives real-world outcomes. Let’s shape a sustainable future. Book a demo now! |