In a significant move, major banks have voted to limit the accounting of carbon emissions in bond and stock sale underwriting. The decision, backed by most banks in the industry working group, excludes two-thirds of emissions linked to their capital markets businesses from being attributed to their carbon footprint. The vote comes after months of discord over the issue, with environmental advocates urging banks to take full responsibility for emissions generated through activities financed via bonds and stock sales.
According to the environmental group Sierra Club, almost half of the financing the six largest U.S. banks provided for top fossil fuel companies between 2016 and 2022 came from capital markets rather than direct lending. The banks’ accounting of these emissions will have an impact on their targets to achieve carbon neutrality. As part of their commitments, major lenders aim to bring their emissions down to zero on a net basis by 2050, and interim targets have been set for this decade.
Banks with significant capital markets operations argued that they should only assume responsibility for 33% of emissions from activities financed through bonds and stock sales. They cited the lack of control over borrowers compared to loans and expressed concerns about capital market-related emissions overshadowing lending-related emissions.
Advocates for a lower accounting threshold argue that assuming full responsibility for 100% of emissions would result in double-counting across the financial system. Bond and stock investors would also account for some emissions generated by financing activities in their carbon footprints.
The working group’s decision on accounting standards will not be mandatory, but it carries significant weight in the industry. The Partnership for Carbon Accounting Financials (PCAF), an association of banks seeking to standardize carbon accounting, hopes that other banks will follow suit.
The sources revealed that some working group members dissented from the 33% threshold, with one advocating for 100%. The final decision lies with PCAF’s board, which is yet to be made.
While PCAF’s efforts to establish standards for emissions are commendable, there have been concerns about disagreements delaying the publication of the final methodology since last year.
Campaign group ShareAction criticized the 33% weighting, calling for a transparent and unbiased assessment of banks’ climate risks and impacts.
The debate also raises questions about whether banks will have to bundle together capital market-related emissions and lending-related emissions into a single target or treat them separately. Experts warn that having a single target with two accounting approaches could pose challenges.
Meanwhile, the Science Based Targets initiative, backed by the United Nations and environmental groups, is developing net-zero standards, which will include considerations on whether banks should have different or combined targets.
Overall, the decision by major banks to limit the accounting of emissions in bond and stock sales underwriting is a crucial step in the banking industry’s efforts to address climate change. While it has garnered support from a majority of banks, concerns remain about the right accounting threshold and the industry’s collective responsibility for carbon emissions. The final outcome will shape banks’ strategies to achieve carbon neutrality and their contribution to mitigating the impact of climate change on the environment.