(Bloomberg) -- Bankers will soon be able to claim credit for emissions they say their financing has helped avoid, as the world’s largest voluntary carbon accounting framework for the finance industry works on broadening standards.
Under the approach, banks can assume a counterfactual scenario in which emissions remain elevated, and contrast that with the CO2 avoidance their loans or bonds enable, according to the Partnership for Carbon Accounting Financials. PCAF also is proposing expanding existing avoided-emissions guidelines to include all asset classes, rather than just the renewable power plants to which such reporting has so far been limited.
Such measures would, for example, allow banks to claim they’re helping avoid emissions by financing the early retirement of coal-fired power plants or a shift in steel production over to renewable energy. PCAF is now launching a consultation designed to get answers on how the industry should report the carbon footprint of such capital allocations, the group said on Tuesday. Respondents have until the end of February to provide feedback.
The market has been asking for metrics that look at “not only the negative emissions, but also avoided emissions,” Caspar Noach, technical director at PCAF, said in an interview. It’s a “hard field” that will require more work to finalize, “but we at least wanted to put out some initial guidance on this in the market,” he said.
PCAF’s proposed standards are part of a larger package of changes and additions that will result in at least 90% of assets under management globally being covered by the carbon accounting system. While equities, corporate bonds and sovereign debt make up the bulk, creating a harmonized methodology for green bonds and avoided emissions will likely be significant, said Hetal Patel, head of climate investment risk at Phoenix Group who also works with PCAF.
The concept of so-called avoided emissions refers to carbon pollution that will no longer be produced, as higher-emitting assets and products get replaced with lower-carbon alternatives. As a model, it’s also drawn some skepticism.
Mahesh Roy, investor strategies program director at the Institutional Investors Group on Climate Change, says that even though calculating avoided emissions holds promise for measuring contributions to the net zero transition, it “faces challenges in data reliability, methodology standardization, and addressing trade-offs with generated emissions.”
In the finance industry, meanwhile, the topic is gaining traction. Several large investors, including Abrdn Plc, Lazard Asset Management LLC, and Franklin Templeton Cos., have published their own research on how to approach avoided emissions, while Baillie Gifford & Co has developed a methodology. And firms, including Brookfield Asset Management and General Atlantic LP, have released data on the avoided emissions of some of their funds.
The Glasgow Financial Alliance for Net Zero, the largest finance sector climate coalition, introduced the idea of a new metric last year to drive transition finance, calling it expected emissions reductions (EER). The basic principle is that finance firms compare the emissions associated with the entity or asset in a business-as-usual scenario with those achieved if that company implements a science-based transition plan, or if a polluting asset is eventually shut down. The so-called delta is the EER.
PCAF says it will pay particular attention to creating guardrails that prevent greenwashing.
“We clearly will organize this separately from financed emissions” because otherwise there would be “a high risk of potentially conflating the figures, or greenwashing,” Noach said. “So we really want these numbers to be reported separately” and for there to be “some key guardrails” that PCAF will introduce, he said.
The goal is to have a transparent and consistent model that allows stakeholders to compare one bank’s claims with another’s, Noach said. It will still be up to banks and asset managers to define transition assets for themselves, he added.
Once introduced, PCAF expects its methodology would affect how use-of-proceeds bonds will be accounted for in future.
“In some cases, an investment in a green bond requires an initial investment to some infrastructure that only down the line generates reductions,” Noach said. That’s why the expected emission reduction is a “relevant metric,” he said.
PCAF was created by Dutch financial institutions during the 2015 Paris Climate summit to encourage banks and investors to play their part in delivering a transition to a low-carbon economy.
Since then, the number of financial institutions committed to or already applying its accounting methods has climbed to more than 550, with combined financial assets of $92.5 trillion, according to PCAF’s website.
(PCAF’s work is supported by groups including Bloomberg Philanthropies, which was founded by Michael R. Bloomberg, the owner and founder of Bloomberg News parent Bloomberg LP. GFANZ is co-chaired by Mark Carney, who is chair of Bloomberg Inc. and a former Bank of England governor, and Michael R. Bloomberg, the founder of Bloomberg News parent Bloomberg LP.)
(Adds details on number of firms applying accounting method, in final paragraph. A previous version corrected the spelling of Caspar in the fourth paragraph.)
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