Financed emissions: A big problem for banks, and a bigger problem for the climate

Written by Ben Collins

Topics: Climate, Coal, Finance, Oil

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What is the total greenhouse gas footprint of Citigroup, Bank of America, or UBS? Right now, we don’t know, and that’s a major problem for both banks and the climate.

Banks emit greenhouse gases to power their offices and branches, but they also finance the emissions of other companies through their loans, investments, and other financial services. Our best estimates indicate that these “financed emissions” dwarf a bank’s emissions from other sources, yet banks currently lack the tools to measure this critical but overlooked component of a bank’s greenhouse gas footprint.

Time is Running out to Reduce Bank Carbon Footprints

In a report released by Rainforest Action Network’s Energy and Finance Program today, “Bankrolling Climate Disruption: The Impacts of the Banking Sector’s Financed Emissions” (PDF), we analyze the consequences of financed emissions for the climate and the risks they pose for banks.

Rising concentrations of greenhouse gases in the atmosphere have begun to disrupt the global climate, triggering extreme weather events around the globe in recent years. To address this growing climate crisis, the global economy must rapidly transition to low-carbon energy sources. This transition poses major challenges for the banking sector, which will need to shift its financing from fossil fuel-based power sources to low-carbon energy infrastructure.

To date, major global banks have been moving in the wrong direction on climate. A report by the BankTrack network of NGOs (PDF) found that the world’s 93 largest banks’ financial commitments to coal mining and coal-fired power generation nearly doubled between 2005 and 2010. Unfortunately, time is running out for banks to decarbonize their financing portfolios. By the end of the decade, locked-in emissions from new infrastructure will make it impossible to limit atmospheric CO2 concentrations below the critical threshold of 450 parts per million, making catastrophic climate change inevitable.

In addition to putting the global climate at risk, a bank’s financed emissions also expose it to reputational risks from an increasingly climate-aware public. Over the long term, banks that fail to measure and reduce their financed emissions will face financial risks from their financing relationships with coal-fired utilities, oil and gas producers, and other companies that face an uncertain future in a carbon-constrained economy.

New Tools for Measuring Financed Emissions

Fortunately, the Greenhouse Gas Protocol has developed new guidelines for calculating financed emissions that provide key tools for banks to measure their financed emissions footprints. And public sector institutions such as the U.S. Overseas Private Investment Corporation have already led the way for their private sector counterparts by setting targets to reduce emissions from their financing portfolios.

Major U.S. banks have taken some positive steps on climate change, such as committing over $100 billion in loans and investments to environmentally beneficial projects over the next decade. However, banks have not actually measured the net greenhouse gas impacts achieved by these commitments. To differentiate themselves from their peers and demonstrate that these green financing is having an impact, banks must measure the bottom-line climate outcomes of both their environmental lending initiatives and their broader financing portfolio.

Next Steps for Banks

RAN’s report recommends that banks participate in an upcoming multi-stakeholder initiative coordinated by the Greenhouse Gas Protocol to finalize tools for banks to measure the climate impacts of their financing activities. In addition to participating, banks should also set aggressive reduction targets for their financed emissions to align with the 450 ppm greenhouse gas stabilization target.

Could banks put these recommendations into practice quickly enough to make a difference for the climate? Let’s hope so. The report’s recommended financed emissions reduction trajectory for banks represents the minimum reductions necessary to align banks with an emissions trajectory that will stay within the world’s dwindling budget of carbon that can safely be emitted through mid-century.

As Bill McKibben, the Carbon Tracker Initiative, and others have noted, this global carbon budget leaves precious little room for error if the world is to avert catastrophic climate change, making it incumbent on banks to address their financed emissions as soon as possible.

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  1. Bostonians Uniquely Positioned to Accelerate Clean Energy Transition » Rainforest Action Network Blog

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