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To the uninitiated, debates about carbon accounting resemble theological discussions on the number of angels which can dance on the head of a pin. Complex, internally coherent and fascinating — but of limited practical value.
Witness, for instance, the latest wrangle in the world of net zero finance. Should banks only report emissions related to loans made to clients? Or should they account for pollution on funding they merely underwrite and sell on?
Almost half of the financing provided to the fossil fuel industry by the 60 largest banks between 2016 and 2021 was in the form of capital markets facilitation, according to Banking on Climate Chaos, a report compiled by pressure groups.
Environmentalists hope that if banks measure their indirect contribution to global warming and set reduction targets, it will tighten access to capital for carbon-intensive industries. They want banks to treat underwriting similarly to straight loans.
Some banks think they should account for a smaller percentage of a client’s emissions than the face value of the bond would imply — perhaps as low as 17 or 33 per cent — when they do not lend the money themselves.
So-called “Scope 3” emissions — those associated with the activities of a company’s suppliers and clients — are a crucial issue for banks. They emit little carbon themselves, but provide billions in financings for companies that do.
Banks need to set Scope 3 targets. Haggling over the precise carbon weightings attributable to different activities is unhelpful. After all, Scope 3 carbon accounting is already a nebulous concept, with emissions along a single value chain double or triple-counted by those involved.
The main purpose of measuring Scope 3 emissions, for banks, is to provide a baseline for reduction targets. If that is from a high level so be it. Consistency, over time and across the sector, is most important. Banks should account for all the emissions associated with their underwriting activities. This has the benefit of clarity.
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