PORTFOLIO CARBON INITIATIVE
EXPLORING METRICS TO MEASURE THE CLIMATE PROGRESS OF BANKS
Exploring Metrics to Measure the Climate Progress of Banks i Funders
This work was funded in part with support to the World Resources Institute from Bank of America Foundation. This report also received funding from the European Union’s Horizon 2020 research and innovation programme as part of the SEI Metrics project under grant agreement No 649982.
The report reflects only the authors’ view and the EC/EASME is not responsible for any use that may be made of the information it contains.
Authors:
Chris Weber 2 Degrees Investing Initiative, United Nations Environment Programme Finance Initiative, World Resources Institute
Jakob Thoma and Stan Dupre 2 Degrees Investing Initiative
Remco Fischer United Nations Environment Programme Finance Initiative
Cynthia Cummis and Shilpa Patel World Resources Institute TABLE OF CONTENTS
Executive Summary...... 1
1. Introduction and Context...... 8 1.1 Background...... 8 1.2 Defining the Business Objective...... 10 1.3 Typology of Banks...... 11
2. The Role of Banks in the Economy and the Implications for Assessing Climate Progress...... 17 2.1 How Do Banks Finance the Economy?...... 17 2.2 How Do These Roles Affect Climate Problems and Solutions?...... 18 2.3 Implications for Measuring the Climate Progress of Banks...... 21
3. Review of Existing Climate Progress Metrics...... 23 3.1 Overview...... 24 3.2 GHG Accounting Approaches...... 26 3.3 Green/Brown Metrics...... 29 3.4 Sector-Specific Energy or Carbon Metrics...... 33 3.5 Comparing the Different Types of Metrics...... 34
4. Common Principles and Reporting Options...... 36 4.1 Common Principles...... 36 4.2 The Importance of Regional Diversity...... 38 4.3 Moving toward “Science-based Targets” for the Financial Sector...... 39
Annex A: Summary of the Financed Emissions Initiative and Portfolio Carbon Initiative Processes...... 40
Annex B: Portfolio Carbon Initiative Advisory Committee and Technical Working Group Members...... 43
Endnotes...... 45
Glossary...... 46
References...... 47
iv Portfolio Carbon Initiative EXECUTIVE SUMMARY
Highlights Introduction This paper informs the ongoing debate about Banks are paying increasing attention ▪▪ how public- and private-sector banks should to climate change for two main reasons: assess and report on their contribution to the interest in understanding and managing transition toward a low-carbon economy. their contribution to both the low-carbon economy transition risk and international ▪▪ The research assesses the metrics that can be climate policy goals. In the lead-up to the used to assess a bank’s contribution to the cli- United Nations climate change conference (COP mate solution or problem. We categorize the 21) in Paris in 2015, many of the world’s larg- existing metrics into greenhouse gas (GHG) est public-sector and commercial banks made accounting, green or brown, and sector- commitments related to climate change mitiga- specific metrics; compare these metrics; and tion and adaptation. They included statements of make recommendations for choosing metrics climate policy support and commitments to either by asset class. decrease the financing of “climate problems” (e.g., Different metrics are appropriate for differ- coal mines) or, more often, increase the financing ▪▪ ent asset classes and/or activities, so banks of “climate solutions” (e.g., renewable energy). At may wish to report using a variety of metrics the same time, the Paris Agreement and initia- to cover all their relevant asset classes and tives such as the Financial Stability Board (FSB) activities. Task Force on Climate-Related Disclosure have increased attention to the potential financial Banks should consider the criteria of com- risk associated with climate problems (known as ▪▪ pleteness, context, fair share, and transpar- carbon asset risk, transition risk, or simply carbon ency when evaluating and choosing metrics to risk) and the potential opportunity associated assess climate progress. with contributing to climate policy goals through financing climate solutions. Banks should report on activities related to ▪▪ climate problems in addition to climate solu- Transition risk and climate policy goals tions to enable full understanding of their lead to two parallel objectives for financial contribution to the low-carbon transition, institutions, with potentially overlapping management strategies. Risk and/or opportu- In spite of evolving climate progress assess- nity management is seen as a business objective, ▪▪ ment practices, banks should still measure while contributing to climate policy goals—for and disclose metrics on climate progress example, by supporting the transition to the low- and tracking performance. Meaningful and carbon economy—is seen as a broader societal practical metrics are currently available for objective. The latter management strategy is numerous asset classes, and banks can im- defined in this paper as climate progress. prove their approach over time as more useful metrics become available.
Exploring Metrics to Measure the Climate Progress of Banks 1 About this Report This paper was prepared by the follow- ing PCI partner organizations: 2 Degree This publication is part of a series by the Investing Initiative (2dii), the United Portfolio Carbon Initiative (PCI). It aims Nations Environment Programme Finance to inform the ongoing debate about how Initiative (UNEP-FI), and World Resources public- and private-sector banks should Institute (WRI). Representatives from banks assess and report on the climate progress and other stakeholders provided feedback on of their portfolios. It builds on a multistake- a draft of the paper. See Annex B for a list of holder process that, in 2013, began to standardize reviewers. the accounting of Scope 3 “financed emissions” (see Annex A). During that process, some finan- The most useful approach to assess the cial institutions questioned the meaningfulness climate progress of a bank will vary, and practicality of the financed emissions metric. depending on the type of bank and the To respond to these concerns, PCI partner orga- range of services it provides. In addition, the nizations agreed to perform a broader assessment importance of climate progress considerations of the various metrics available to help financial varies depending on the bank’s mandate, the institutions report on their impacts on climate regulatory and political environment it oper- change and their contributions (both negative and ates in, and the level of pressure from external positive) to the transition toward a low-carbon stakeholders to take action on climate. In general, economy. This paper follows a 2015 sister publi- commercial and cooperative banks have as their cation for investors: Climate Strategies and Met- main business objectives delivering value to their rics: Exploring Options for Institutional Inves- customers and shareholders, whereas public- tors. Both these papers are based on a broad PCI sector banks may also be subject to public policy review of the metrics that financial institutions objectives and mandates. Thus, for commercial are using to publicly report on climate progress. banks, the specific business driver for pursuing climate progress (as opposed to risk manage- This paper categorizes the relevant met- ment) may be less clear. For such institutions, rics for assessing the climate progress of managing climate progress may be more related banks, provides a comparison of these to reputational management and stakeholder metrics, and provides recommendations engagement through traditional corporate social for choosing metrics by asset class. The responsibility activities such as disclosure and paper does not include guidance on how to collect reporting. However, an emerging driver for many data and calculate results using the various met- banks is the business opportunity represented by rics discussed. The development of new metrics rapidly growing sectors that are contributing to was also not in scope of this paper, but it does the energy transition, such as sustainable trans- identify limitations of available metrics and areas portation and renewable energy. for needed further research. Further, this paper does not address the objective to manage climate A discussion of bank climate progress asset risk, although some strategies and metrics must begin with an understanding of the to address these two objectives are overlapping. exact roles that banks play in the broader The topic of carbon asset risk was covered in economy. Such services can largely be classified another PCI paper: Carbon Asset Risk Discussion into four categories: Framework, published in August 2015. Retail banking: banking services targeted at The primary audiences for this paper ▪▪ individual consumers rather than companies are commercial banks and government- or other clients, including consumer lending associated banks such as development (credit and debit cards, automotive loans) and finance institutions (DFIs). These banks mortgage finance, as well as savings products, may be of all sizes and located in all regions. deposits, and custodian functions. Other intended audiences are governments, nongovernmental organizations (NGOs), and ▪▪ Corporate banking: a class of services sim- academics interested in understanding how ilar to retail banking but targeted at corporate they can advance banks’ efforts to improve their clients, including corporate loans and other climate progress. credit products (e.g., lines of credit, letters of credit), financing for projects, equipment leasing, and commercial real estate activities.
2 Portfolio Carbon Initiative Investment banking: services performed Standard and Green Bond Principles). Disclo- ▪▪ by banks but relating to investment markets sures are likely to be more meaningful when the and traded securities, including underwriting, use of financing is known. Finally, practicality of securitization, and advisory and merger and accounting considerations (e.g., double count- acquisition (M&A) services. ing) and the question of what stakeholders desire from bank climate progress disclosure are also Investment and asset management important. ▪▪ services: the management of investment portfolios for individual or institutional clients, including wealth management and Reviewing Existing Metrics institutional brokerage. Using the recommended scope of relevant banking activities, this report reviews the Scoping considerations: This report sug- existing landscape of climate progress gests the following asset classes as a rea- metrics for banks and assesses the relative sonable scope for commercial banks to merits of these different metrics.The first consider when measuring their climate step was a review of existing reporting by 35 large progress: banks (14 development banks and 21 commercial banks, chosen using a combination of global size financing for projects; ▪▪ rankings and process participation). This review corporate lending to climate-related sectors; found three main categories of metrics currently ▪▪ being disclosed by intermediaries (Figure ES-1): securities underwriting in these sectors; ▪▪ ▪▪ GHG accounting approaches, which include ▪▪ mortgages and auto loans; and project accounting and financed emissions. asset management services. Other sector-specific energy and carbon ▪▪ ▪▪ metrics. Because banks are diverse, proper scoping of an accounting and reporting exercise is key to Exposure-based green or brown metrics such ensuring clear and meaningful reporting. On the ▪▪ as counts, percentages, and currency values, one hand, the financing provided by public banks, which measure the relative share of “green” particularly development banks, is generally or “brown” activities within a portfolio. fairly uniform. Many public banks invest primar- ily in development projects and local financial These three types of metrics are described further institutions rather than performing the diversity in Table ES-1. of intermediation services provided by universal GHG accounting approaches: Two types banks. The situation is more varied in commer- of GHG accounting approaches are rel- cial banks, with different institutions taking part evant to financial institutions: project in different activities and with different levels GHG accounting and “financed emissions” of emphasis. This diversity makes measuring estimations. Corporate GHG accounting—for climate progress more challenging at the group example, the GHG Protocol Corporate Standard— level (i.e., across all business activities) for such is less relevant because it covers only financial banks. That said, measurement and reporting at institutions’ operations and not their investment an asset-class level can be practical and can be and financing activities. meaningfully compared across institutions using common metrics. Project-level GHG accounting uses meth- ods set forth by the GHG Protocol Project Within the recommended scope, banks Protocol, Clean Development Mechanism, should assess all the activities that are or other methodologies (UNEP-FI et al. relevant to their business. However, several 2015; GHG Protocol Project Protocol 2005). The additional considerations are important. First, method accounts for the net GHG emissions or the different roles banks play in the economy reductions from a baseline scenario based on can have different effects on climate problems project-level GHG accounting. Within the finan- and solutions. Further, depending on the type cial sector, this method is currently being used of financing, banks may not know exactly which most actively by multilateral development banks activities are being financed (e.g., the concept of to assess the avoided emissions associated with “use of proceeds” in the GHG Protocol Scope 3
Exploring Metrics to Measure the Climate Progress of Banks 3 Figure ES-1 | Number and Type of Metrics Currently in Use by Public and Commercial Banks
Commercial Bank DFI o ntin avoi e finan e e i ion
e tor e ifi ner Carbon
Per enta e
Green/ Brown Co nt Metrics
C rren ba e
Co nt of etri Source: WRI and UNEP-FI 2015.
financed projects. entire portfolio and used for various asset classes. The calculation of financed emissions does have The concept of financed emissions has several unresolved questions, including how to been in active development in both bank- allocate emissions from an investee to the inves- ing and investing circles since at least tor for different asset classes; a lack of clarity 2005 (2dii 2013). Financed emissions can be on whether to account for annual or lifetime defined as the portfolio-level aggregation of GHG emissions of an investee; lack of consistency on emissions associated with a portfolio’s underlying accounting across scope 1, 2, and 3 emissions entities or projects. The GHG Protocol Corpo- of investees; and double counting of emissions rate Value Chain (Scope 3) Standard provides across banks and within a bank. Additionally, due requirements and guidance to account for such to data availability issues for underlying investees, emissions from selected asset classes, notably emissions for some investees or counterparties for equity investments, debt investments with a may need to be estimated using techniques that known use of proceeds, and project finance. The can produce a high level of uncertainty at investee key distinction between project-level accounting level. The Scope 3 Standard offers guidance on and financed emissions-based approaches is that many of these issues, recommending reporting on financed emissions approaches allocate the GHG proportional GHG emissions from investees due emissions of investees proportionally to different to activities in the reporting year. investors or financiers based on their financial stake in the project or investee. For example, Green or brown exposure metrics. Compared if a project emits 1,000 tons of carbon dioxide to other approaches, the use of green or brown
(CO2)/yr. and is owned equally by two banks, the metrics in existing bank disclosures is quite high financed emissions allocated to each bank are 500 (Figure ES-1), particularly among commercial
tons of CO2/yr., whereas the project emissions are banks. The majority of disclosed metrics tend to
1,000 tons CO2/yr. be measured either in terms of financial exposure (e.g., $, €), counts of projects or activities identified Financed emissions, when aggregated to as either “green” or “brown,” or as ratios (most often the portfolio level, can show a broad pic- green: total or, more rarely, brown: total). If they are ture of the portfolio’s exposure to underly- to be useful, such metrics must gain widely accepted ing investee emissions. This is because one agreement on what constitutes “green” and “brown.” metric can be applied and aggregated across an
4 Portfolio Carbon Initiative Table ES-1 | Climate Progress Metrics
CATEGORIES SPECIFIC DESCRIPTION OF METRICS TYPES OF METRICS Greenhouse Gas Corporate accounting Corporate-level tracking of annual GHG emissions related to a company’s Accounting operations Project accounting Estimating net GHG emissions or emission reductions from projects relative to a baseline scenario Financed emissions (Generally) portfolio level aggregation of GHG emissions associated with a portfolio’s underlying entities or projects, allocated proportionally, based on financial stake in the underlying entity or project Green/Brown Exposure-based Metrics that measure climate progress of a project, activity, or asset class Metrics in terms of exposure in financial terms such as $ invested in green energy, counts such as number of energy star buildings in a real estate portfolio, or percentages such as % car loans to hybrids. Metrics could also be ratios such as $ invested in hybrids or total $ invested in cars Sector-Specific Physical unit-based (e.g., Metrics that are specific to a sector and expressed in absolute units Energy and kWh, ft2, km, etc.) (e.g., kWh generated) or intensity units (kWh/ft2). Metrics can also Carbon Metrics be expressed in ratios such as KWh from green energy or total Kwh generated from power generation
Source: Authors.
Today, such metrics are commonly used to report on financial assets with known use of proceeds (e.g., a portfolio’s exposure to green technologies, notably financing for projects, green bonds, and project renewable energy and green-labeled assets (e.g., bonds) represent the most practical and meaning- Leadership in Energy and Environmental Design ful uses of financed emissions and/or project- [LEED] buildings). Reporting on the “brown” level GHG accounting, as the underlying activity portions of portfolios is more limited. to be accounted for is clear. Reporting the results of such accounting in either absolute (i.e., project Sector-specific energy or emissions met- GHG accounting) or proportional (i.e., financed rics. A third type of metric, less used currently, emissions) terms can be relevant. Either way, it involves reporting sector-specific energy and/or is particularly important to disclose whether the emissions metrics in either absolute terms (e.g., metric represents total (e.g., project-level) or kilowatt hours [kWh] saved by projects, mega- proportional (e.g., financed) emissions. watts [MW] installed) or ratio terms (e.g., CO2/ kWh of power clients). Such metrics are poten- The main advantage of GHG accounting tially highly meaningful, since a key performance approaches is that a single metric can be indicator (KPI) can be derived for each sector or used to encompass an entire portfolio technology in the most relevant terms. Based on rather than just segments of the portfolio. the institutions reviewed for this paper, a striking This applies at the asset class level; multi-asset split was observed between commercial banks, portfolios are more difficult. Therefore, taking a who reported primarily “green” metrics and DFIs, broad financed emissions approach can also be who reported both “brown” and “green” energy useful for banks that are primarily interested in and GHG metrics. getting a broad picture of their overall exposure to GHG emissions and have a tolerance for using Comparing Existing Metrics non-investee-specific, averaged data. The GHG Protocol Corporate Value Chain (Scope 3) Stan- Table ES-2 summarizes the pros and cons dard’s requirements for accounting for emis- of the different metrics in terms of bank sions from investments are consistent with these reporting on climate progress. Each type findings. of metric may be appropriate for different types of banking assets and transactions. In general, On the other hand, green:brown ratios can
Exploring Metrics to Measure the Climate Progress of Banks 5 track both “green” and “brown” exposures if you represent 20 percent of a $10 million with relative practicality. They can apply syndicated loan.) to investment banking services (e.g., advisory, underwriting) as well as on–balance sheet assets, Transparency: Information should be and can provide sector- and asset-specific nuance ▪▪ provided on the key assumptions and meth- when designed correctly. Their credibility and odologies used to assess climate progress so meaningfulness as disclosure metrics, however, the reader knows how to use the information depend on three critical needs: and its limitations.
contextualization (both between “green” and The emergence of regional dialogues is an ▪▪ “brown” categories, relative to overall port- important recent trend in bank climate folio levels, and relative to economy-wide progress tracking. There are several reasons averages); why a regional approach makes sense. First, some types of stakeholders (e.g., responsible inves- the use of clearly defined taxonomies of what tor groups) can be regionally based and may be ▪▪ constitutes “green” and “brown”; and interested in different types of disclosed metrics, including the relative focus on climate-related the need for complete reporting covering both risks vs. climate progress. Further, financial ▪▪ “brown” and “green.” regulation can vary by market, driving differences in confidentiality requirements and peer group Conclusions practices. Finally, given different resource endow- There is likely no universal approach to ments, development levels, and existing energy how to best measure the climate progress systems in different countries, relatively green of banks, but general considerations can practices in one location may not necessarily be guide the way. The broad stakeholder engage- generalized to other markets. ment that contributed to this report suggests that some agreement can be found on a set of decision Benchmarks and roadmaps are urgently criteria that should guide banks in their climate- needed to address one of the main weak- progress reporting. Such criteria can be summa- nesses of all existing metrics, which is rized as follows: their inability to contextualize “how much is enough.” In other words, how little “brown” Completeness: Reporting should include all or much “green” must a bank’s portfolio have to ▪▪ material parts of the bank’s business, nota- ensure that it is doing its part for the achievement bly including all parts of the bank financing of global climate policy goals? Such benchmark- climate-relevant activities and the financing ing is currently possible in certain asset classes of both climate “problems” (e.g., coal-fired (e.g., listed equity and corporate bonds based on power plants) and “solutions” (e.g., renewable the EU-funded Sustainable Energy Investment energy). Current reporting practices often Metrics project) for certain sectors. There is a focus much more, sometimes exclusively, need for science-based targets and benchmarks on “green” activities with little disclosure of that show, by asset class and transaction type, high-carbon financing as specifically desired how “green” or “brown” different portfolios can by many stakeholders. be while still meeting the needs of the global energy transition. Research is under way by vari- Context: Where possible, metrics should be ous organizations to create such benchmarks and ▪▪ compared to values outside the bank’s port- road maps for financing the transition. Tools are folio, such as ratios in the regional economy already available for many asset classes, including and required financing to meet global policy listed equity, corporate bonds, and real estate. goals.
Fair share: When banking activities occur Recommendations ▪▪ in syndicates, reporting should be based on Different metrics are appropriate for different “fair share” of the activity, for both climate ▪▪ asset classes, or activities, or both, so banks problems (banks shouldn’t be saddled with may want to report using a variety of metrics lifetime emissions of a coal plant if they were to cover all their relevant asset classes and only part of an underwriting syndicate) and activities. solutions. (Don’t claim $10 million of “green”
6 Portfolio Carbon Initiative Table ES-2 | Pros and Cons of Different Climate Performance Metrics
DESCRIPTION APPLICATION PROS CONS & EXAMPLES GHG Cross-sector ▪▪ Connecting the dots ▪▪ Broad information on ▪▪ Emissions data availability Accounting portfolio-level between portfolios carbon emissions of ▪▪ Inability to track “green” Approaches assessment of and GHG emissions sectors and portfolios activities directly investees’ exposure in the real economy ▪▪ Directly measures (except through avoided to GHG emissions ▪▪ Project finance contribution of emissions accounting) such as financed screens (e.g., lifetime each transaction (if ▪▪ Lack of accounting emissions (a bank’s GHG emissions > 50 proportional, i.e., for standard and agreement scope 3 emissions) Mton) financed emissions) on some measurement ▪▪ Public communication ▪▪ Metric works across issues & reporting, sectors and asset ▪▪ Data availability and particularly for assets classes, thus enabling confidentiality issues with known use of portfolio-level outside listed companies proceeds reporting and projects ▪▪ Difficult to apply to off– balance sheet services Sector- Sector-specific ▪▪ Measuring sector- ▪▪ Sector- and asset- ▪▪ Only applicable for a Specific physical unit metrics level climate specific indicators can number of key sectors Energy/ expressed in performance provide nuance and ▪▪ No obvious way to Carbon absolute units (e.g., ▪▪ Comparing portfolio context aggregate data across Metrics kWh generated) or performance to ▪▪ Benchmarks possible sectors or assets and/or intensity units (kWh/ economy-wide for transition (e.g., 2°C transactions ft2) averages scenarios) Green / Taxonomies ▪▪ Tracking both ▪▪ Ability to track both ▪▪ Controversial Brown distinguishing “green” and “brown” “green” and “brown” technologies and Metrics between activities financing in the ▪▪ Exposure metrics easy taxonomies (e.g., are and technologies that context of portfolios to track natural gas, nuclear, are climate solutions ▪▪ Tracking and ▪▪ Applicable to off– CCS, biofuels “green” or (“green”) and climate reporting for any balance sheet services “brown”?) problems (“brown”) transaction or asset and on–balance sheet ▪▪ Lack of standard type, including assets taxonomy services
Source: Authors.
To fully understand a bank’s contribution to A green or brown metric is recommended ▪▪ the low-carbon transition, there needs to be ▪▪ when a bank wants to understand both its more comprehensive reporting on activities significance of exposure to climate solutions related to climate problems in addition and problems in relation to each other. to climate solutions. Banks should not be reporting on their contribution to climate ▪▪ The current discussions on the climate prog- solutions without also reporting on their ress of banking exhibit strong regionality. contribution to the climate problem. Therefore, the best selection of accounting and reporting metrics may vary regionally. Peer Banks should consider the criteria of comparisons and stakeholder outreach can be ▪▪ completeness, context, fair share, and important aspects for performance tracking. transparency when evaluating and choosing metrics to assess climate progress. Most importantly, in spite of evolving ▪▪ climate-friendliness assessment practices, GHG accounting approaches, including proj- banks should not wait to begin measuring ▪▪ ect emissions and financed emissions, are the and disclosing metrics on climate progress most useful for asset classes when the use of and tracking performance. Meaningful and proceeds is known. Financed emissions may practical metrics are currently available for also be useful to provide a high-level picture numerous asset classes, and banks can im- of a bank’s exposure to emissions. prove their approach over time as more useful metrics become available.
Exploring Metrics to Measure the Climate Progress of Banks 7 INTRODUCTION & CONTEXT
1.1 Background SUMMARY OF Climate change is an increasingly prominent MAJOR POINTS issue for banks. In the lead-up to the United ▪▪ Climate change and the transition to a low- Nations Framework Convention on Climate carbon economy are increasingly prominent Change (UNFCCC) Conference of Parties (COP issues for banks, which provide much of the 21) in Paris, many of the world’s largest public- external financing needed for the transition sector1 and commercial banks made commit- (either directly or indirectly through securities ments related to climate change mitigation and underwriting). adaptation, including statements of climate ▪▪ Banks can have two primary objectives for policy support as well as commitments to either estimating their contribution to climate change decrease the financing of “climate problems” (e.g., and the low-carbon transition: carbon risk and coal mines) or increase the financing of “climate opportunity (a business objective) and climate solutions” (e.g., renewable energy). As just one progress (broader societal considerations). The appropriate metrics to track, use, and potential- example, a set of 23 public and commercial banks ly report on each objective are likely different. signed a set of five voluntary principles to “main- stream climate action” within their institutions ▪▪ Public banks and commercial banks differ in the in December 2015 and included risk manage- primary reasoning for assessing climate progress, 2 with many public banks having an explicit or im- ment and climate progress tracking objectives. plicit climate mandate, while commercial banks At the same time, increasingly ambitious climate may be driven more by commercial and possibly mitigation policies, including a reaffirmation of reputational issues. Both may pursue long-term the global goal to limit warming to well below 2°C business opportunities in the transition to the (and to strive for 1.5°C), have further solidified low-carbon economy. the potential financial risk associated with climate problems (alternatively referred to as carbon asset risk, transition risk, or simply carbon risk) and the potential upside or opportunity associ- ated with financing climate solutions. These two concepts can be referred to as climate progress and carbon asset risk, respectively (2dii et al. 2015), and are further explained below. Purpose The purpose of this report is to inform the ongoing debate about how banks (public and private) should assess and report their contributions, both positive and negative, on climate change. The report represents the outcome of a multistakeholder process that is summarized in more detail in Annex A, originally called the Financed Emissions Initiative (FEI) and later renamed the Portfolio Carbon Initiative (PCI). Importantly, this report represents the third sister report in a series through the PCI, with the first two reports focused on metrics and strategies for institutional investors (2dii et al. 2015) and managing carbon asset risk (UNEP-FI and WRI 2015), henceforth referred to as Inves- tor Report and Carbon Risk Report, respectively, or sister reports, collectively. Throughout this
8 Portfolio Carbon Initiative BOX 1. DISTINGUISHING BETWEEN THE REPORTING OF BANKS’ CLIMATE PROGRESS AND BANKS’ GREEN FINANCING
Climate progress and green financing are financing without doing so on The concept of climate progress frequently used interchangeably, but all the other financing, including of banks can address these two even if they are linked and do overlap, the potentially “brown” financing shortcomings by going beyond the they have important differences. provided. This means that they fall transaction level and covering the short of enabling a full reflection bank’s entire portfolio, including The concept of green financing, as of the bank’s overall financing as full sector exposure and the entire currently applied in the reporting it pertains to GHG emissions and balance sheet (also including, at least in practices of banks, focuses on decarbonization pathways and principle, the bank’s off–balance sheet the transaction level and typically therefore fail to comply with the operations). Climate progress can go encompasses all transactions that important Completeness principle of beyond measures of the volume of enable financial flows toward assets sound reporting. green financing provided and look at the (companies and/or projects) that qualify entire portfolio to gauge the financial as being of a low-carbon nature (for the • Second, applicability of the concept institution’s degree of alignment with sake of this exercise, the concept of of green financing is limited to a low-carbon economic transition “green” and sustainable development is sectors where technological and/ across all relevant sectors. As such, it reduced to the concept of low-carbon or infrastructural taxonomies of would comply with the completeness development). The financing of such green versus brown technologies requirement of sound disclosure and assets can undoubtedly be considered are themselves meaningful or allow for a full and fair assessment supportive of, or conducive to, a feasible. This includes the important of a bank’s climate-related behavior low-carbon economy, yet there are electricity generation sector (albeit and impact. This report proposes a generally two major shortcomings in with certain caveats) but excludes wider range of sector-tailored metric banks’ reporting on green financing: other sectors (or subsectors) families, including green/brown metrics, that are significant in terms of GHG emissions and intensity metrics, • First, these reports are incomplete GHG emissions and low-carbon and others that can be used for this because they are selective and development, such as airlines, purpose. provide transparency on green cement, and car companies.
report, these reports will be cited heavily, and cer- Practicality: How easy is it to get underlying tain topics will be covered in less detail here due data? How complete are such data? Are there to their expanded coverage in the sister reports. regulatory constraints?
As described in greater detail in Annex A, the Meaningfulness: Does the metric communicate PCI stakeholder process did not produce enough the real-world effects of the financing decision? agreement on critical issues to produce a common Can it be used for internal decision-making? Is standard reporting framework for bank climate it comparable across banks with different busi- progress (but it may be a first step in working ness models? Does it measure both “brown” and toward this goal in the future). Likewise, this “green”? report does not attempt to present any single best way to measure and report on bank climate Applicability: Which metrics are applicable to progress. In fact, given the issues discussed in which asset class, or transaction type, or both? chapters 2 and 3, it may not be possible to define The report is structured around a set of key any single best approach given the immense vari- questions: ability among different types of banks, banking activities, and individual institutions. Instead, What are the business drivers for banks to the report reviews the available metrics and ▪▪ consider the effects of their activities on cli- approaches for measuring the climate progress of mate change? (Chapter 1) banks, assessing each with respect to three main criteria: What roles do banks play in financing the ▪▪ economy, and how can these different roles affect climate change?( Chapter 2)
Exploring Metrics to Measure the Climate Progress of Banks 9 What are the metrics that can help inform scale decarbonization. As discussed in the ▪▪ and track the climate progress of banking Carbon Risk Report, the materiality of carbon activities, and what are their strengths and asset risk may be lower for short-term lend- weaknesses? (Chapter 3) ing portfolios than equity portfolios due both to their position in the capital stack and the ▪▪ Given the available approaches and metrics often shorter-term nature of lending relation- and their strengths and weaknesses, what ships (UNEP-FI and WRI 2015). principles can be applied today; and how can actions best be reported? What does the The climate progress objective stems future hold? (Chapter 4) ▪▪ from a broader societal objective, sug- gesting that some banks may seek to con- 1.2 Defining the tribute to GHG emissions reductions and the transition to a low-carbon economy in Business Objective response to internal or external pressures Financial institutions can have at least that go beyond risk management. These could two distinct climate-related objectives.3 include the bank’s mission, its external man- As discussed in previous reports, these objectives date, corporate social responsibility consid- likely have different, but potentially overlapping, erations, and reputational concerns. Impor- management strategies. These include the following: tantly, climate-friendly financing strategies will not necessarily lead to GHG emissions The carbon asset risk or climate oppor- reduction impacts in the real economy (chap- ▪▪ tunity objective stems from a business ter 2). Thus, this report distinguishes between objective, suggesting that the transition to a a bank’s climate progress, its intended contri- low-carbon economy may create financial risk bution to the transition in the real economy, and/or investment opportunities for financial and climate impact, the actual contribution institutions. These risks and opportunities are to climate mitigation in the real economy, and driven by changes in climate policies, the as- focuses on the former as the most feasible sociated economic value chain, changes in the proxy for the latter. relative economics and viability of different technologies, and public- and private-sector These two topics (carbon asset risk and climate investment decisions. In December 2015, progress) are often discussed interchangeably, nearly 200 countries adopted the Paris Agree- and some metrics (e.g., green or brown metrics) ment, the first-ever universal climate agree- may at least partially be used to measure and ment that seeks to “strengthen the global manage both of them. In reality, though, they response to the threat of climate change by are quite distinct issues that in most cases will keeping a global temperature rise this century require different measurement and management well below 2 degrees Celsius above pre- strategies. This is because the climate progress of industrial levels and to pursue efforts to limit an investee or a portfolio of financial holdings is the temperature increase even further to 1.5 a necessary but insufficient criterion for assess- degrees Celsius.” This gives a clear long-term ing risk exposure, which is a function of climate signal that investment decisions should be progress as well as many other characteristics like taken in the context of this long-term decar- market positioning, geography, pricing power, bonization signal (zero net emissions in the and future plans of the investee and asset class later part of this century). However, despite and tenor of the financial instrument (2dii 2015; recently increasing ambition in climate policy UNEP-FI and WRI 2015). arising from the 2015 Paris Agreement, the This report focuses on the measurement near-term materiality of this risk for inves- and reporting of climate progress rather tors is still unclear, and this near-term view than carbon asset risk. This distinction is drives most financial decision-making despite by design and due to two primary reasons: first, the clear long-term risks of climate change.4 because metrics and management techniques Short-term risk will depend on portfolio are distinct in each, and second, because several composition, the expected time frame of these reviews of carbon asset risk have recently been risks, portfolio diversification effects, and published (UNEP-FI and WRI 2015; CDC Climat underlying assumptions about public policy Recherche 2015; Bank of England 2015). and technological progress to drive large-
10 Portfolio Carbon Initiative Table 1 | Typology of Major Types of Banks
COMMERCIAL BANKS COOPERATIVE PUBLIC BANKS BANKS Owners Institutional investors/individual Depositors/members Municipalities, states shareholders
Major Bank Types Investment banks, retail banks Cooperative banks, Savings banks, national and regional credit unions public banks, development banks, export-import banks Main Customers Corporate and institutional clients, SMEs, households, and projects small and medium-size enterprises (SMEs), households Geographic Scope National and international Regional for cooperatives and savings banks + national and international for development and export-import banks
Business Revenue, profit, shareholder value, Customer value Customer value and policy Objective customer value objectives
Source: Authors, based on Deutsche Bank 2013.
Nonetheless, it is not always easy to distinguish 1.3.1 Public Banks fully between these related but distinct objectives. Some public and development banks and inter- For instance, many public banks perform climate national financial institutions (IFIs) have climate progress type calculations as part of an envi- mitigation or adaptation explicitly in their man- ronmental and social risk management process. dates, and others include climate-related criteria Similarly, many commercial banks engage with as part of an implicit mandate or policy objective interested stakeholders (e.g., civil society, inves- adopted by governance bodies (NCI et al. 2015). tors, regulators) on both climate progress and car- Here are some examples: bon asset risk issues simultaneously. The report focuses on the assessment of climate progress In France, the Banque Publique d’Investissement while addressing risk-related issues where they (Public Investment Bank), created in 2012, has are relevant and directly connected. It should also a specific mandate to finance the “ecological be noted that climate progress is often equated transition” (Art. 1). While not a bank per se, the with green financing, but this report argues that French Pension Fund (Fonds de Réserve pour les they are fundamentally different (see Box 1). Retraites, FRR) “report[s] on the way the general guidelines of the Fund’s investment policy took 1.3 Typology of Banks into account social, environmental and ethical The relative importance of climate progress considerations.” considerations, as well as the specific perfor- The German Kreditanstalt für Wiederaufbau mance objectives of a bank, will vary depending (KfW) Group has a mandate focused more on the type of bank and its mandate—particularly broadly on environmental protection and, for whether the bank is partially or wholly publicly distinct business areas on development, export owned. Table 1 shows a basic typology of major finance or support of small and medium enter- types of banks, including commercial, coopera- prises (SMEs), respectively (KfW 2013, Art. 2.1). tive, and public banks. Although all banks will have as their main business objectives delivering The United Kingdom created a national Green value to their customers and shareholders, public Investment Bank (GIB) in 2012 with a specific banks may also be subject to public policy objec- climate and environmental mandate. From 2015, tives and mandates. the GIB will also invest internationally.
Exploring Metrics to Measure the Climate Progress of Banks 11 decisions. Since 2005, IFIs have been individually BOX 2. INTERNATIONAL devising approaches to report on the climate FINANCIAL INSTITUTION progress of their investments and account for (IFI) GHG ACCOUNTING the climate benefits of certain types of financing HARMONIZATION decisions, with attempts to standardize these PROCESS approaches bearing fruit in 2012 (Box 2). 1.3.2 Commercial Banks In 2012 a group of 13 IFIs came together to formalize “Brown” Financing their collaboration and harmonize their approaches to project-level accounting for estimating GHG Banks have a rich history of stakeholder engage- emissions reduced or avoided and to establish ment on environmental and climate-related minimum standards for climate-related accounting and issues. Often, such engagement has focused on reporting. Carbon accounting issues had begun to be quantifying the financing of climate problems discussed much earlier around IFI consultations on (“brown” technologies), for reasons related the Equator Principles and environmental and social to both environmental risk management and risk management practices. Because the framework broader societal responsibility. Some initiatives applies only to finance for projects, project-type specific to the finance sector have occurred for GHG accounting is performed whereby the emissions associated with the project are measured relative “brown” financing, notably the Equator Principles 5 to a baseline scenario that generally reflects either on financing for projects launched in 2003, no action or the prevailing market conditions in the which require participating banks to adhere to country or region. In late 2015, the group released common environmental and social performance sector-specific guidance for the accounting of GHG management measures, including public report- emissions reduced or avoided in three sectors: ing on projects that generate more than 100,000 transportation, energy efficiency, and renewable tons CO2e/yr. in emissions. electricity (IFI 2015). The IFI process is revealing: It took several years to standardize such accounting However, given that most commercial banks are and reporting even for a relatively homogeneous and publicly listed companies themselves, a signifi- “public-interest-driven” constituency. Several interim cant amount of engagement on “brown” financing steps were involved, including agreement on a common assessment and reporting has occurred through set of definitions for climate relevance or friendliness broader environmental performance and disclo- and methodologies for calculation, particularly with sure initiatives that are not specific to the finance regard to the baseline. As IFIs come under increasing industry. These include the Carbon Disclosure scrutiny for their climate relevance, advancements in Project (CDP), the Global Reporting Initiative extra-financial disclosure as well as standardization of this disclosure, will likely evolve from the current (GRI), and national GHG emissions registries in focus on “green” to a more comprehensive view of some countries. Particularly important to this the portfolio that includes “brown” activities. The broad history was the development of the concept harmonization is also likely to extend to commercial of “financed emissions”—emissions attributed to IFIs and rating agencies, as investors demand more a specific financial position in a GHG-emitting transparency and disclosure. project or company, or aggregated to portfolio level. The history of such accounting has been documented previously (2dii 2013) and is sum- marized in Box 3 and illustrated in Figure 1. Climate assessment often takes place as part of the larger environmental, social, and governance “Green” Financing (ESG) risk assessment, which is itself part of In addition to stakeholder demands for disclosure a variable decision-making process specific to on financing of “brown” technologies, many com- the bank in question. As an example, while the mercial banks have made public commitments World Bank’s guiding principle is to alleviate with respect to their financing of climate solu- poverty, it also has stated goals to increase tions (“green” technologies). Such commitments access to sustainable energy, leading to a balance are becoming widespread, as illustrated in Box between cost effectiveness and climate protection 4. This is a rapidly evolving area of bank activ- in project assessment and development (NCI et ity, and the examples below, although far from al. 2015). In responding to such mandates, IFIs exhaustive, show some of the characteristics of have built up a rich history of accounting for the such commitments. GHG emissions associated with specific financing
12 Portfolio Carbon Initiative BOX 3. FINANCED EMISSIONS AND GHG PROTOCOL SCOPE 3 HISTORY
In the past 10 years, about 20 developed a similar bottom-up • Adoption of the Scope 3 Standard. different calculation methodologies approach focused on the ownership Financed emissions were included as have been developed to assess GHG of fossil-fuel reserves. a category (Category 15) of Scope emissions related to investments. Most 3 emissions in the GHG Protocol approaches rely on the application of • Innovation from equity managers. At Scope 3 Standard in 2011. Coverage standardized greenhouse gas accounting the same time, two equity managers is largely limited to debt with methodologies (based on the GHG (Henderson Global Investor and known use of proceeds (namely, Protocol), specifically applied to carbon- Pictet AM) commissioned Trucost project finance and similar loans) intensive projects (power plants, oil and Inrate to estimate the carbon and significant equity investments, and gas projects, etc.). The application footprint of equity funds for research although optional reporting can be at portfolio level is more recent and and marketing purposes. At the made for generic debt instruments originates from four parallel trends: time, the Carbon DIsclosure Project and small equity investments. A (CDP) was still in its infancy. Given desire to provide more detailed • Reaction to nongovernmental the lack of standardized reporting guidance on the Scope 3 category organization (NGO) pressure. In the and its aim to include supply chain led to the launch of the Financed mid-2000s, environmental NGOs, emissions, the CDP developed top- Emissions Initiative, which later such as World Wildlife Fund and down approaches, mostly based on became the Portfolio Carbon Platform, developed assessment input-output macroeconomic models. Initiative. methodologies to calculate projects’ Over the years CDP data have been footprints as part of their campaign used by other equity managers (to • Investor commitments in the lead-up against “dirty” projects. Some banks develop “green” funds), by index to COP 21. In the lead-up to the responded by implementing their providers (e.g., NYSE-Euronext), critical UN climate negotiations in own assessment framework based and consultants publishing fund Paris in 2015, two investor climate on the a ‘bottom-up’ approach. The rankings. More recently, in 2010 and pledges were announced: United consultancy Profundo extended this 2013, respectively, new players— Nations Principles for Responsible approach in 2007 to various types of namely, South Pole Carbon and Bank Investment’s (UNPRI) Montreal financing based on publicly available of America Merrill Lynch—used Pledge focuses on mobilizing data in order to rank banks on the mathematical models to extrapolate investors to measure and disclose the basis of their level of involvement the carbon emissions reported carbon footprint of their portfolios, in the “financing of climate change.” by listed companies to estimate a and the Portfolio Decarbonization NGOs, such as Friends of the Earth, broader spectrum footprint. Such Coalition (PDC), led by CDP and Rainforest Action Network, and data are now available in several UNEP-FI, focuses on decarbonizing Greenpeace and its international mainstream financial databases (2dii portfolios. network BankTrack, have also et al. 2015. “Climate Strategies Source: Adapted from 2dii (2013). commissioned studies. More recently, and Metrics: Exploring Options for the Carbon Tracker Initiative Institutional Investors).
1.3.3 Differences between positioning and signaling (whether and how Banks and Investors ▪▪ an investor publicizes its strategic activities); and The Portfolio Carbon Initiative reviewed climate metrics and strategies for institutional investors a series of performance metrics that can track in the parallel Investor Report (2dii et al. 2015). ▪▪ progress toward improving portfolio climate The study discussed how climate progress strate- progress (including GHG accounting, green gies (see Figure 2) for institutional investors or brown metrics, and qualitative ESG or consist of climate scores).
investment activities (portfolio construction ▪▪ and engagement);
Exploring Metrics to Measure the Climate Progress of Banks 13 Figure 1 | Short History of Financed Emissions
ata a aila le on an marks for metho ologies Bloom erg terminals e metho ologies portfolio le el onl e applications Extrapolation of reporte ata to all liste e uities E uit portfolio after plausi ilit check irect suppl chain emissions
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nfrastructure portfolio footprint E uit fun s ranke on their footprint Bon fun s ranke on their footprint EE Corporate loan ook mo el Bank cross asset metho olog
E uit portfolio scope inclu ing sol pro ucts
Multi assets portfolio cop right free metho olog Cross asset top o n cope ase on alance sheet ata for anks
an E ata pro i ers ottom up tool for anks co ering all liste companies op o n s C footprinting all asset t pes
Car on la el on sa ings pro ucts tool for financial eplo e on pro ucts institutions
P E Banks rankings ase on Pillar e elopment
op o n footprint for anks corporate an so ereign assets
Banks ranke on their fossil fuels financing inclu ing un er riting an asset management
tock exchanges ranke on their o nership of fossil fuel reser es
cope tan ar Pu lishe
inance Emissions nitiati e tan ar i ation
Source: Authors.
14 Portfolio Carbon Initiative BOX 4. GREEN FINANCING COMMITMENTS
The examples in this box show statements how the accounting of such fossil fuel industries as a material the variability of green financing commitments is performed, including risk and in direct conflict with our commitments made public over the such issues as how to add together stated position on the need to reduce last decade by an illustrative sample of different transaction types, how greenhouse gas emissions.” private financial institutions. Generally, multiple counting for syndicate financing most of these commitments take the is treated, etc. • “[D]evelop innovative and scalable form of a total monetary value (e.g., $X solutions that attract new investors Importantly, such commitments are billion over Y years) of financing across and additional capital to clean energy underpinned by a variety of different a variety of banking activities, including and low-carbon infrastructure motivations related to environmental lending, investment management, bond opportunities.” risk management, broader societal issuance, advisory services, and more responsibility, and the mobilization • “[H]elp deploy capital to scale general financing. Such commitments of investors. These quotes are taken up clean energy technologies” can take place within a climate-specific from press releases for the selected and “[P]lay a catalytic role and context or as part of a broader “green” initiatives, respectively, in the table facilitate financial innovations in or socially responsible context, as seen below: clean energy.” by the types of sectors and activities covered in the table below. It is not • “We understand some of our always possible to ascertain from public stakeholders view our financing of
ASSETS/TRANSACTIONS SECTORS/ACTIVITIES COVERED COVERED ANZ Climate • Lending • Energy efficiency in industry Change Statement • Investment services • Low emissions transport (Revised 2015) • Advisory • Green buildings • Other markets transactions • Reforestation • Renewable energy and battery storage • Emerging technologies (such as carbon capture and storage) • Climate change adaptation
Bank of America • Lending • Energy efficiency Environmental • Investment services • Renewable energy and transportation Business Initiative • Capital raising/bonds • Water conservation (Updated 2015) • Advisory • Land use • Developing financing solutions • Waste
Goldman Sachs • Underwriting/financing • Renewables (solar, wind, sustainable hydro, biomass, Environmental • Coinvestment geothermal, advanced biofuels) Policy Framework • Energy efficiency (Revised 2015) • Advanced materials, energy storage, • LED lighting • Electric vehicles • Renewable energy transmission
Exploring Metrics to Measure the Climate Progress of Banks 15 Figure 2 | Summary Figure of PCI Institutional Investors Report Describing Climate Strategies and Metrics for Investors
Source: 2dii et al. 2015.
This framework has several parallels with consid- ing obligations that have not historically erations of climate metrics for banks. Notably, as applied to institutional investors (with the discussed above, many banks (particularly com- exception of insurance companies), although mercial banks) are driven by some of the same institutional investors are increasingly under objectives as investors with respect to tracking such pressures.6 climate progress, including minimizing financial risk associated with climate change and contrib- ▪▪ Reputational risk may be more significant for uting to the transition to a low-carbon economy commercial banks, as compared to investors, for reasons such as mandates and reputational due to consumer choice (i.e., in some markets management. Further, as discussed in the follow- individuals may not be able to choose their ing section, many of the same metrics for tracking pension fund but can choose their bank). climate progress currently used by investors are Banks generally have a larger presence of available to banks as well. ▪▪ non-listed companies and SMEs than their However, there are also several critical differ- equivalent in investment portfolios (e.g., ences between banks and investors with respect equity and corporate bonds). This has two to tracking climate progress. These include the practical consequences that are discussed following examples: further in the next chapter:
Intermediaries act as both asset owners (i.e., □□ Data and confidentiality challenges may ▪▪ financial assets on a balance sheet) as well as be significantly greater for commercial service providers to asset owners and other banks than for institutional investors economic actors through securitization, because financial and environmental data mergers and acquisitions and advisory ser- of counterparties may be private and of vices, underwriting, and asset management varying quality or not subject to regula- services. tory reporting.
▪▪ Most private intermediaries are themselves □□ Comparative benchmarks (e.g., equity listed companies with both financial and indexes) are more widely available for nonfinancial (e.g., Global Reporting Initiative, investor asset classes than for commercial CDP, Dow Jones Sustainability Index) report- lending portfolios.
16 Portfolio Carbon Initiative THE ROLE OF BANKS IN THE ECONOMY AND THE IMPLICATIONS FOR ASSESSING CLIMATE PROGRESS
2.1 How Do Banks Finance SUMMARY OF the Economy? MAJOR POINTS Banks have differing business lines and play ▪▪ Banks play a variety of roles in providing finance many different roles in financial intermediation to the real economy, including direct lending to (matching lenders to borrowers) in the economy. consumers, businesses, and governments; asset This creates many challenges in measuring the management for institutional and individual clients; and securities underwriting. climate progress of banks. Banks may classify their activities differently or have different orga- ▪▪ Through these different roles, banks affect the nizational groupings for them, but in general, the financing of climate problems and solutions in main categories of intermediation can be summa- several ways: direct lending that contributes to climate problems and solutions at the consumer rized as follows: (mortgages, auto loans), business, and govern- Retail banking: banking services targeted ment levels; investment products and practices; ▪▪ and the underwriting of financial securities with to individual consumers rather than com- underlying “green” and “brown” assets. panies or other (institutional) clients. With regard to tracking climate progress, relevant Different types of banks have different business ▪▪ services in this category include consumer models. Given the differences between bank types, transaction and asset class types, and lending (credit and debit cards, automotive the variability across banks, a one-size-fits-all loans, white goods) and mortgage finance. approach to measuring bank climate progress Some “green” savings products are also is unlikely to lead to comparability. Instead, a emerging. tailored approach following common principles, methodologies, and a menu of different metrics Corporate banking: services targeted to specific to different types of banking activities is ▪▪ corporate clients, such as corporate loans and more likely to be meaningful. other credit products (e.g., lines of credit, let- ▪▪ Since most large banks affect the real economy ters of credit), financing for projects, equip- through numerous types of financial instru- ment leasing, and commercial real estate ments and activities, tracking and reporting of activities. The corporate banking category can climate progress across all banking activities is also be thought to include interbank lend- not necessarily relevant. This report focuses on the highest priority areas from the standpoint of ing, which is not included in the scope of this both stakeholder concern and impact: financing report. for projects, commercial lending and securities underwriting for “green” and “brown” technolo- Investment banking: services performed gies, mortgages and auto loans, and wealth ▪▪ by banks relating to investment markets and management. traded securities. Services relevant to climate progress include
Exploring Metrics to Measure the Climate Progress of Banks 17 □□ underwriting debt and equity securities 2.2. How Do These Roles for corporate and government clients (equities and corporate, sovereign, and Affect Climate Problems and municipal bonds); Solutions? □□ securitization of pooled mortgage-backed As seen above, banks play different roles in securities (MBS) and other asset-backed financing economic activity, with varying effects securities (ABS); and on contributing to climate problems and solu- tions. Determining which of these roles is most □□ advisory and merger and acquisition important for funding climate problems and solu- (M&A) services. tions is challenging, and the answer likely varies considerably between banks. For example, retail Investment and asset management and corporate banking activities lend money ▪▪ services: the management of investment directly to households and companies, which may portfolios for individual or institutional produce GHG emissions or reduce them, depend- clients, including wealth management and ing on how the funds provided are used, while institutional brokerage. investment products and investment banking activities can help shift the larger pools of inves- In short, banks provide intermediation by raising tor assets toward climate solutions or contribute funds through retail and wholesale deposits, by to climate problems, depending on how they are issuing equity and debt in the bank itself, by fees directed. Figure 3 provides a schematic illustra- associated with investment banking activities, tion of how the banking roles discussed above and by using these funds to finance loans and relate to the largest areas of climate impact; i.e., provide other credit to individuals, companies highest GHG emissions. The center pie of the dia- and projects, and governments. As a part of this gram shows the shares of global GHG emissions intermediation, the bank holds a certain portion by economic sector, while the outer circle depicts of its financial assets on its balance sheet (notably financial ownership and the three types of roles loans), with other assets held for third parties banks play in financing—loans and mortgages (assets under management, AUM) or as off– held on balance sheets (green), securities sold to balance sheet activities (e.g., financial derivatives investors (blue), and retail investors or private and other financial commitments such as letters ownership (dark gray). A large portion of global of credit), which are beyond the scope of this emissions is due to agriculture, land use, land use report. change, and forestry (AFOLU). However, AFOLU Not all banks take part in all the activities are considered beyond the scope of this paper due described above, and the relative share of each to the fundamentally different nature of economic varies considerably across different banks. Banks activity, GHG emissions, and climate-friendly are categorized above based on the majority of behavior relative to energy and fossil fuels. the bank’s activities. For instance, a bank that As illustrated in Figure 3, the largest shares of primarily performs retail banking services is often global emissions outside of AFOLU are generated referred to as a retail bank, while one that focuses by industry, buildings (both commercial and on investment activities is called an investment residential), and road transportation (notably bank. In some countries, it is common to refer to personal automobiles but also on-road freight). a bank that performs both commercial and invest- These major emissions sources are linked to ment banking activities as a universal bank. both banking balance sheets (through corporate, The financing provided by public banks, par- project, mortgage, and auto-loan books) and ticularly development banks, is generally more to investment banking services through the uniform, given that many invest primarily in securities backing these entities (corporate equity development projects rather than performing the and bonds, mortgage backed securities, ABS). diversity of intermediation services provided by The same logic can be used for “green” finance— universal banks (NCI et al. 2015; CPI 2015). these types of transactions and assets are most important for avoiding emissions through financing “green” rather than “brown” activities— to the extent that the financing structures of
18 Portfolio Carbon Initiative Figure 3 | Schematic of Global GHG Emissions and Financial Intermediary Roles in Their Financial Structure (External Financing Only)
Auto loans Securitized Household ABS equity
Household Road equity transport Mortgages
Private REITs/private homes Not AFOLU/other Corporate credit discussed REITs/ private here Commercial buildings Securitized CMBS
Gov. o ned assets Corporate Industry Securities sold to investors Corp o ned transport credit Government bonds Government loans Intermediary Balance Sheet Corporate bonds Coporate equity Private Private o nership (emissions not Private equity Corporate equty Corporate credit allocated to FI or investor) bonds Corporate equity
Note: Data on financing shares are illustrative only and do not reflect actual ratios. Source: Authors, GHG breakdown based on IPCC 2013.
“green” and “brown” activities are similar.7 Thus, the logic of positive impact or catalytic finance, at its simplest expression and within a strictly stressing that innovative financing mechanisms, emissions-related accounting framework, the in particular for “green” technologies, will be categories of banking transactions and assets needed to meet international climate goals. that are most related to climate progress and However, such considerations are largely outside are logically the most important ones for banks the scope of this report. Additional work on bank to account and report on are corporate credit climate progress should further develop these (including financing for projects), mortgages and assessment approaches. auto loans to consumers, and underwriting of securities associated with these entities. Use of proceeds. As discussed in the GHG Protocol Scope 3 Standard, whether or not the use However, several additional issues complicate of proceeds is known in a financing relationship this simplistic accounting exercise. is crucial to determining its associated emissions and thus potential impact on climate. For both Climate progress vs. impact. An important risk and responsibility reasons, it is more reason- consideration is the extent to which different able to expect disclosure on transactions where financial assets and transactions actually have an the counterparty’s use of proceeds is known impact in the real economy, an issue closely tied (financing for projects, project bonds, equipment to the concept of additionality. Additionality is leasing, etc.) rather than for general financing, when an individual financing decision changes which is fungible and can be used by consumers, what would have occurred compared to business governments, and companies in any desired way. as usual. Some banks have begun to move toward
Exploring Metrics to Measure the Climate Progress of Banks 19 Double counting between off–balance financing of climate problems and solutions. sheet transactions and on–balance sheet Further, many banks already report on such holdings. Another issue relates to the double activities. counting of emissions between the investment bank’s underwriting or advising on corporate What do stakeholders want? The final securities and the investors who own the actual important question is which aspects of banking securities. Whether or not to include investment represent the highest demands for disclosure by banking activities—in particular underwrit- stakeholders? Given that the primary business ing—within a climate progress framework for objective for tracking climate progress for com- banks was the subject of significant discussion in mercial banks is stakeholder (including investor) the PCI and FEI processes (see Annex A). Table engagement and reputational risk (chapter 1), 2 displays some of the major discussion points this, in fact, may be the most important driver for for and against the inclusion of such off–balance action. Historically, stakeholders have been most sheet items in a financed emissions framework. interested in disclosure on high-carbon lending The FEI process concluded that underwriting was and underwriting activities and sectors such as fos- not appropriate for financed emissions account- sil fuel production and power generation, for both 8 ing due to a perceived issue with double counting risk and responsibility reasons. This contrasts (i.e., that emissions should be allocated only to with the financing of mortgages and auto loans, capital providers and not also to service provid- which, despite being responsible for relatively large ers); but in a more general climate progress portions of global emissions (Figure 3), have seen framework, there is no reason to exclude it as relatively little stakeholder attention. As will be investment banks can be seen as an important discussed further in Chapter 4, there may also be part of the financing chain that enables the regional variability in the disclosures that stake- holders are most interested in.
Table 2 | Pros and Cons Surrounding the Use of Off–Balance Sheet Items Identified in the FEI/PCI Process
PROS CONS Services such as underwriting are essential to They are off–balance sheet activities, so they should be accounted company activities so they “enable” the company’s for by the holders of the assets instead emissions Underwriting (IPO) is the point of maximum In most cases, like for underwriting, the service company is not information in the market and therefore potentially directly exposed to a financial risk the point of most influence Financial services can represent a large portion of an There is no clear way to allocate a proportion of the company’s FI’s revenue stream and where one is earning money emissions to the financial service provider one is responsible The guidance should be as comprehensive as If service providers have to account for the emissions from the possible—all of an FI’s activities should be covered companies to which they provide the service, then this logic should also be applied to other service providers that are equally essential to the transaction; e.g., lawyers, consultants, etc. GHG emissions reporting on underwriting can improve transparency in general
Source: 2dii 2013.
20 Portfolio Carbon Initiative 2.3 Implications for first, because it may be difficult to understand how to combine loans, transactions, and assets Measuring the Climate under management together in a meaningful manner; and second, because such metrics will be Progress of Banks strongly correlated to the overall size of the bank.9 The previous two sections can be summarized as follows: An alternative approach would accept that differ- ent banking activities are “apples and oranges” Banks finance the economy through a variety and develop a suite of metrics most applicable ▪▪ of roles, including direct lending to consum- to each type of activity or business. Such an ers, businesses, and governments; asset approach can more easily target specific aspects of management for institutional and individual climate progress (i.e., measure both “green” and clients; and securities underwriting. “brown” activities) and allow for more nuance between risk and climate progress objectives, Through these different roles, banks affect the different sectors (e.g., fossil fuel production vs. ▪▪ financing of climate problems and solutions renewable technology development), and differ- in several ways: through direct lending to ent types of banking activities. The drawback to problems and solutions, through investment this approach is that a suite of metrics is poten- products and practices, and through the un- tially harder to communicate in aggregate; it may derwriting of equity and bonds with underly- also make it more difficult to compare different ing “green” and “brown” assets or activities. institutions in aggregate. Furthermore, given the Banks are not a monolithic group. Even strong correlation of group-level metrics with ▪▪ among large universal banks, there is great bank size, such comparisons may have limited variability in the different shares of business meaning to begin with. between retail, corporate, and investment Given these strengths and weaknesses, most banking and other financial services. stakeholders in the FEI and PCI processes Given the complexity of banks, climate progress thought that a single approach was unlikely to ▪▪ tracking will likely be limited for practical rea- succeed and agreed with the approach taken in sons, and stakeholder interest, use of proceeds, this report, which is to develop a suite of metrics and impact are important considerations. across different banking activities.
There are two major implications of these points 2.3.2 What Is Reasonably to Be for the assessment and management of the Included? climate progress of banks. The first is a ques- Given the complexity of measuring bank climate tion of whether performance metrics should be progress, it is necessary for practical reasons to tracked at the bank level or at the business line focus performance tracking where it can have the (asset class) level. The second is a question of most impact and where it is feasible and impor- scope: Given limited resources, what are the most tant to stakeholders. As discussed above, a strict important aspects of a bank’s activities to be emissions allocation exercise would focus efforts assessed? on corporate credit (including financing for 2.3.1 Bank Level or Asset Class Level projects), mortgages and auto loans to consum- ers, and underwriting of securities associated with Given the considerable differences in banking these entities. Stakeholder interest and use of activities and among different banks, perfor- proceeds could additionally narrow the potential mance metrics tracked at bank group level (i.e., scope of assessment to financing with a known highest corporate structure combining all busi- use of proceeds or financing in only high- or low- ness lines) would seem to have several weak- carbon activities and sectors. nesses, notably the difficulty of using a single unit of measurement for a heterogeneous group of Interestingly, these same types of assets and banking activities. It can be argued that a single activities are the most disclosed in recent finan- unit, such as emissions or currency, increases the cial and nonfinancial reports (Figure 4). This communications value of the metric, as the public highlights both their informational value as well and stakeholders alike are familiar with such as the practicality of assessing and reporting on units (perhaps less so with emissions). Yet the such metrics, which will be discussed more fully communications value is limited for two reasons: in the following chapter.
Exploring Metrics to Measure the Climate Progress of Banks 21 Figure 4 | Count of Recently Disclosed Quantitative Climate-Relevant Metrics in Reviewed Private and Development Finance Institutions (DFI) Reports
DFI Commercial Bank
Count of isclose Metrics
Pro ect nspecifie Commercial sset etail reen on s ll other finance financea loans management anking un er riting
Note: a. Unspecified finance relates to any tracked metric where the specific transaction or asset type was not clear from reporting. Source: WRI and UNEP-FI 2014.
In light of the considerations and tradeoffs discussed above, this report focuses on the metrics shown in Table 3.
Table 3 | Scope of Report
INCLUDED EXCLUDED Financing for projects Personal loans and credit cards Corporate lending Guarantees Securities underwriting Derivatives (corporate bonds, equities, and project bonds) Mortgages and auto loans Insurance products Underwriting of government bonds (exc. project bonds) Money market
Source: Authors.
22 Portfolio Carbon Initiative REVIEW OF EXISTING CLIMATE PROGRESS METRICS
SUMMARY OF MAJOR POINTS
▪▪ Two primary types of metrics are used for tracking the opportunity planning (since the metric does not climate progress of banks: GHG accounting, including track “green” easily, except through the calculation financed emissions, and a variety of green or brown of project accounting from a baseline). If the busi- metrics tracking exposure to climate problems and/ ness case is primarily providing transparency on or solutions. A third lesser-used class of metrics are exposure to GHG emissions and reputational risk sector-specific energy and GHG-related metrics. management, disclosure may be valuable and most meaningful when focused on high-carbon sectors ▪▪ An effective performance tracking metric should be crucial to the energy transition. practical to use with existing or easily acquired data, as well as meaningful for the bank’s business goal ▪▪ Compared to GHG accounting approaches, the use (whether business opportunity planning, reputational of green/brown metrics in existing bank disclosures risk management, or a broader societal goal). is quite high particularly among commercial banks, showing a perceived practicality and perhaps mean- ▪▪ Perspectives on both the practicality and meaning- ingfulness among banks. Such metrics have several fulness of GHG accounting approaches, particularly advantages, tracking both “green” and “brown” expo- financed emissions, differ among stakeholders, but sures with relative practicality, applying to investment several points of agreement have emerged over the banking services (e.g., advisory, underwriting), as well past several years of intense discussion. as on–balance sheet assets, and providing sector- and asset-specific nuance when designed correctly. How- □□ Practicality: The effort needed to assess port- ever, to be meaningful, such metrics must be reported folio or group-level Scope 3 GHG/financed emis- completely (i.e., covering both “green” and “brown”), sions is largely a function of the desired level of must provide context where possible, and must precision. The effort to track such emissions from use clearly defined taxonomies of what constitutes the bottom up for each client or relationship may “green” and “brown.” exceed the perceived value of the metric for most banks. Top-down approximation methods exist, ▪▪ A third type of metric, less used currently, involves but many banks question the value of such estima- reporting sector-specific energy or emissions metrics tions. An important counterexample is financing in either absolute (e.g., kWH saved by projects, MW for carbon-intensive projects when there is known installed) or ratio terms (e.g., CO2/kWh of power use of proceeds. clients). Such metrics are potentially highly meaningful, since a KPI can be derived for each sector or technol- □□ Meaningfulness: Proportionally allocated financed ogy in the most relevant terms and can be compared emissions measure the responsibility of a bank for to science-based road maps for decarbonization. the emissions of its underlying clients and are of However, such metrics are likely the least practical at limited relevance to carbon asset risk or business scale since they have the highest data needs.
Exploring Metrics to Measure the Climate Progress of Banks 23 3.1 Overview 3.1.1 Recent Reviews of Climate Metrics for Banks For each asset or transaction type, this chapter compares three types of metrics for assessing This paper uses, among other sources, two recent the climate progress of banks along dimensions reviews of climate progress metrics for banks, one of practicality and meaningfulness. As discussed conducted in 2015 as part of a report to the G7 in the PCI Investors Report, as well as other on climate criteria for development banks (NCI recent investor reviews (2dii et al. 2015; Kepler et al. 2015) and the other conducted as part of Cheuvreux 2015), a first useful classification the PCI process, focused on a sampling of large distinction is between the principal types of universal banks and development banks (referred metrics that are currently in use by major banks to as Landscape Review of Alternative Climate and investors, which are as follows: Metrics, September 2014).
GHG accounting, including financed emis- The landscape review of how development banks ▪▪ sions accounting, represent an assessment integrate climate progress in investment criteria of investees’ GHG emissions, which can be shows a variety of climate progress management proportionally allocated to investors and techniques in place. This review found that the lenders via their financial stake in the invest- following three main types of sector-specific ees (financed emissions). climate criteria are commonly used for assessing climate finance activities: Green/brown metrics are a class of indi- ▪▪ cators that distinguish which activities and Qualitative criteria (e.g., financing coal plants technologies are climate solutions or climate ▪▪ only in countries with strong mitigation problems. goals)
ESG scores are qualitative indicators pro- Positive and negative lists (green/brown tax- ▪▪ vided by specialized ESG analysts based on ▪▪ onomies; e.g., financing renewables but not quantitative and qualitative climate indica- coal plants) tors, including carbon and green/brown Other quantitative benchmark criteria (e.g., exposure metrics. ▪▪ only financing power plants below a certain
This paper focuses on GHG accounting (primar- level of CO2 emitted per kWh of electricity ily the financed emissions approach) and green/ generated) brown metrics, as they are less well-established in The landscape review looked at climate progress current practice. The climate component of ESG metrics disclosure for 14 development banks scores are used largely in risk management (as and 21 commercial banks (mostly large uni- opposed to climate progress accounting) and are versal banks). The sample was chosen using a covered in other reports, including the Investor combination of global size rankings and process Report (2dii et al. 2015). We also distinguish a participation. This review found three main types third class of metrics: sector-specific energy and of metrics currently being disclosed by interme- GHG metrics that build from GHG accounting diaries, as shown in Figure 5: GHG accounting principles but create sector-specific performance approaches, including project accounting and indicators at investee or portfolio level. financed or avoided GHG emissions; green/brown exposure based metrics such as counts, percent- ages, and currency values; and other sector- specific energy and carbon metrics. The following sections review the current use of such metrics and discuss their practicality and meaningfulness for conveying the climate progress of a portfolio.
24 Portfolio Carbon Initiative Figure 5 | Count of Metrics in PCI Landscape Review by Major Type (GHG Accounting, Sector- Specific Energy and Carbon Metrics, and Exposure-Based Indicators)
Commercial Bank DFI o ntin avoi e finan e e i ion
e tor e ifi ner Carbon
Per enta e
Green/ Brown Co nt Metrics
C rren ba e
Co nt of etri Source: WRI and UNEP-FI 2014.
Table 4 | Categories of Climate Progress Metrics
CATEGORIES SPECIFIC DESCRIPTION OF METRICS TYPES OF METRICS Greenhouse Gas Corporate accounting Corporate-level tracking of annual GHG emissions related to a company’s Accounting operations Project accounting Estimating net GHG emissions or emission reductions from projects relative to a baseline scenario Financed emissions (Generally) portfolio level aggregation of GHG emissions associated with a portfolio’s underlying entities or projects, allocated proportionally, based on financial stake in the underlying entity or project Green/Brown Exposure-based Metrics that measure climate progress of a project, activity, or asset class Metrics in terms of exposure in financial terms such as $ invested in green energy, counts such as number of energy star buildings in a real estate portfolio, or percentages such as % car loans to hybrids. Metrics could also be ratios such as $ invested in hybrids or total $ invested in cars Sector-Specific Physical unit–based (e.g., Metrics that are specific to a sector and expressed in absolute units Energy and kWh, ft2, km, etc.) (e.g., kWh generated) or intensity units (kWh/ft2). Metrics can also be Carbon Metrics expressed in ratios such as kWh from green energy or total kWh from power generation
Source: Authors.
Exploring Metrics to Measure the Climate Progress of Banks 25 3.2 GHG Accounting emissions approach (portfolio-level accounting) and project-based accounting use emissions Approaches metrics to track responsibility for GHG emissions, As discussed in chapter 1, and reviewed in detail but they have some conceptual differences, most in 2dii (2013), the concept of financed emissions, notably their sector or activity specificity and use which can be defined as “the allocation of an of proceeds information (See Table 5.) underlying entity’s, activity’s, or portfolio’s emis- The general pros and cons of GHG accounting sions to the parties holding a financial stake,” has for financial portfolios were reviewed for inves- been in active development in both banking and tor asset classes in the PCI Investor Report. The investing circles since at least 2005. The concept main advantage of a cross-sector, portfolio-level gained considerable traction in the lead-up to the GHG accounting approach is to show a broad UNFCCC COP 21 in November 2015, including picture of the portfolio’s exposure to underlying several large-scale pledges by investors to calcu- investee emissions. However, the approach was late and disclose their portfolio carbon footprint, found to have several unresolved issues related to notably the PRI Montreal Pledge and the UNEP- allocation rules across asset classes, time bound- FI/CDP Portfolio Decarbonization Coalition. aries, reporting scopes, and double counting. The concept of financed emissions starts from Additionally, due to incomplete data for underly- an underlying accounting of the GHG emissions ing investees, emissions for some investees or associated with a financial institution’s investee counterparties need to be estimated, increasing entities (i.e., the projects, companies, individuals, the uncertainty of the metric (2dii 2013; Kepler etc., to which it lends or invests its capital). This Chevreux 2015). Accounting for off–balance sheet concept notably differs from traditional corporate transactions is also made more difficult by unclear GHG accounting as applied to a financial institu- allocation rules between the service provider (e.g., tion, which would only cover the institution’s underwriter) and investee. The Investor Report operational GHG emissions (e.g., associated provides more details on these and other issues with its buildings, IT systems, etc.). This type of related to financed emissions, specifically related accounting is outside the scope of this report. to the investor asset classes most commonly used Project-level GHG accounting is included in this today (listed equity and corporate bonds). These section as an important subtype of GHG account- unresolved issues could likely be overcome by a ing, as many banks account for and report on bank interested in developing an approach, but their project finance activities. Both the financed there is currently no harmonized standard on
Table 5 | Differences between Financed Emissions and Project-level GHG Accounting
DESCRIPTION SECTOR/ USE OF INTENDED ACTIVITY PROCEEDS PURPOSE COVERAGE Financed portfolio-level aggregation Cross-sector and cross- Not necessary Portfolio (multisector Emissions of GHG emissions asset class approach and/or multi asset associated with a class) understanding of portfolio’s underlying responsibility for GHG entities or projects emissions Project GHG net emissions or reductions Generally sector- and Necessary Understanding of the Accounting resulting from a project asset/transaction- GHG emissions impact compared to a baseline specific of financing a project, scenario relative to an assumed baseline Corporate GHG Emissions associated with a N/A N/A Tracking operational Accounting bank’s operations (Scope 1 sustainability for banks Applied to and Scope 2) Banks
Source: Authors.
26 Portfolio Carbon Initiative financed emissions to apply. Availability of investee GHG data ▪▪ (numerator) Development banks and commercial banks that implement the Equator Principles use project Availability of investee capital structure GHG accounting approaches to measure the GHG ▪▪ (denominator) emissions associated with a specific financed activity. A detailed review of such methods is out- ▪▪ Number of financial institution’s side the scope of this work, but current practices relationships by asset class (count of number in the investor community are available in Annex of relationships in a portfolio) 3 of the Investor Report, and a summary of GHG For example, through the due diligence process accounting metrics found in the landscape review typically undertaken in financing for projects, an can be found in Table 4. Generally, compared intermediary will have a high level of access to with cross-sector financed emissions accounting, the emissions of the project and sufficient infor- there is less uncertainty associated with activity mation about its role in the project’s financing. data and financing structure in project-specific In addition, the total number of project finance accounting, since it is only performed in the activities per year will be low for most banks. context of a specific project (e.g., for financing Thus, estimating financed emissions for financing for projects). However, greater uncertainty may of project transactions is likely very feasible for be introduced through the need for an assumed most intermediaries. The same goes for lending to baseline scenario reflecting the outcome in the publicly listed companies, where oftentimes both absence of the project (see GHG Protocol Proj- emissions and capital structure data are publicly ect Protocol). This approach also faces issues of available. The opposite, however, is true for SME appropriate boundaries, assessment period, and loans, auto loans, and mortgages, where capital attribution of impacts. Development banks have structure data (i.e., loan-to-value ratios) are developed numerous methodologies that address private, and portfolios consist of a large number these issues in certain sectors (IFI 2015). of small transactions.
Due to the inherent variability in types of busi- Of course, some of these data issues can be over- ness lines and types of banks (see chapter 2), it is come, notably by the use of sector-average emis- useful to review the practicality and meaningful- sions or capital structure data, and some banks ness of GHG accounting, specifically the financed are taking this approach in their financed emis- emissions and project accounting approaches, sions assessment (see chapter 4). However, many within the reduced scope of this paper (see Table financial institutions consulted in the Financed 6), including a summary of its current limited Emissions Initiative believe that the large-scale usage in banks (see Table 7). use of such average data would result in disclo- 3.2.1 Practicality of Financed sures that are meaningless due to little differen- tiation in bank inventories. To make this point Emissions for Banks clear, if all banks were to estimate their mortgage Figure 7 illustrates how the overall practicality book financed emissions using similar average of assessing the financed emissions of a port- emissions factors, the results would simply reflect folio varies across types of banking activities. a linear relationship of the overall mortgage book In general, financed emissions of an individual size (more mortgages -> more GHG emissions), a investee (project, company, etc.) can be defined trivial answer. There would similarly be a limited through the GHG emissions profile (numera- ability to track progress over time without client- tor) and capital structure (denominator, used to specific data. Because of these limitations, the allocate to different lenders/investors). Thus, at current use of GHG accounting is mostly limited the portfolio level, the practicality of financed to financing for projects (see Table 7). emissions for different asset classes depends on three dimensions:
Exploring Metrics to Measure the Climate Progress of Banks 27 Table 6 | Summary of Elements and Overall Practicality of Financed Emissions for Relevant Asset Classes and Transactions
ASSET CLASS/ DATA DATA CONFIDEN- NUMBER OF OVERALL TRANSAC- ACCESS: ACCESS: TIALITY: RELATION- PRACTICAL- TION EMISSIONS CAPITAL CAPITAL SHIPS ITY OF FE
Project Finance High High Private Low High
Lending to Listed High High Public Medium High Companies
SME/Private Low Medium Private High Low Company Lending
Mortgages/Auto Medium Medium Private High Low Loans
Advisory and N/Aa Variable Variable Variable N/A* Underwriting
Note: a. Emissions for advisory and underwriting are listed as N/A due to ownership logic taken in FEI/PCI—emissions are allocated only to capital providers rather than service providers. Source: Authors.
Table 7 | Examples of GHG Accounting Metrics
ASSET CLASS/ SECTOR GHG ACCOUNTING APPROACHES OBSERVED IN TRANSACTION LANDSCAPE REVIEW Corporate Finance Oil & gas & coal (Lending, Lease Finance, Securities Power Underwriting) Cross-sector ▪▪ Total GHG associated with lending portfolio Financing for Projects Cross-sector ▪▪ Total financed emissions associated with financing for projects portfo- lio ▪▪ Net GHG emissions or reductions associated with individual projects or portfolio ▪▪ Gross GHG emissions associated with construction and operations of transport projects Retail Banking Auto loans ▪▪ Net GHG emissions reduced or avoided associated with financed green cars Mortgages Asset Mgmt. and Cross-sector ▪▪ GHG accounting of portfolio/funds, comparison to index Investment Products
Source: WRI and UNEP-FI 2014.
28 Portfolio Carbon Initiative 3.2.2 Meaningfulness of Focus on high-carbon and low-carbon Financed Emissions ▪▪ sectors. If the main business case for track- ing climate progress is disclosure/reputation- Substantial differences in opinion arose around al risk, GHG accounting should focus on the the meaningfulness of financed emissions esti- high-carbon sectors most crucial to and most mation during the PCI and financed emissions potentially at risk in the energy transition, as processes. (See Annex A for a full description.) well as their low-carbon competitors. Thus, it is difficult to present a consensus view on this point in this paper. Nevertheless, most stakeholders in the process, which include banks, 3.3 Green/Brown Metrics investors, data providers, consultants, and NGOs, As discussed above, green/brown metrics are agreed on the following points: taxonomy-based approaches to classify financed activities into climate problems (“brown” tech- Direct measure of contribution or nologies) and climate solutions (“green” tech- ▪▪ responsibility. Because the financed nologies). We now turn to their practicality and emissions approach allocates the emissions meaningfulness. associated with a financing activity to differ- ent financial actors, a direct and interpre- 3.3.1 Practicality of Green/ table relationship exists with an institution’s Brown Metrics responsibility for emissions or contribution As evidenced by the overall level of disclosure to emissions reductions. This proportional al- found in the landscape review (Figure 6), location (GHG Protocol Scope 3 Standard) is exposure-based green/brown metrics are uncommon for green/brown metrics. considerably more commonly reported than Aggregation of investments allowed energy- and emissions-based metrics, particularly ▪▪ across portfolio. Because it uses a unit that outside of financing for projects. Figure 6 shows can apply to any sector, financed emissions the total count of metrics disclosed by banks, enables a single aggregated score within a including DFIs, representing metrics reported in multisector or multiasset portfolio. exposure and proportion/ratio of exposure units ($, €, etc.). Table 8 also reviews the main metrics Difficulty of capturing “green.” The usu- encountered in the review. ▪▪ al measure of a carbon footprint at portfolio level does not capture investments in “green” activities well because low GHG emissions sectors and activities include both “green” and “gray” (climate neutral activities).10 ▪▪ Uncertainty and precision for disclosure. Uncertainty and precision WRI differs from the other authors in its recom- are important considerations for corporate mendations on the use of financed emissions. Since disclosures, and many banks are not financed emissions is the only metric that represents a comfortable releasing information to the bank portfolio’s overall contribution to climate change, WRI recommends that this metric be reported, as public that is based on modeled, as opposed to a minimum, by all banks to provide transparency investee/counterparty-specific, information. to stakeholders. Green/brown metrics and sector- specific metrics are also useful to understand a bank’s Services vs. on–balance sheet assets. contribution to climate progress and should be used ▪▪ Financed emissions for on–balance sheet following the recommendations in this paper. items (i.e., emissions allocated to sharehold- ers and lenders, under an “ownership of emis- While there is not yet a widely accepted method to measure financed emissions, there are existing calcula- sions” logic) are more meaningful than for tion approaches developed by Ecofys, TruCost, South services (asset management, underwriting; Pole, and others, although these existing approaches i.e., “enabling emissions to occur” logic). At are generally proprietary. The GHG Protocol Scope 3 the bank level, it is difficult to interpret fi- Standard also provides useful guidance on accounting nanced emissions numbers in aggregate given for financed emissions (pp. 51–54). Banks should use an existing approach, or develop and adopt their own the substantial conceptual difference among method until a standardized approach is available. different types of banking transactions, ser- vice, and assets.
Exploring Metrics to Measure the Climate Progress of Banks 29 Figure 6 | Counts of Currently Disclosed Metrics by Sample of Banks by Asset Class/ Transaction Type and Metric Unit
Count Exposure based Percentage
Pro ect nspecifie Commercial sset ther etail iste eal Portfolio finance finance loans management anking e uit estate ll Source: Authors.
This review suggests that the practicality of statistics offices or financial data providers are exposure-based green/brown metrics may be used to classify industrial activity at the facility considerably higher than for GHG accounting level, assigning a code to each facility based on or other emissions-based metrics. This is not the activities pursued there. On the other hand, surprising, since tracking such metrics generally some ESG-specific systems now provide seg- requires only two types of information about the mented “green share” data that identify “green” portfolio in question: financial data on the proj- and “brown” activities at the business line level, ects, loan book, etc. (tracked as part of the core allowing users to assess diversified companies business of banking), and a taxonomy of which of on the basis of the percentage of their revenues the activities, sectors, etc., are considered “green” derived from “green” or “brown” activities. or “brown.” This seemingly compares well with emissions- and energy-based metrics, which The practicality of tracking portfolio climate require financial and nonfinancial data (e.g., progress by these different systems varies, emissions intensity, fuel consumption, electric according to data availability by asset class, capacity, etc.) transaction type, or sector. Banks generally have access to at least investor classification codes As discussed in the Investor Report, several or the standard industrial classification codes ESG data providers are beginning to offer seg- of most corporate clients, allowing a simple mentation indicators for green/brown metrics categorization relatively quickly based on the at company and project levels. Such indicators sector of each client. However, given their level of operate at different levels, such as project or aggregation, broad investor classification schemes activity, facility, and company or issuer (see Table like GICS and ICB can identify sector-level 9), and the level of specificity offered can vary exposures such as total lending to the utility or considerably within climate-relevant categories. mining sectors but cannot easily be used to classify Commonly used classification systems such as the “green” or “brown” activities in these sectors. Global Industry Classification Standard (GICS) Broader industrial classification systems like the or the Industrial Classification Benchmark (ICB) International Standard Industrial Classification operate at the company level, such that each indi- (ISIC), the North American Industry Classification vidual company can only be considered “green” or System (NAICS), Nomenclature of Economic “brown” using a single indicator. Similarly, broad Activities (NACE), Australian and New Zealand industrial classification systems used by national Standard Industrial Classification (ANZSIC),
30 Portfolio Carbon Initiative Table 8 | Examples of Exposure-based Green/Brown Metrics for Banking Asset Classes/Transactions
ASSET CLASS/ SECTOR GREEN/BROWN EXPOSURE INDICATORS TRANSACTION BROWN GREEN Corporate Finance Oil & gas & ▪▪ Share of high-cost capital ▪▪ Share of revenues in carbon (Lending, Lease coal expenditure capture and storage Finance, Securities ▪▪ Total exposure to high-carbon ▪▪ Share of renewables in R&D and Underwriting) sectors (e.g., energy) capital expenditure ▪▪ Count of loans to energy sector Power ▪▪ Share of high-carbon lending in ▪▪ Share of renewables in elec. electricity generation portfolio generation, installed capacity, and ▪▪ Total value of loans to power sector capital expenditure ▪▪ Total value financed to renewables companies Cross- ▪▪ Share of oil & gas in sales/revenue ▪▪ Share of “green” (e.g., low-carbon sector ▪▪ Share of coal in revenues economy) in sales ▪▪ Total value lent to “green” activities ▪▪ Total value of “green” bonds issued/underwritten ▪▪ Total value underwritten for low- carbon clients Financing for Projects Cross- ▪▪ Share of projects by Equator ▪▪ Share of projects financed meeting sector Principles category “green” categorization (CBI, etc.) ▪▪ Value of projects screened by ▪▪ Number of renewables projects, Equator Principles loans, transactions ▪▪ Count of projects by sector (oil & ▪▪ Total value of climate finance gas, mining, energy) ▪▪ Total value of renewables/“green” ▪▪ Share of structured finance projects projects (count) by technology (wind, oil, ▪▪ Share of structured finance solar, gas, biomass) projects (count) by technology ▪▪ Share of financing for projects value (wind, oil, solar, gas, biomass) by sector ▪▪ Count of projects screened for ESG risks Retail Banking Auto loans ▪▪ % of car loans to hybrids, electric vehicles ▪▪ Count of “green” vehicles financed Mortgages ▪▪ % of mortgage financing to energy- efficient homes ▪▪ Value lent to energy-efficiency home retrofits ▪▪ Number of energy-efficiency projects financed in homes Asset Mgmt. and Cross- ▪▪ Number of ESG-rated issuers ▪▪ Number of Socially Responsible Investment Products sector ▪▪ Value of assets under management Investment (SRI) funds screened or invested according to ▪▪ Total value of SRI/ESG assets ESG criteria under management ▪▪ Percentage of AUM screened Source: WRI and UNEP-FI 2014.
Exploring Metrics to Measure the Climate Progress of Banks 31 Table 9 | Green/Brown Taxonomies and Sector Classification Schemes Used for Classifying Green and Brown Activities
CLASSIFI- MAIN FEA- LEVEL APPLICABLE OVERALL CATION TURES TRANSAC- PRACTI- TIONS/ CALITY ASSETS ESG-Specific CBI (Climate Classification Project/activity Financing for Medium for Classifications Bonds Initiative) developed for “green” projects, “green” applicable bonds involving a bonds assets or taxonomy of “green” transactions compatible assets and investments. MSCI “Green” classification Project/activity, Corporate lending, High (with applicable to listed aggregated to underwriting subscription), equity, corporate company limited to listed bonds, and sovereign companies bonds FTSE Exposure of listed Project/activity; Corporate lending, companies to 60 aggregated to underwriting energy transition company activity segments. Standard BICS Broader industrial Project/activity; Corporate lending, Medium; Industrial (Bloomberg), classification system, aggregated to underwriting requires Classification SASB SICS used to segment company corporate Schemes companies by activity segmentation Eurostat/ NACE, National industrial Facility; Corporate lending, High ISIC, NAICS, classification systems aggregated to underwriting ANZSIC, etc. linked to national company statistics. Used by financial and ESG data providers to segment companies into activities Investor ICB, GICS, Sector classification Company/ Corporate lending, High but Classifications TRBC, system including green security underwriting limited to listed Bloomberg, and brown sectors companies SASB
Source: 2dii 2015b.
etc., can have varying levels of detail available for Times Stock Exchange (FTSE), and others. Such different climate-relevant sectors. The level of schemes are most useful for classifying transac- detail in these schemes is typically higher than for tions with a known use of proceeds (financing for investor classification schemes, and some financial projects, “green” bonds underwriting, etc.) or, data providers use them to segment companies’ when aggregated to company level, for estimating revenues into different categories. the green/brown activity fractions of corporate lending and corporate bond and equity under- The most comprehensive solution for segment- writing. However, the use of such classifications ing activities into “green” and “brown” are may require more effort than applying a simpler classification systems and standards specific to classification scheme, such as ISIC, and will be the ESG space, such as those developed by the limited to specific types of transactions or assets Climate Bonds Standard and commercial “green” (e.g., known use of proceeds) or types of counter- taxonomies from providers like MSC, Financial parties (e.g., listed companies).
32 Portfolio Carbon Initiative 3.3.2 Meaningfulness of Green/Brown Figure 7 | Count of Identified Metrics in Metrics WRI and UNEP-FI Landscape Review As was the case for GHG accounting, the mean- ingfulness of different green/brown metrics is variable and dependent on the specific metrics, sectors, and assets or transactions in question. There were differences of opinion among the dif- ferent stakeholders in the FEI and PCI processes with regard to the usefulness and credibility of such metrics for measuring the climate progress of portfolios. Some of the high-level conclusions reached are summarized below:
A one-sided story. Both stakeholder ▪▪ perceptions and the results of the landscape
Count of metrics review show a relatively one-sided story on banking climate progress disclosures, with a significantly greater number of metrics dis- closed on “green” than on “brown” financing, Commercial particularly among commercial banks (Figure Bank 7). Many civil society stakeholders pointed out this discrepancy and argued strongly for Green financing Avoided emissions further disclosure on “brown” financing. ESG/risk screening Bro n financing
The need for context. Stakeholders ex- Source: WRI and UNEP-FI 2014. ▪▪ pressed a desire for context for both “green” and “brown” performance metrics. Simple metrics tracking counts of projects, counter- parties, etc., or exposures to either “green” or 3.4 Sector-Specific Energy or “brown” activities without some context, such Carbon Metrics as reference to total portfolio values, lack The final type of observed metric is sector-specific meaning. Instead, more meaningful metrics energy and/or GHG metrics that use a perfor- can be constructed by tracking either the ratio mance indicator in physical units (examples in of “green” to “brown” (or vice versa) or the Table 10). Despite their relatively uncommon proportion of “green” or “brown” financing use, such metrics are generally seen as relatively in the overall portfolio. Context can also be meaningful and useful, notably because they provided through a comparison of the portfo- can be more directly compared to realities in the lio climate progress with parallel values in the economy like the global carbon budget, national real economy, such as economy-wide aver- energy mixes, etc. For instance, a portfolio aver- ages (see chapter 4), or to relevant security aged carbon intensity in the utilities sector (CO / indexes. 2 kWh) can be compared to both the regional mix Credible taxonomies. In general, metrics in the markets the bank operates as well as future ▪▪ used for stakeholder disclosures will be more scenarios of the energy transition to set science- meaningful when they use “green” or “brown” based targets for this portion of the portfolio. taxonomies that are external to the bank Furthermore, units of exposure permit a more (see 6), as some stakeholders are skeptical nuanced appreciation of climate impact: $1 lent to of taxonomies generated by the bank itself. a renewable power utility will not have the same However, there is a need for balance here: impact as $1 lent to a producer of smart-grid while the use of standard industrial classifica- equipment. tion systems may represent the most credible green/brown classification taxonomy for dis- closures, internal business planning may be better served by more FI-specific taxonomies.
Exploring Metrics to Measure the Climate Progress of Banks 33 The downside of such metrics, and likely why 3.5 Comparing the Different they are not currently used more, is that they require more effort from the bank, given the Types of Metrics need for sector-specific nonfinancial (energy/ Table 11 summarizes the strengths and weak- carbon/technology) information for its clients, nesses of the reviewed types of metrics. In gen- many of whom may not disclose such informa- eral, GHG accounting and specifically financed tion. That said, forward-looking physical asset emissions face several perceived issues associ- level production capacity data are available for ated with both practicality and meaningfulness many climate-relevant sectors, such as electric when the use of proceeds is not known. Thus, power, fossil fuels, automotive, and other sectors such accounting is best applied to financing for but can be costly (2dii 2017) and can be utilized projects and related transactions with a known to create such performance indicators and track use of proceeds. In these cases, the metric can portfolio alignment with climate scenarios (2dii represent a feasible and credible tracking metric, 2015c). Further, for some types of transactions, particularly for exposure to “brown” activities. banks may possess all the information required GHG accounting, however, is not usable for as part of the due diligence process or from the measuring “green” activities, except through the transaction itself. For instance, the specific make use of project accounting calculations such as and model of automobile is available for auto avoided emissions estimations due to the inabil- loans, and fuel economy data are generally public. ity to distinguish “green” and “gray” activities. In general, though, the overall effort required to Tracing performance over time through financed calculate such metrics is likely to be higher than emissions is also challenging if using average just tracking exposure to sectors or activities. data instead of investee-specific data, since such data will not track performance improvements
Table 10 | Examples of Exposure-based Green and/or Brown Metrics for Banking Asset Classes and Transactions
ASSET CLASS/ SECTOR SECTOR-SPECIFIC RATIOS AND METRICS TRANSACTION
Corporate Finance Oil & gas & coal Portfolio average or distributed intensity by fuel type (Lending, Lease Finance, Securities Power Portfolio average carbon intensity (e.g., CO /kWh) ▪▪ 2 Underwriting) ▪▪ Total renewable capacity (MW) associated with lending portfolio ▪▪ Total renewable generation by portfolio (MWh) Cross-sector ▪▪ Steel: Breakdown of asset base by EAF/BOF production method ▪▪ Shipping: Breakdown of asset base by ship efficiency rating Financing for Projects Cross-sector ▪▪ Total/lifetime energy savings (MWh) from energy efficiency projects ▪▪ Steel: Breakdown of asset base by EAF/BOF production method ▪▪ Shipping: Breakdown of asset base by ship efficiency rating Retail Banking Auto loans Breakdown of auto loans by drivetrain/powertrain Mortgages ▪▪ Percentage of global real estate portfolio LEED certified ▪▪ Energy intensity of real estate portfolio (kWh/m2) Asset Mgmt. and Cross-sector Investment Products
Source: Authors, based on WRI and UNEP-FI 2014 and 2dii et al. 2015.
34 Portfolio Carbon Initiative Table 11 | Pros and Cons of Different Climate Performance Metrics
DESCRIPTION APPLICATION PROS CONS & EXAMPLES GHG Cross-sector ▪▪ Connecting the dots ▪▪ Broad information on ▪▪ Emissions data availability Accounting portfolio-level between portfolios carbon emissions of ▪▪ Inability to track “green” Approaches assessment of and GHG emissions sectors and portfolios activities directly investees’ exposure in the real economy ▪▪ Directly measures (except through avoided to GHG emissions ▪▪ Project finance contribution to emissions accounting) such as financed screens (e.g., lifetime each transaction (if ▪▪ Lack of accounting emissions (a bank’s GHG emissions > 50 proportional, i.e., for standard and agreement scope 3 emissions) Mton) financed emissions) on some measurement ▪▪ Public communication ▪▪ Metric works across issues & reporting, sectors and asset ▪▪ Data availability and particularly for assets classes, thus enabling confidentiality issues with known use of portfolio-level outside listed companies proceeds reporting and projects ▪▪ Difficult to apply to off– balance sheet services Sector- Sector-specific ▪▪ Measuring sector- ▪▪ Sector- and asset- ▪▪ Only applicable for a Specific physical unit metrics level climate specific indicators can number of key sectors Energy/ expressed in performance provide nuance and ▪▪ No obvious way to Carbon absolute units (e.g., ▪▪ Comparing portfolio context aggregate data across Metrics kWh generated) or performance to ▪▪ Benchmarks possible sectors or assets and/or intensity units economy-wide for transition (e.g., 2°C transactions (kWh/ft2) averages scenarios) Green / Taxonomies ▪▪ Tracking both ▪▪ Ability to track both ▪▪ Controversial Brown distinguishing “green” and “brown” “green” and “brown” technologies and Metrics between activities financing in the ▪▪ Exposure metrics easy taxonomies (e.g., are and technologies that context of portfolios to track natural gas, nuclear, are climate solutions ▪▪ Tracking and ▪▪ Applicable to off– CCS, biofuels “green” or (“green”) and climate reporting for any balance sheet services “brown”?) problems (“brown”) transaction or asset and on–balance sheet ▪▪ Lack of standard type, including assets taxonomy services
Source: Authors. by client. Despite these weaknesses, some banks, tion (between “green” and “brown” categories especially those with a higher tolerance for the and relative to overall portfolio levels) and the use of averaged data, may also find value in the use of clearly defined taxonomies of what con- use of financed emissions for other on–balance stitutes “green” and “brown.” The disadvantage sheet assets like mortgages and auto loans and of green/brown exposure metrics is the inability corporate lending. For such banks, financed emis- to roll up such metrics to bank level as an overall sions can be used to encompass an entire portfo- performance metric and the lack of availability of lio, rather than just segments of the portfolio, and taxonomies for all sectors and assets. in these cases the boundaries of such assessments should include Scope 1, 2, and 3 emissions of the Finally, sector-specific energy and carbon indica- assets in a portfolio so that the full GHG impact of tors can provide a highly nuanced performance the investee is captured. metric for specific sectors. The key advantage of such indicators is the ability to benchmark Green/brown exposure metrics can track both a portfolio to broader economy-wide averages “green” and “brown” exposures with relative and to assess portfolio alignment by coupling practicality, can apply to services as well as on– with climate scenarios. The main drawback of balance sheet assets, and can provide sector- and these indicators, and likely the reason for their asset-specific nuance when designed correctly. relatively small usage to date, is the availability of However, their credibility and meaningfulness as data and the expertise needed to estimate them. disclosure metrics depend on their contextualiza-
Exploring Metrics to Measure the Climate Progress of Banks 35 COMMON PRINCIPLES AND REPORTING OPTIONS
KEY RECOMMENDATIONS
▪▪ There is likely no universal single approach for how of a coal plant if they were only part of an under- all banks should measure and report climate progress writing syndicate) and solutions (don’t claim $10 due to different stakeholder perspectives and the million of “green” if you represent 20 percent of a large differences in bank business lines and types of $10 million syndicated loan). intermediation. Also, different metrics are more ap- propriate for a specific asset class or activity, so banks □□ Transparency: Information should be provided may want to report using a variety of metrics. on the key assumptions and methodologies used to assess climate progress so the reader knows ▪▪ What stakeholders agree to can be summarized in the how to use the information and its limitations. following series of common principles: ▪▪ The current discussions on climate progress of banking □□ Completeness: Reporting should include all ma- exhibit strong regionality, and it may not be possible to terial parts of the bank’s business, notably including achieve one global standard today. all parts of the bank financing climate-relevant ac- tivities and the financing of both climate problems ▪▪ For many types of banking activities, there is a lack of (e.g., coal-fired power plants) and solutions (e.g., benchmarks available to determine whether a bank’s renewable energy). Current reporting practices overall financing is in line with the transition to the often focuses much more, sometimes exclusively, low-carbon economy. Road maps that show financing on “green” activities with little disclosure of high- needs by region, technology, and transaction or asset carbon financing as specifically desired by many type are needed to fill this gap and allow banks to stakeholders. benchmark their portfolios to their role in the transi- tion. Such road maps are in development now. □□ Context: Where possible, metrics should be compared to values outside the bank’s portfo- ▪▪ Most importantly, in spite of evolving climate progress lio, such as ratios in the regional economy and assessment practices, banks should not wait to be required financing to meet global policy goals. measuring and disclosing metrics on climate progress and tracking performance. Meaningful metrics are cur- □□ Fair Share: When banking activities occur in syn- rently available that are practical for numerous asset dicates, reporting should be based on the bank’s classes, and banks can improve their approach over fair share of the activity for both climate problems time as more useful metrics become available. (banks shouldn’t be saddled with lifetime emissions
4.1 Common Principles industry segments and even within a similar segment, not to mention across regions. Thus, The previous sections have discussed the various rather than deliver a single set of recommenda- metrics currently available to track climate prog- tions, we provide a set of common principles that ress across the many types of climate-relevant can be tailored to different regional and industry assets and transactions of banks. As discussed, contexts and that can form the basis for continued it is very difficult to provide a single standard work on the subject. approach to tracking climate progress at the bank level, for several reasons: First, the differ- Given the drivers, scope, and types of metrics ent metric types have their relative strengths and identified in previous sections, we have identi- weaknesses, and perceptions vary considerably fied four principles for tracking and reporting on among banks. Second, there are large differences climate disclosure, as shown with examples in between banks’ business activities, both across Box 5.
36 Portfolio Carbon Initiative BOX 5. GENERAL PRINCIPLES OF CLIMATE PROGRESS TRACKING FOR BANKS
Completeness: Reporting should Context: Where possible, metrics • A bank should not be responsible for include all material parts of the bank’s should be compared to values outside the entire lifetime emissions of a coal business, notably including all parts of the bank’s portfolio, such as ratios in plant if the bank was only a minority the bank that are financing climate- the regional economy. part of an underwriting syndicate. relevant activities and the financing of Examples: both climate problems (e.g., coal-fired Transparency: Information should power plants) and solutions (e.g., • When reporting occurs on hybrid be provided on the key assumptions renewable energy). Current reporting car loans, a ratio of hybrid car loans and methodology used so the reader practices often focus much more, to total car loans is more meaningful knows how to use the information and sometimes exclusively, on “green” than an aggregate value. its limitations. activities with little disclosure of high- Examples: • A bank tracking the average carbon carbon financing as specifically desired • If portfolio averages are used to intensity of its utility lending portfolio by many stakeholders. calculate a performance metric can compare the value (X g CO2e/ (e.g., CO intensity of a utility loan Examples: kWh) to the regional grid mix (Y g 2 portfolio), information on how the • Development banks should report on CO2e/kWh in the same geography). average was calculated (weighted by all financing for project finance and • A bank tracking the percentage of exposure, weighted by exposure and any major underwriting activity. green-certified commercial real company or project size) should be disclosed. • Universal banks should assess their estate loans can benchmark this ratio business lines to find any material to the average ratio of green-certified • Full details should be provided on sources of financing for either climate buildings in the market. included transaction types and assets problems or solutions. Table 2 can for rolled up totals of “green” or serve as a guide of where to start. Fair Share: When banking activities “brown” financing (e.g., $x million of green financing includes $y million • Wherever reporting occurs on occur in syndicates, reporting should of loan exposure and $z million of renewable power financing, a parallel be based on the fair share of the underwritten green bonds). metric should be tracked for financing activity for both climate problems and of coal-fired power plants or for solutions. • Utilized taxonomies should be overall power sector financing. Examples: disclosed for “green” or “brown” categories. • When external stakeholders assess • A bank should not claim $10 million a bank’s financing of the fossil fuel of “green financing” if it only sector, they should also acknowledge contributed 20 percent of a $10 the bank’s financing of green million syndicated loan. technologies (BankTrack 2016).
Exploring Metrics to Measure the Climate Progress of Banks 37 4.2 The Importance of The tools and framework developed are expected to give PCAF participants more insight into Regional Diversity the carbon impact of their banks’ activities and An important recent trend in bank climate prog- help them manage this impact by, for example, ress tracking has been the emergence of regional offsetting the emissions caused by their carbon- dialogues on such tracking. There are several rea- intensive activities with those reduced by sons why such a regional approach makes sense. their financing of climate-friendly activities. First, some types of stakeholders (e.g., respon- Participants hope that better measurement of the sible investor groups) can be regional and may be climate footprint will enable them to formulate interested in different types of disclosed metrics climate goals for their activities and contribute to or relative focus between climate-related risks a more sustainable future. vs. climate progress. Second, financial regulation The Australian experience: In 2014, ahead in different markets can be quite different, with of and during the Australian Annual General resulting consequences on disclosure. Confidenti- Meeting season, a group of institutional investors ality and regulation mandates may inhibit certain demanded from the banks in Australia that they types of disclosures in certain markets. (This start disclosing their climate, and in particular point was made strongly in the financed emis- their GHG-emissions-related, risk exposures in sions process; see Annex A.) Also, the structure of a consistent way. Key motivations included the capital markets in different regions may be such following: that peer comparisons may be more meaningful on a regional rather than a global basis. The prospect of large coal mining projects ▪▪ being developed and financed in Australia. The Dutch approach: The Platform Carbon Although environmental and civil society Accounting Financials (PCAF) was set up by groups argued against these projects on 10 Dutch financial institutions—ABN AMRO, the grounds of their incompatibility with Actiam, APG, ASN Bank, FMO, MN Services, 2-degrees pathways, investors’ concerns PGGM, SNS Bank, Stichting Pensioenfonds were focused on the possibility of those Metaal en Techniek, and Stichting Pensioenfonds assets becoming stranded and the financial van de Metalektro—to jointly develop methods to implications that such stranding would measure the climate impact of their investment have on the investors and creditors (banks) and financing activities. The initiative recognizes involved. that banks, insurance companies, pension funds, and other financial institutions contribute indi- The initiation of an international agenda on rectly to carbon emissions and, therefore, climate ▪▪ financial institution climate transparency. change by financing greenhouse gas emitting The international, multistakeholder FEI activities. Conversely, by financing sustainable provided some of the background and energy and energy-saving programs, they con- impetus to investors’ demands for greater tribute to reducing carbon emissions, and they climate-related transparency by the banking can leverage their position as shareholders and community at the national level in Australia. financiers by requiring companies to make their business operations more sustainable. Investors called on the banks for comprehensive and consistent disclosure of the financial risks The PCAF represents a bottom-up initiative in associated with present and future GHG emis- which a group of different financial institutions sions in their portfolios. In line with the inter- have come together to devise a common frame- national FEI, the demand was that banks start work for measuring their impact on climate, both measuring and disclosing their portfolio-level positive and negative. To this end, the PCAF will financed emissions. develop tools for carbon footprint measurement based on Greenhouse Gas Protocol standards.
38 Portfolio Carbon Initiative The response from the banks was that, while 4.3 Moving toward “Science- they were prepared to meet investors’ demands for comprehensive and consistent carbon-risk based Targets” for the disclosure over time, they did not all necessarily agree with the approach and metric of financed Financial Sector emissions. Some banks did not believe that Although currently most banks track climate financed emissions methods would be effective in progress for reasons of mandate or reputational conveying carbon-related risk exposures; other management, the impending energy transition banks started to disclose financed emissions for driven by climate policy and techno-economic parts of their portfolios. The end result was that change is changing the landscape. With the different banks started responding to investors in unprecedented capital needs required for the different ways, using different metrics for differ- transition, forward-thinking banks are now plan- ent parts of their portfolios. ning for the transition by seeing the financing needs of the energy transition and climate resil- However, consistency of disclosure—and, with it, ience as an important business opportunity (see comparability of disclosed information over time “green” financing pledges highlighted above and and between different disclosers at one particular the Non-state Actor Climate Action Zone pledges point in time—was one of the key demands of from the financial sector).11 Moreover, this real- investors, and it was also in the interest of the ization has coincided with two other important disclosing banks. Recognizing this, major Austra- events: first, a formalized agreement by the global lian banks created a working group to exchange policy community to ensure that financial flows views and lessons learned, as well as to identify are aligned with the global goal to limit climate areas of convergence from which standardization change to well below 2⁰C (see Paris Agreement, in climate disclosure practice could be achieved. Article 2.1(c)); and second, a push for companies in the real economy to set science-based targets in As discussed in this report, the optimal choice of line with such climate goals. meaningful metrics for climate-related disclosure will often depend on the characteristics of the Together, these drivers suggest a strong need for typically local economy to which banks are pre- science-based metrics and tools for the financial dominantly exposed. Key characteristics include sector that allow financial institutions to set the GHG-emissions profile of the economy as performance benchmarks in line with global well as the corresponding 2 degrees–compatible climate goals. Such an assessment framework trajectory. In other words, metrics to standard- would build on investment needs analysis in a ize climate disclosure by FIs, including banks, 2°C future (IEA 2016; Accenture and Barclays will often have to be context-specific. Banking 2011) to set institution and portfolio-level targets roundtables at the national level, such as those in in line with different global decarbonization Australia and the Netherlands, could be models goals. Key challenges remain in setting such for processes aimed at defining “metric families” targets, including overcoming the confidentiality, that are sufficiently context-specific and amenable practicality, and aggregation and grouping to standardization. concerns discussed above. Such target-setting is already in development in the context of the European Commission–funded Sustainable Energy Investment Metrics project for listed equity, corporate bond, and corporate loan books, but further methodological development is needed to assess institution-level target setting and other assets and transactions.
Exploring Metrics to Measure the Climate Progress of Banks 39 ANNEX A: SUMMARY OF THE FINANCED EMISSIONS INITIATIVE AND PORTFOLIO CARBON INITIATIVE PROCESSES A1.1 Context: Financed Emissions Initia- ated the Financed Emissions Initiative (FEI) project in tive and Portfolio Carbon Initiative early 2014, an international, multistakeholder process to enable practical, meaningful, and actionable disclosure of In late 2011, the GHG Protocol released the Corporate financial institutions’ Scope 3 GHG emissions from lend- Value Chain Accounting and Reporting Standard (the ing and investing activities. The first six months of this Scope 3 Standard). This standard provides a framework process revealed several challenges (see next section), to account for emissions from an organization’s entire notably a lack of sufficient understanding and consensus value chain, including the emissions from its investments as to which climate metrics are most meaningful, practi- (Category 15 of the Scope 3 Standard). However, feed- cal, and actionable for different purposes. The discus- back from stakeholders suggested that more detailed sions also suggested that business goals related to ac- guidance was needed to cater to the realities and needs counting and reporting climate-related data can be very of the finance sector and to harmonize the various exist- different from one type of financial institution to another ing approaches. During a year-long scoping phase, and (institutional investors as universal owners, development with input from an advisory committee, it was deter- banks with an internal climate policy, asset managers fac- mined that the financial sector needed guidance on two ing marketing constraints and opportunities, commercial distinct but interlinked challenges: banks facing reputational challenges, etc.). Thus, a need emerged to tailor the guidance to different segments or In order to provide harmonized and meaningful emis- actors of the financial system. sions disclosure, financial institutions need accounting guidance on how to measure and report emissions from Since the launch of the UNEP-FI/GHG Protocol process, their financial assets. a growing appetite has emerged for a robust and global standard for financed emissions by some institutional Financial institutions need guidance on how to identify, investors. The recent launch of the PRI Montreal Pledge assess, and manage “carbon asset risks” in their lending and the Portfolio Decarbonization Coalition are cases and investing portfolios. in point.12 Despite this growing appetite to develop financed emissions guidance for institutional investors, In response to these challenges, the United Nations the first six months of the FEI process showed that Environment Programme Finance Initiative (UNEP-FI) stakeholders in the process were divided over the and the Greenhouse Gas Protocol (GHG Protocol) initi- practicality and meaningfulness of using the Scope 3
Figure A1 | Summary of Three Work Streams of the Portfolio Carbon Initiative (Asset Owners, Banks, and Risk Management) and Four Products (Two Comparative Analyses, Emissions Accounting Guidance for Asset Owners, and Risk Management Guidance)
Asset Owners Banks Risk Management
Comparative Comparative analysis of climate analysis of climate performance metrics performance metrics
Defining and managing carbon asset risk Guidance on climate performance disclosures and targets
Source: Authors.
40 Portfolio Carbon Initiative emissions concept to deliver transparency and disclosure Advisory Committee Meetings: Initial meetings to external stakeholders and shareholders. Further, of the advisory committee again showed a diversity of there was a general agreement that financed emissions opinion on the shape, scope, and goals of the initiative. were not helpful for internal decision-making. A major discussion point at both meetings was the need for clear business goals for financed emissions measure- Thus, in response to these divergent opinions and needs, ment and management, since the connection with finan- GHG Protocol and UNEP-FI, joined by the 2° Investing cial risk management was considered tenuous by many Initiative, split the previous FEI into three separate work committee members. Further opinions were given that streams. Two focused on developing climate progress a one-size-fits-all approach may not make sense for both metrics for asset owners and banks—including a broader banks and investors, given their different predominant set of metrics beyond only financed emissions—and a activities (primary vs. secondary markets, intermediation third continued to develop guidance on assessing and vs. investing, etc.). However, despite this growing aware- managing carbon asset risks (Figure A1). This reorganized ness, a critical decision was made at the first advisory initiative was retitled the Portfolio Carbon Initiative committee meeting to structure technical working (PCI) and set out to develop four research products groups (TWGs) by investee type (governments, consum- through a multistakeholder process with balanced repre- ers, and companies or projects) rather than by financial sentation from financial sector companies, governments, institution type (banks vs. investors) or financial instru- environmental groups, academics, and consultants across ment type (lending vs. investing vs. financial services). the globe. This report represents the outcome from the By this time it was becoming clear that financed emis- banks’ work stream of the PCI. sions alone may not represent a holistic and consistent performance metric for some financial portfolios (due to A1.2 Governance of the FEI and PCI the reasons discussed in section 3.2), and thus it may be necessary to use alternative metrics to contextualize the Both the FEI and PCI were governed by a secretariat results for certain types of portfolios or transactions. comprising WRI, UNEP-FI, and the 2 Degrees Investing 13 Initiative, as well as an advisory committee and techni- Technical Working Group Meeting: Following cal working groups. Advisory committee and technical the advisory committee meetings, the TWGs of both working group members who contributed to either the the carbon asset risk and financed emissions part of the FEI or PCI are listed in Annex B. FEI met together. There was again agreement on several points but just as many disagreements. Nearly all TWG A1.3. Summary of Findings of the FEI members present agreed with the advisory commit- The FEI formed an important precursor to the research tee that financed emissions represented an incomplete presented in this report, notably section 3.2. For this metric for assessing carbon asset risk (some members reason, a short description of the process and important believed more strongly that the metric was completely points of agreement and disagreement are highlighted in disconnected from such risk assessment). Thus, it was this section. Figure A2 on the following page summarizes agreed that the primary business goal for financial institu- major discussion points and the perceived role of fi- tions to assess financed emissions was for stakeholder nanced emissions in the overall scope of climate progress engagement and disclosure and transparency. The TWG assessment for financial institutions, notably banks. members also expressed significant concern over the practicality of financed emissions assessment for certain Scope Phase: The scoping phase of the FEI took place types of portfolios (in particular lending portfolios starting in early 2013 and consisted of an online survey including private and SME companies) if the assessment and a series of scoping workshops (London in February was done bottom up on an investee-by-investee basis. 2013 and New York in April 2013). Although the scoping Although it was agreed that average sector values could survey and initial workshops did find appetite for the be used instead, some members questioned the value development of a financed emissions standard—for of the calculation if such average values were used. instance over 75 percent of respondents to the survey For these reasons, as well as the desire to disclose the reported that financed emissions measurement was financing of both “green” and “brown” activities and an important business issue—even these initial steps companies, it was agreed that the FEI Secretariat should showed strong disagreement on core issues, including undertake a landscape review of other nonfinanced whether such measurement was relevant for risk or re- emissions metrics that could be used in place of financed sponsibility and whether similar methods were applicable emissions to measure the climate progress of financial between banks and investors.14 It was also realized early portfolios, the findings of which are shown in several on that different types of financial relationships (debt, parts of this report (notably chapter 3). equity, financial services) might require different solu- tions and that different financial institutions had different opinions on different financial instruments (Figure A2). A final finding was that few institutions had significant experience with financed emissions.
Exploring Metrics to Measure the Climate Progress of Banks 41 Figure A2 | Summary of Major Discussion Points and the Role of Financed Emissions throughout the FEI and PCI
Scoping Phase and Advisory Technical Working Stakeholder Survey: Committee Group Meeting: feedback/ PCI Meetings: Design: Jun. 2012–Sep. 2013 June 2014 Oct. 2013–May 2014 Jun. 2014–Jan. 2015
Major ▪▪ Project finance, public ▪▪ Carbon risk has lim- ▪▪ Only business goal for ▪▪ No general agree- discussion/ equity, corporate ited connection to FE commercial banks in ment on usefulness of loans and bonds, and Unclear vision and financed emissions is FE across stakehold- agreement private equity most ▪▪ business goals transparency ers: greater appetite points important Structure technical Wide concern over among investors Most experience to ▪▪ work by investee ▪▪ practicality of FE, par- FE utility different ▪▪ date with project (gov, companies, ticularly outside listed ▪▪ across asset classes finance consumers) companies Landscape review: Three types of FE with Different boundaries Split opinion of FE ▪▪ Most reporting on ▪▪ differences: invest- ▪▪ and needs for banks ▪▪ meaningfulness when ▪▪ ‘green’ ments, lending, and and investors estimated using aver- Wide usage of green/ financial services (advi- Prioritize on–balance age values ▪▪ brown metrics at com- sory/ underwriting) ▪▪ sheet items and Conduct landscape mercial banks Prioritize high-impact corporates/projects ▪▪ analysis on alternative ▪▪ sectors metrics Desire to report on ▪▪ ‘green’ and ‘brown’
Role of FE/ Measuring FE “Contextualize” Examine alternative General agreement carbon important, mainly for FE with metrics as potential on use of multiple alternative footprinting reputational reasons replacement for FE metrics across asset metrics classes/users
Source: Authors.
Stakeholder Feedback and PCI Design: Fol- was found between institutional investors and commer- lowing the TWG meeting, the FEI Secretariat conducted cial banks on such issues, which led to the conclusion the landscape review of available reported metrics and that additional work on climate progress metrics for both conducted a series of stakeholder discussions with advi- groups should likely be discussed separately, with some sory committee and TWG members to ensure that the overlap necessary due to the involvement of universal findings of the in-person meetings were not biased by banks in asset management and investment banking. the members able to attend. These discussions further solidified the lack of universal agreement on the mean- Given the feedback that occurred throughout the FEI ingfulness of financed emissions to different stakehold- process, the decision was made in late 2014 to broaden ers, some of whom continued to believe the concept the scope to include all climate progress metrics as well represented a valuable data point at both portfolio and as to split the process into new TWGs representing financial institution level and others who believed that banks and investors. The first year of the new PCI largely the concept had very limited value in most asset classes focused on the investors’ TWG, leading to the sister outside of financing for projects. A further divergence report to this document (2dii et al. 2015).
42 Portfolio Carbon Initiative ANNEX B: PORTFOLIO CARBON INITIATIVE ADVISORY COMMITTEE AND TECHNICAL WORKING GROUP MEMBERS
Advisory Committee Technical Working Group Bill Harnett, U.S. Environmental Protection Agency Nicky Chambers, Anthesis Group Chris Walker, WBCSD Candace Chandra, AQEX, LLC Christopher Rowe, Prudential Danielle Fugere, As You Sow Daniel Marroquin, National Bank of Mexico Jeroen Loots, ASN Bank Elisa Tonda, United Nations Environment Programme Ben Walker, ANZ Banking Group Ltd. Emma Herd, Investor Group on Climate Change Grant Bransgrove, Australia and New Zealand Banking Giorgio Capurri, UniCredit Group Jochen Harnisch, KfW Development Bank Andres Perilla, Bancolombia Group Julie Gorte, Pax World Funds Beatriz Ocampo, Bancolombia Group Kaj Jensen, Bank of America Maria del Mar Velez Mejia, Bancolombia Group Karsten Loeffler, Allianz Yann Louvel, BankTrack Mark Didden, WBCSD Nathalie Jaubert, BNP Paribas Matthias Kopp, WWF Lauren Compere, Boston Common Asset Management, LLC Moses Choi, Orange Silicon Valley Steven Heim, Boston Common Asset Management, LLC Namita Vikas, Yes Bank Jerry Blenman, Calidad Finance Nick Robins, United Nations Environment Programme, HSBC James Hulse, CDP Robyn Luhning, Wells Fargo Eliza Eubank, Citi Sefton Laing, Royal Bank of Scotland Magnus Borelius, City of Gothenburg Srinath Komarina, Yes Bank Anna Lehmann, Climate Policy Advisory Stanislas Dupre, 2 Degrees Investing Initiative J Scott Beckerman, Comerica Steve Priddy, GISMA Business School, Germany Conor Platt, Confluence Capital, LP Santanu Kumar Ghosh, Department of Commerce, The University of Burdwan Murray Birt, Deutsche Asset Management Sabine Miltner, Deutsche Bank Oistein Akselberg, DNB Bank Oliver Schmid-Schonbein, E2 Management Consulting AG William Nchembe, Ecobank Wouter Meindertsma, Ecofys Group Peter Holt, Energetics Kal Trinker, EY Albert Van Leeuwen, FMO Tom Baumann, GHG Management Institute Ederson Augusto Zanetti, Green Farm CO2Free Stephen Donofrio, Green Point Innovations Bruce Duguid, Hermes Investment Management Xu Ke, ICBCI BJ Collins, Individual Bruce Cahan, Individual Dick Ligtthart, Individual
Exploring Metrics to Measure the Climate Progress of Banks 43 Drew Schectman, Individual Maaike Harmsen, Rotterdam School of Management, Alan X. Gómez Hernández, Citibanamex Erasmus University Joe Benegas, Individual contributor Sanjay Kapoor, S2 Consultants Wendy Engel, Individual contributor Carolina Learth, Santander Brazil Bank Majella Clarke, Indufor Group Guilherme Piffer, Santander Brazil Bank Romain Hubert, Institute for Climate Economics Miguel Rodriguez, Servicios Ambientales S.A. Victoria Bakhtina, International Finance Corporation Shannon Rohan, Share Nathan Fabian, Investor Group on Climate Change Gert Crielaard, SNS Bank Fredrik Fogde, ISS-Ethix Climate Solutions Laura van Heeswijk, SNS Bank Max Horster, ISS-Ethix Climate Solutions Emmanuel Martinez, Societe Generale Daniel Gribbin, KPMG Kristy Murray, The PNC Financial Services Group, Inc. Ali Ali, LIAQAT CORP (PVT) LTD Pedro Galoppi, UBS Robert Charnock, London School of Economics and Yann Kermode, UBS Political Science Gavin Templeton, UK Green Investment Bank Maria Gaspar, Sustainability Consulting Benjamin Karatzoglou, University of Macedonia, Greece Sharif Habibu Ahmed, Mautech Felipe Bittencourt, WayCarbon Blanca Fernandez, Mercator Research Institute on Robyn Luhning, Wells Fargo Global Commons and Climate Change Katie Eisenbrown, WSP Rosemary Bissett, National Australia Bank Eric Christensen, WSP Jose Celis, National(Mexican) Solar Energy Association Chaitanya Kommukuri, Yes Bank Dominique Diouf, Nework for Sustainable Financial Markets L’_gia Carvalho, Pangea Capital Jan Willem Van Gelder, Profundo
44 Portfolio Carbon Initiative ENDNOTES 1. Public-sector banks in this report refer to banks that 8. For instance, Bank A may have a “greener” loan book are partially or wholly owned by the public sector, such than Bank B but still trail in total dollar amounts of as development finance institutions. Commercial banks “green” financing due purely to the smaller size of its refer to banks–whether listed publicly or not–owned loan book. Conversely, expressing the “green” financ- by private interests, individuals, or institutions. ing as a percentage of total loan book may cause Bank B to trail despite a much larger volume of financing in 2. Announcement here. Signatories supporting these absolute terms. voluntary principles pledged to commit to climate strategies, manage climate risks, promote climate 9. As an example, two FIs with similarly low GHG/$ smart objectives, improve climate performance, and portfolios could have anywhere from 0 to 100% green account for their climate action. activities in their portfolios if the “green” activities have an impact in their use phase (e.g., Scope 3) and 3. Although there is an overlap between the business the GHG accounted for in the financed emissions met- objective (climate risk or opportunity) and societal ob- ric only represent direct (Scope 1) and energy-related jective (climate problem or solution), these two drivers (Scope 2) investee emissions. are not the same. 10. The UN-sponsored Non-state Actor Climate Action 4. See, for instance, Prudential Regulation Authority Zone platform currently tracks over 400 financial 2015. institution–led climate commitments.
5. For example, the Asset Owner Disclosure Project tar- 11. See 2dii et al. 2015 for further details. gets climate disclosure for large institutional investors, and Article 173 (VI) of France’s Energy Transition Law 12. 2dii joined the secretariat at the start of the PCI mandates such reporting for institutional investors in process. France (2dii 2015b). 13. A significantly higher fraction of investors (77 percent) 6. This may not always be true. For instance, some au- reported that financed emissions were an important thors argue that traditional electric utilities may be less business issue than did commercial banks (52 percent). able to incorporate renewable power than alternative owners in a distributed generation model. 14. For instance, only 34 percent of banks reported that corporate bonds were important to include, vs. 90 7. See, for instance, Boston Common 2015. The desire percent of investor for disclosure of the financing of such sectors was a large point in discussions in the FEI process (see Annex 1).
Exploring Metrics to Measure the Climate Progress of Banks 45 GLOSSARY Brown financing: Financial flows toward activities Greenhouse gas (GHG) accounting: Green- and technologies that contribute significantly to GHG house gas accounting techniques that include two emissions. primary approaches to tracking GHG emissions resulting from a company’s operations: (1) corporate account- Climate impacts: Activities that contribute to pro- ing through an annual GHG inventory, which involves ducing significant GHG emissions. financed emissions as part of the accounting; and (2) project accounting through estimating net emissions reductions or increases from individual projects or activi- Climate progress: The financial institution’s intent ties relative to a baseline scenario. to contribute to GHG emissions reductions and the transition to a low-carbon economy through invest- ment activities, such as by financing climate solutions or IFIs (International Financial Institutions) by limiting the financing of GHG-intensive sectors and and DFIs (Development Finance Institu- technologies. Financing actions can contribute to positive tions): IFIs are international financial institutions, and climate progress or negative climate progress. DFIs are all financial institutions with a development or climate focus. In this report, IFI and DFI are used synonymously with each other to mean a government- Climate-related risk: Financial risk associated associated financial institution with an explicit “green” with climate-related investments and activities, including and/or development focus. carbon asset risk or transition risk, physical risk, and legal risk. Project accounting: Estimating the net emissions or reductions resulting from a project compared to a base- Climate-relevant: Investments that have a clear line scenario that represents the conditions most likely climate change mitigation or adaptation intent or impact to occur if that project does not take place. or that contribute significantly to GHG emissions or their abatement. Scope 1 emissions: Emissions from operations that are owned or controlled by the reporting company. Climate solutions: Activities and technologies that are low-carbon or that contribute to significantly reduc- ing GHG emissions. Scope 2 emissions: Emissions from the generation of purchased or acquired electricity, steam, heating, or cooling consumed by the reporting company. Exposure-based metrics: Green/brown metrics that use a monetary unit (e.g., $, €, ¥). Green/brown metrics measure the relative prevalence of climate solu- Scope 3 emissions: All indirect emissions (not tions (green) and/or climate problems (brown) within a included in Scope 2) that occur in the value chain of the portfolio. Exposure-based metrics and sector-specific reporting company, including both upstream and down- metrics can both be types of green/brown metrics. stream emissions.
Sector-specific metrics: Energy or carbon inten- Financed emissions: Portfolio-level aggregation of sity metrics that use a physical unit denominator and are GHG emissions associated with a portfolio’s underly- applicable to a specific sector. Examples include kg CO / ing entities or projects. Financed emissions are included 2 MWh (power), MWh/m2 (real estate), etc. in an annual corporate Scope 3 inventory of a financial institution.
Green financing: Financial flows (such as lending, equity positions, or underwriting and advisory services) associated with zero- or low-carbon assets or activities. This term is often used to reflect non-climate-specific “green” activities as well, such as “green” bonds, which can support climate-relevant activities or water, conser- vation, and other related activities.
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Exploring Metrics to Measure the Climate Progress of Banks 47 48 Portfolio Carbon Initiative