Climate Responsibility in Banking: Banks' Efforts to Decarbonise (Chapter 7)

What are financed emissions, you ask? This back-to-school episode dives into the importance of banks disclosing their highest-emission activities — all buried within their financing.

What are a bank's financed emissions?

Anoushka:  This time, we'll be talking about banks – how they're moving towards greener energy solutions and moving away from the fossil fuel industry. There's a lot of talk of financed emissions, and I'd love to ask: what are a bank's financed emissions? What does that mean?

Katherine: Great question. Thank you. Financed emissions are the emissions enabled by a bank's lending. So without that loan, those emissions wouldn't exist. For example, if a bank provides 10% of the capital needed to build an oil pipeline, the pipeline operator will calculate the emissions from constructing and operating that pipeline. Let’s say the total emissions come to one million tons. Because the bank contributed 10% of the financing, it would account for 10% of those emissions—so about 100,000 tons of CO₂. This is a lot, and it shows how financed emissions are calculated. To give you a sense of perspective, an individual’s annual carbon footprint is usually between one and twelve tons, depending on where they live in the world. So when we’re looking at financed emissions, it really helps frame the scale of impact.

There’s actually an established protocol for measuring this, called PCAF – if you want to get really technical! In our rating methodology, we give extra credit to banks that use this gold standard for measuring financed emissions. Without it, there are lots of loopholes and greenwashing opportunities for banks. For example, banks can cherry-pick which types of emissions—known as scopes – they account for. But if they follow PCAF, they have to include all emissions for the financed project (the pipeline in this case) and then allocate their share based on the percentage of financing.

Probably the most interesting thing about financed emissions is that they make up about 99% of a bank’s total carbon footprint. So their operational emissions just pale in comparison compared to their financed emissions. That’s why it’s so important for us to demand from banks that they really fully account for their financed emissions, because that gives you a sense of how much they are actually enabling in terms of their carbon footprint.

Are banks facing pressure to reduce CO2 emissions?

Anoushka:   Thank you, Katherine. That brings a lot of clarity. And my next question is, are banks facing pressure to support cleaner energy projects? And if so, by whom?

Katherine:  Yes, there’s definitely pressure, but in many cases, it’s actually commercially beneficial. Renewable energy and the generation of electricity from renewable sources is already the cheapest form of energy. The economics of clean energy are such that it is very beneficial to fund, even before any external pressure arises.

The problem lies in various misalignments of incentives and external costs that haven’t been internalised. For example, the fossil fuel industry receives a lot of incentives—tax incentives, for instance. On the surface, fossil fuels often appear to be a better investment or lending prospect. I recall that Darren Woods, the CEO of Exxon, was asked why Exxon doesn’t invest more in renewable energy projects. He was very open about it. He said, “Look, renewable energy projects do make money, but not nearly as much as fossil fuels.” Therefore, they are not changing their fossil fuel to renewable energy ratio. From a bank’s perspective, that approach makes sense. But because of these misaligned incentives, fossil fuels still often appear to be the better investment.

Then there are investors. Investors in banks can also put pressure on them – particularly large asset managers who manage investments on behalf of their clients. Think about how the financial system works: asset owners like pension funds, university endowments, and family offices invest and typically use asset managers. These asset managers then invest in corporations, including banks. They can apply pressure by saying, “I don’t want any fossil fuels in my portfolio. I want you, BlackRock and Vanguard, to be investing in cleaner banks for me.”

Finally, there are activists like us and grassroots demand for better and cleaner options. We want to see banks help move us toward a future where we fund many more clean energy projects than fossil fuels. That’s why Bank.Green exists: to help individuals play a part in that transition.

How can banks move away from funding dirty energy?

Anoushka:  Thank you. And that's a good segue into my next question, which is, how are banks moving away from dirty energy?

Katherine:  Yes, there are several ways. First, some banks already have those policies in place. Some of them are in the process of formalising them, but you could put a policy in place stating that you will not lend to a certain number of industries – high-carbon industries, not only fossil fuels but also arms, et cetera. We call these exclusion policies, which is the industry term. So, a bank can implement an exclusion policy saying, "If I'm approached by a fossil fuel company, I will not provide any support to them." Another way is more gradual, which essentially involves ramping up funding for clean energy projects while also reducing financial support for fossil fuel companies and projects. Essentially, this means not providing any new loans, and if existing loans come up for renewal, simply not renewing them, thus gradually increasing the critical ratio we look at when rating banks: renewable energy to fossil fuel lending. Another way banks clean up their loan portfolios is by introducing green products targeted at individual consumers. Examples include loans to purchase select vehicles or energy improvement loans. Although smaller in overall impact – since these involve small consumer products and not massive projects like financing a solar farm – they still represent a good way for banks to contribute to moving us away from fossil fuels.

How can we nudge our banks to be more sustainable?

Anoushka:  And my last question for today is, how can I help and nudge my bank to become more sustainable?

Katherine:  Yes, great question. First of all, check our website to see how your bank is doing and then decide if you need to take action. We have a lot of banks in our database, but it certainly doesn’t have every single one that exists! So if your bank is missing, let us know and we will rate it. It is entirely possible that your bank hasn’t disclosed sufficient information for us to draw any conclusions from its datapoints. If you are a customer, as a bank account holder, you can use your power to pose some of these questions directly to the bank. We can support you by drafting suggested language that you can use to ask intelligent questions about the mix of fossil fuels and renewables, their policies, their green products, and where they are on their decarbonisation journey. So yes, that’s how you can help.

See you next time!

Anoushka:  Great. Thank you. That's valuable. That'll be very valuable to all of our listeners and our followers at Bank.Green. So, thank you all so much for tuning in again into our Climate Responsibility in Banking series, and I'll see you next time.

Katherine:  Bye, see you next time!

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