Introduction to Financed Emissions

Michelle Horsfield

25 years: Sustainable Finance

In this video, Michelle will provide a walkthrough of the steps that could be adopted by financial institutions to reduce their financed emissions. She will explain this by splitting it into 4 stages: calculating the current emissions, assessing the shape of the future path, planning for reductions and setting targets and embedding them into the organisation.

Climate & Biodiversity

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Introduction to Financed Emissions

15 mins 53 secs

Key learning objectives:

Understand what are financed emissions and why financial institutions need to reduce this
Understand how to calculate financed emissions
Understand how to assess the future path of financed emissions and plan for reductions
Understand how to execute the reduction of financed emissions and embed it within the organisation

Overview:

Financial institutions play a major role in helping organisations achieve net zero. One of their main objectives in this transition is to reduce their financed emissions. This is the metric for which financial institutions are held accountable for their contributions. It is very pertinent for financial institutions to stay on top of financed emissions numbers and start reducing this as we transition to a sustainable future.

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Summary

What are financed emissions and why is it important to calculate it?

Financed emissions serves as a good metric for a financial institution to measure their impact and is probably the best barometer we have at the moment to determine progress towards any net zero targets that might have been made. The real dilemma here is that in order to reduce emissions in real life, companies often need finance to make the necessary investments. Hence more finance is required before the emissions come down. It is not linear to zero.

How to calculate the current baseline?

Calculating the current baseline essentially involves calculating the emissions that an institution’s lending or investments are currently supporting. The most common method used is the standard published by PCAF as it is referenced in the recommendations issued by the TCFD.

Real world GHG emissions (all scopes, 1, 2 and 3) must be calculated. These can usually be found in an organisations’ annual or sustainability report. This is usually reported in thousands of tonnes, or millions of tonnes. Data that comes from a physical metre that’s been regularly calibrated and has been externally audited is a lot better to work from than just using sector-based proxies.
Next we need to find the portion of the emissions attributed to the financial institution, and this attribution factor is really the share of the value. The share is because usually there are lots of different financial market players involved in a big asset. (Although this is just drawn exposure.
Next we have to calculate the value of the asset. This is known as ‘enterprise value including cash’ or EVIC. The emissions value should match the year the enterprise value has been taken for.

Due to the way the calculation works, there are ways to manipulate to make the numbers look like it is reducing by showing the company’s value going up or reducing the amount that is drawn.

How to use the baseline to assess the shape of the future path?

This will be determined by a mix of what the assets that you lend to can reduce themselves; what you decide to finance, or want to be exposed to, overlaid by real world economics and politics. In order to make informed decisions, a number of scenarios can be used to explore what actions might need to be taken. Some considerations include assessing how industry forecasts or potential government policies might alter the pace of change. With a view on what the future trajectory looks like, you will know how big the gap is between the emissions that are currently being financed, and where you want to get to.

How to plan for emission reductions?

Some of the levers that can be employed to deliver a reduction are:

Reduce the amount that is lent (not good for business though)
Engage with clients to support their low carbon transition
Steer portfolio towards companies with strong transition plans
Increase lending to low carbon or zero carbon financing opportunities

How to set a target and embed it within your organisation?

It is important to take time in choosing the right metric to use:

Targets based on intensity (units of activity eg: tonnes of steel produced)
Economic measures (eg: emissions per unit of revenue)
Absolute emissions (direct number of tonnes of carbon dioxide emissions being financed)

Internal processes will need to be revised as it is a big overhaul across the business especially within the areas of risk and management reporting, policies and client engagement.

One of the key aspects of embedding a target is disclosing progress and unfortunately, much of the reporting of financed emissions is done on a voluntary basis. However, increasingly, the requirement is coming into regulations.

The last part in embedding the targets involves the people within the organisation:

Training and resourcing people across the company to become fluent in this new vocabulary.
Story-telling and managing stakeholders

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Michelle Horsfield

Michelle Horsfield, an environmental scientist with a climate change specialisation, transitioned into the financial sector four years ago to apply her knowledge to the largest reallocation of capital in history, as the economy moves towards a lower carbon future.

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