Decarbonizing Finance: Unveiling Hidden Carbon Emissions in Financial Markets

Financed emissions have emerged as a critical concept in understanding the environmental impact of financial institutions, including banks, investment firms, and insurance companies. These emissions are defined as the greenhouse gas emissions that arise from the financial activities of these institutions, specifically linked to the projects and companies they finance through various means such as loans, investments, or underwriting.

Unlike direct emissions produced by an institution's own operations, financed emissions represent the broader climate footprint resulting from the allocation of financial resources to entities that may contribute to greenhouse gas emissions through their operations.

Understanding the full scope of emissions that are produced by the world economy - as categorized under the Greenhouse Gas (GHG) Protocol - is essential for companies to assess and manage their carbon footprints effectively:

• Scope 1: Direct emissions from company-owned or controlled sources, such as factory emissions.
• Scope 2: Indirect emissions from the generation of purchased energy, like electricity.
• Scope 3: All other indirect emissions that occur in a company's value chain, including material extraction and processing, transportation, waste management, and the use and end-of-life treatment of sold products.

Measuring financed emissions typically involves calculating the carbon footprint of the entities receiving financing. This process can include evaluating the emissions produced by the funded projects or companies, which is essential for understanding the environmental impact of financial activities.

However, when calculating financed emissions for the automotive industry, for example, there is significant variance in whether the entire lifecycle aspect of vehicles is considered, with some banks only including tailpipe emissions (tank-to-wheel). Further, the quality of data used to measure and report emissions varies widely, with some banks not disclosing the data quality scores they use.

The assessment of financed emissions is increasingly becoming a focus for regulators, investors, and the public, as there is a growing demand for transparency and accountability in the financial sector's role in addressing climate change.