Financial market update

Research from the Sierra Club shows that in 2020 the 8 largest banks and 10 largest asset managers in the US were together responsible for financing 1.968 billion tons of carbon dioxide – if these institutions alone made up one country, it would be the fifth largest emitter in the world (after Russia). In the same year, the Carbon Disclosure Project (CDP) looked at a group of 332 financial institution – representing US$109 trillion of assets – and found that funded emissions were, on average, over 700 times greater than direct emissions for each of these financial institutions. At the same time, only about a quarter of financial sector organisations even measured financed emissions in the first place, and under half of CDP disclosing financial institutions reported actions to align portfolios with a well below 2-degree Celsius world.


Given that indirect GHG emissions linked to the lending and investment activities of financial institutions are one of the leading contributors to global GHG emission levels, it is disappointing that financial institutions are not doing a better job of disclosing this.


Measuring and disclosing financed emissions is no trivial matter. It requires standardised, credible, and consistent information on investment and debt portfolios – and the emissions intensity of underlying assets. However, a growing number of guidelines, methodologies, and tools have been developed to overcome these barriers. A good example of this is the guidance provided by the GHG Protocol. Scope 3 Category 15 (GHG Protocol), or “financed emissions” are the emissions that financial institutions, such as banks, finance through their loans, investments, underwriting, and other financial services. These are emissions that the institutions are not directly responsible for, but instead are indirectly accountable due to the financial activities that they conduct. Calculating a portfolio’s carbon footprint requires granular information about the assets within it. The analysis — for which several methodologies exist — will be different for each asset class and often takes into account the size of the holding an institution has in each company. Unaccounted financed emissions put the global climate at risk while exposing financial institutions to a great deal of reputational risk from an increasingly climate-aware public. It also exposes these institutions to financial risks from the devaluation of investments and potential stranded assets. However, if and when financed emissions are properly accounted for, financial institutions will be able to better understand the climate costs of their financing activities (this includes whether or not the use of the finance is known, unknown, towards a high emitting sector, or a lower emitting sector – see Figure 1).

Figure 1: PCAF guidance for choosing an appropriate approach to calculate financed emissions

Calculating a portfolio’s carbon footprint will be different for each asset class and often takes into account the size of the holding an institution has in each company. Many institutions have started by homing in on a handful of carbon-intensive sectors as defined by the Net-Zero Banking Alliance (NZBA) – in particular oil and gas, power, and coal-mining. For example, HSBC has focused on oil, gas, power and utilities – in other words, priority sectors where the banks believe they can have the most significant impact, i.e., the most GHG-intensive sectors within their portfolios. Barclays, the UK bank, said it would be extending this work to cover Cement, Metals (Steel and Aluminium), and expect to include additional Industry & Manufacturing sub-sectors in the short-term time horizon. Other sectors the NZBA have noted include Transport (automotive, aviation and shipping), Agriculture, Commercial real estate, and Residential real estate.


South African financial institutions are starting to take financed emissions seriously. Table 1 shows the efforts of three leading South African financial firms. Investec has moved furthest towards its baseline financed emissions. In addition, Absa and FirstRand have estimated financed emissions for selected portfolios, and Nedbank, Standard Bank and Old Mutual have signalled their intent to measure financed emissions

Investec collaborated with PCAF to measure financed emissions and to establish what they call a “baseline” towards a net-zero path. This “baseline” impact on the climate through Investec’s financed emissions is used to measure materiality, and thus guide an overall strategy to reduce Scope 3 financed emissions. Investec calculated financed emissions within commercial real estate, residential real-estate, mortgages, motor vehicle finance, asset finance (motor vehicle fleet and aviation), and listed investments. Not only does this start providing transparency for civil society and the investor community, but also allows for the assessment of the impact of, for example, an increase in the carbon tax.

Table 1: Financial Institutions and their financed emissions journey

Even initial attempts to quantify financed emissions in South Africa makes it clear that these emissions dwarf direct emissions from financial institutions. Absa’s 2021 TCFD report, for example, shows the financed emissions for two of its loan books – agricultural lending (3.55 MtCO2e) and its real estate portfolio across CPF and residential mortgages (9.46 MtCO2e). These emissions are considerably higher than the organisation’s Scope 1 and 2 direct footprint (0.18MtCO2e)[1]. This disparity between financed and direct emissions will only grow as Absa and other financial institutions move toward reporting all of their financed emissions. Calculating financed emissions is costly, complicated, and time-consuming. Significant uncertainty exists regarding the scale of financed emissions. This is especially true in emerging markets like South Africa. But the situation is changing and practical toolkits and guidelines are becoming more readily available. And example is the toolkit developed as part of a South Africa UK Partnering for Accelerated Climate Transitions (South Africa-UK PACT) – a funded project to support climate-related financial disclosures in South Africa.


The IPCC’s Sixth Assessment report has shown that the time for stabilising climate change at 1.5 or even 2-degree Celsius is rapidly running out. The current decade is going to be crucial. If the world wants any hope of containing climate change to relatively liveable levels, the financial sector is going to have to play a leading role in addressing the global climate emergency.Information on financed emissions will provide the sector with the necessary information to act, and the rest of us with the information to judge whether the sector is supporting or hindering efforts to contain climate change.

[1]Before carbon offsets and the purchase of renewable energy certificates.

[2] The large comparison is influenced by the fact that Absa has done good work with regards to reducing its operational emissions.