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Why banks are struggling to report capital markets fossil fuel activity

By Michael Klimes
Canary Wharf financial district, London. The work banks have done so far to create a universal standard to report facilitated emissions is incomplete and has attracted much attention. (Photo: Chris J. Ratcliffe/Bloomberg)
Canary Wharf financial district, London. The work banks have done so far to create a universal standard to report facilitated emissions is incomplete and has attracted much attention. (Photo: Chris J. Ratcliffe/Bloomberg)

Climate campaigners lament banks’ limited reporting on facilitated emissions, while lenders argue that arriving at a standard for disclosure is a complicated process

Banks are under serious pressure to come clean about their ties to fossil fuel companies. Much of this criticism comes from environmentally focused non-governmental organisations, such as ShareAction in the UK and the Sierra Club in the US.

Both these bodies have alleged that banks are reluctant to disclose comprehensive emissions reports on the capital markets side of their businesses. These are known as “facilitated emissions” as opposed to “financed emissions”. The latter are easier to understand and measure, for example, when a bank lends money directly to an oil company to build a pipeline. But harder to grasp are facilitated emissions, where a transaction – for instance, the initial public offering of an oil major – is underwritten indirectly through the capital markets.

Figures from the report Banking on Climate Chaos 2023 show that between 2016 and 2022 the ratio of capital markets fossil fuel financing to direct lending was almost even. In 2022, however, bond issuances dropped in proportion to loans, compared with the overall trend since 2016.

Nonetheless, the report adds that many bank fossil fuel exclusion policies apply only to lending, which leaves a massive $2.7tn loophole for banks that do not include underwriting in their climate policies. It is worth recapping the history of facilitated emissions reporting to understand where banks are and why.

Reason for delays

The work banks have done so far to create a universal standard to report facilitated emissions is incomplete and has attracted much attention. The Partnership for Carbon Accounting Financials has been trying to create a standard for the past few years.

It has a working group of banks chaired by Morgan Stanley and Barclays. Other members include Bank of America, BNP Paribas, Citi, HSBC, NatWest and Standard Chartered. Some banks outside the group have independently done their own work on facilitated emissions.

According to media reports and other sources, the publication of the standard has been delayed because banks in the working group are debating the best way to disclose carbon footprints. The key problem is that banks have not yet been able to agree how much exposure or weighting they should have for a facilitated emission transaction.

Using the example of an oil firm’s IPO, how should exposure of the banks involved in the capital raising be apportioned?

“Initially, what the [PCAF] working group was considering was anything between 17 per cent to 100 per cent weighting,” says Jeanne Martin, head of banking programme at ShareAction. “And 17 per cent was just a number that was taken out of a Basel regulation which hadn’t been developed with facilitated emission disclosures in mind.

“Our view was that basically anything between those numbers does not really have a scientific rationale. And it’s hard to see how a weighting below 100 per cent aligns with banks’ ambitions to be net zero by 2050.”

The PCAF has carried out two rounds of consultations so far. Most key concepts were agreed after the first consultation in late 2021. The second consultation in late 2022 focused on a “weighting factor” applied to facilitated amounts.

How far have banks got?

There are a range of approaches from banks to report facilitated emissions. Some banks, such as NatWest, report 100 per cent of their facilitated emissions, while Barclays has a 33 per cent weighting.

Other banks, such as HSBC, appear to have rolled back the scope of some disclosures until the PCAF has published its standard. For example, HSBC’s 2021 annual report did include disclosures of its facilitated emissions for oil and gas alongside power and utilities, but in its 2022 report, HSBC said it had deferred setting targets for facilitated emissions until the PCAF standard for capital markets was published.

It added: “We had intended to disclose facilitated emissions for 2019 and 2020 for the oil and gas, and power and utilities sectors for transparency, as we did last year. However, following internal and external assurance reviews performed during the year, we identified certain data and process limitations, and have deferred the publication of our facilitated emissions for 2019 and 2020 for these two sectors while additional verification procedures are performed.”

HSBC’s line is typical of what many banks have said about their work on facilitated emissions in their public statements. On October 19, Deutsche Bank published its initial transition plan and further targets for high-emitting sectors.

While there are 12 references to financed emissions in the initial press release, there is only one mention of facilitated emissions. The German lender goes on to say that reporting and reducing facilitated emissions relating to capital markets activity is the next step of its work.

In the release, Deutsche Bank chief sustainability officer Jörg Eigendorf added: “Our transition plan sets out what clients and the public can expect from us as we scope out our role in decarbonising the economy. As the economy progresses toward net zero, regulations, reporting standards and the role of the banking industry will evolve. This will allow us to continuously refine our own transition plan.”

The key word in his remarks is “evolution” because the work on facilitated emissions is very much that.

Research exposes failings

Several studies have shed light on how banks are doing on facilitated emission disclosures. In July 2023, the Sierra Club’s Fossil-Free Finance campaign published a report that looked at the capital markets activities of the six biggest US banks for 30 of the top fossil fuel expansion companies in the world.

It revealed that between 2016 and 2022, nearly two-thirds (61 per cent) of the financing for fossil fuel expansion companies came from the top six Wall Street banks: JPMorgan Chase, Citi, BofA, Wells Fargo, Morgan Stanley and Goldman Sachs. The source of the funding was through capital markets, as opposed to direct lending.

The report also pointed out that only JPMC, Goldman Sachs and Wells Fargo include bond and equity underwriting in their sectoral emissions reduction targets. It added the remaining three banks do not disclose their facilitated emissions activities.

“One of the reasons for writing the report was to shed light on capital markets and how banks underwrite fossil fuel expansion through debt and equity deals,” says Adele Shraiman, senior campaign strategist for the Sierra Club’s Fossil-Free Finance campaign.

“What [banks] are doing is performing a sleight of hand and they continue to funnel money to fossil fuel companies. That is why it is really important we talk about capital markets and where the PCAF comes in – without this industry-wide standard, there is a massive inconsistency across the board. It is really clear we need an industry benchmark.”

She adds that many groups, such as thinktanks and NGOs, are concerned that the PCAF may soften the requirements in the standard it eventually publishes. However, she acknowledges that one of the explanations for the heterogeneity of bank reporting on facilitated emissions targets is the time when they were initially developed.

“Banks started developing targets before the PCAF and Glasgow Financial Alliance for Net Zero,” Shraiman says. But she argues this cannot be used as an excuse for what she sees as the slow progress of banks to provide more details about how they tackle facilitated emissions.

“One of the things we hear a lot about regarding facilitated emissions specifically is there are a lot of methodology concerns, like double counting or inherent volatility. Those concerns are valid and there is legitimate difficulty in creating standards to calculate facilitated emissions,” she says. “But the issue is you also see double counting and volatility in more traditional investments. In conversations like these, it is important to not miss the forest for the trees. These considerations are inherent to the subject matter.”

Other reports suggest that the European banks are also not doing as much as their US peers. On September 26, an investigation by The Guardian newspaper in the UK revealed that some of Europe’s largest lenders helped fossil fuel companies raise more than £869bn from global capital markets since the Paris Climate Accords.

The banks’ viewpoint

A bank spokesperson, who asked not to be named, likens the development of a facilitated emissions standard for banks to that of voluntary carbon market disclosures rules. The complexity of the subject – combined with regulators not being prescriptive about what they want from banks – has led to the current situation, says the spokesperson, adding: “All this means that it can take a long time. You want to do good reporting and get things right, otherwise you could be open to litigation claims.”

Banks tend to set facilitated emissions targets in certain sectors such as oil and gas that they aim to meet by a certain date. Hence, Wells Fargo cited its “CO2eMission” statement from May 2022 when asked to comment on the subject.

The bank methodology includes 100 per cent of origination activities that directly fund company operations. This includes equity capital markets alongside debt capital markets, including high-grade securities, high-yield securities and term loan transactions, but does not include advisory activities such as mergers and acquisitions advisory activity, commodities activity or derivatives.

Citi’s most recent 2022 Task Force on Climate-Related Financial Disclosures report says it will initiate facilitated emissions calculations for sectoral capital markets portfolios once the PCAF methodology is finalised, while target-setting will be considered subsequently.

Some banks, such as BNP Paribas, are taking the initiative and working on their own standards. In a statement, the French bank said: “Following the PCAF proposed methodology, BNP Paribas has decided to start working on our own methodology instead. One of the main limitations in the proposed methodology is the fact that the PCAF has no specific approach for green bonds.”

JPMC documents show that in 2021 it set intermediate targets of 2030 for three sectors: oil and gas, electric power and automotive manufacturing. In its 2022 climate report it added three more: iron and steel, cement and aviation. In its 2023 climate report, the US bank provided information for the first time on absolute financed emissions for sectors where it has set targets. JPMC also announced new 2030 emission intensity reduction targets for shipping and aluminium.

A JPMC spokesperson said: “In 2021 and 2022, we facilitated more than $175bn for green activities like renewable energy, energy efficiency and sustainable transportation. These efforts help put us well on our way to our target of $1tn for green initiatives over 10 years, including for technology that will tackle climate change but does not even exist yet.

“We are also taking pragmatic steps to meet our 2030 emission intensity reduction targets in the six sectors that account for the majority of global emissions, while helping the world meet its energy needs securely and affordably.”

In a statement, Dutch ethical bank Triodos said it believes that measuring financed emissions is a catalyst for action for banks, regardless of their size, business model or geographical location.

It added: “Discussions within the PCAF on facilitated emissions have not yet been completed and no conclusion has been reached. We do not feel it is appropriate to comment externally at this stage. Of course, we are curious about the outcome of the discussion and the details of the standards. We expect a thorough rationale for the percentage weighting that is agreed on.”

While many banks eagerly await the final PCAF standard on facilitated emissions, some point out that any benchmark is a tool and, hence, needs to be used with a degree of realism.

Laurent Adoult, managing director and head of sustainable fixed income in Europe at Crédit Agricole CIB, says: “When it comes to the disclosure of carbon emissions, it is very important to be transparent. At the moment there is no universally accepted database where you can get data on capital markets investments. This means it is hard to have a complete picture of what is happening in terms of carbon footprint. It is important to remember that all of these disclosures are a way for banks to help clients decarbonise themselves.

“In theory, we as a bank could stop serving all our clients that have a large carbon footprint tomorrow,” he adds. “We would then as a bank be a carbon-neutral business – yet those clients we serve would still have not changed their carbon footprint.”

This article first appeared in The Banker

A service from the Financial Times