Title: Banks Clash Over Carbon Emission Accountability in Underwriting Practices
Major international banks are currently embroiled in a heated debate over how to account for carbon emissions generated through bond and stock sale underwriting. The issue has sparked discord with environmental advocates who argue that banks should assume full responsibility for emissions resulting from activities financed through these transactions.
In a recent development, banks involved in the creation of global standards on carbon accounting have voted to exclude two-thirds of these emissions from their own carbon footprints. This decision has significant implications, as it directly impacts the banks’ targets for achieving carbon neutrality.
According to recent data, major US banks have provided almost half of the financing for top fossil fuel companies through capital markets, rather than direct lending, between 2016 and 2022. The accounting of emissions generated from these transactions will have a profound effect on the industry’s efforts to combat climate change.
The rationale behind the banks’ insistence on a 33% accounting share is rooted in the argument that they lack control over borrowers in the same way they do with loans. Banks with large capital markets operations are asserting that they should not be held fully responsible for emissions generated by companies that they finance.
Opponents of this stance argue that assuming only partial responsibility would enable banks to shirk accountability for their financing activities. They argue that if banks were to assume full responsibility for emissions resulting from their underwriting practices, it would eliminate the risk of double-counting across the financial system, as bond and stock investors would account for these activities in their own carbon footprints.
Disagreements over the accounting standard have led to delays in the publication of the final methodology by the Partnership for Carbon Accounting Financials (PCAF). This association of banks, which seeks to harmonize carbon accounting, will ultimately determine whether the 33% accounting share for capital markets is adopted.
Furthermore, there is uncertainty regarding whether banks will have to consolidate capital market-related emissions and lending-related emissions into a single target or address them separately. The Science Based Targets initiative, supported by the United Nations, is currently developing net-zero standards that will consider these issues and determine whether different or combined targets are necessary for banks.
As the global financial sector grapples with the urgent need to address climate change, this contentious debate over carbon emission accounting exemplifies the challenges faced by banks in aligning their practices with sustainability goals. Environmental advocates continue to push for greater accountability from banks in financing activities, emphasizing the necessity for a comprehensive approach to combatting climate change in the financial sector.
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