Decoding Financed Emissions: The Financial Sector’s Climate Responsibility

Addressing climate change is an urgent imperative and it has various problems associated. One critical but often overlooked obstacle is financed emissions.??

Despite growing awareness of the environmental impacts associated with investments in fossil fuels and other high-emission industries, financed emissions persist as formidable barriers to achieving our climate goals.??

But what exactly are these emissions that pose such a significant threat to our efforts to combat climate change??

What are financed emissions???

Financed emissions, in simple words, encompass the greenhouse gas (GHG) emissions stemming from financial activities, investments, and lending conducted by investors and financial service providers.??

These emissions encompass the carbon footprint of a firm’s entire investment portfolio or lending book, attributing emissions based on the activities financed by the institution.?

These emissions enter the atmosphere through investments in fossil fuel projects, industries, and infrastructure. Despite growing awareness of their environmental toll, financed emissions persist as formidable barriers to achieving our climate aspirations.?

According to the Greenhouse Gas Protocol , financed emissions are classified as Scope 3 emissions .

Why are these emissions important???

Financed emissions are important because they contribute significantly to global greenhouse gas emissions. If left unattended or neglected, even with other mechanisms in place to tackle climate change, these emissions can dent the efforts.??

For instance, a study found that the portfolio emissions of global financial institutions are, on average, over 700 times larger than direct emissions, according to the emissions disclosed by the companies.??

Financial institutions are overlooking the most critical climate-related risks linked to financing.?

The report also mentioned that the majority of companies considered for the study fail to disclose credit risks (65%), including borrower defaults on loan repayments, and a significant percentage (74%) neglect market risks, such as stranded assets and devaluation of financial assets.?

However, the financial impacts of these financing-related risks are significantly greater than those associated with operational risks, amounting to a combined US$1 trillion versus just US$34 billion, as per the study.?

Continue reading