The emissions weight of facilitation

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??This week: The push for banks to account for their facilitated emissions is picking up. But as the industry confronts the question of how to do so, it’s important to help stakeholders understand the metric and to avoid unintended consequences.

Sustainability consulting firm Asia Research and Engagement (ARE) analysed the net-zero strategies of nine leading banks in Asia’s advanced economies – three banks each in Japan, Singapore and South Korea.

All the banks had net zero targets for financed emissions – emissions attributable to the loans and investments on the banks’ balance sheets – in key sectors. But only the Singapore banks had targets that incorporated facilitated emissions – emissions attributable to services provided by the banks, including capital market activities such as bookrunning.

ARE’s recommendations for the banks included integrating facilitated emissions into their decarbonisation strategies.

Inclusion may happen sooner rather than later. Major industry groups have already started to lay down expectations for banks to include facilitated emissions in their reporting. The Partnership for Carbon Accounting Financials (PCAF) in December 2023 laid out a set of reporting standards for facilitated emissions. The Net-Zero Banking Alliance in March adopted new guidelines to extend targets where possible to cover facilitated emissions.

The banking sector will have to confront a number of challenges as it begins to account for facilitated emissions.

The first is explaining to stakeholders what facilitated emissions are and what the numbers mean.

The basic concept for calculating financed and facilitated emissions are quite similar: Work out how much of a company’s value is financed or facilitated by the bank, and attribute that same percentage of the company’s total emissions to the bank.

But the banks argue that there’s a key difference between financed and facilitated emissions that lies in whether a bank’s own capital is used. Financed emissions are produced from assets that sit on the banks’ balance sheets, such as a bank loan to an energy company, so the banks’ ownership of those emissions is much easier to understand.

However, when a bank runs the books on a bond offering, the bank doesn’t buy those bonds; it merely helps other people to lend their money to the borrower. It’s like the difference between the landlord who allows the tenant to use the flat as a drug den versus the property agent who brought the landlord and tenant together. From the banks’ perspective, if someone were tallying up misdeeds, the agent would be much less guilty than the landlord.

That difference manifests in the PCAF standards as a weighting factor. After working out the emissions from their share of capital-market deals, banks need only attribute one-third of that to themselves as facilitated emissions. For financed emissions, however, the weighting is 100 per cent. The 33 per cent weighting takes guidance from an early Basel approach to assessing banks’ risk.

There’s understandably some controversy about the one-third weighting for facilitated emissions. When the banks report their numbers, they will have to explain the distinction in all its complexity to stakeholders. For instance, DBS’ tracking of its net zero progress currently accounts for both financed and facilitated emissions as a combined total and accounts for 100 per cent of its facilitated emissions from its equity and debt capital market underwritings. When it adopts the new PCAF standards, those numbers could change.

The other challenge that the sector may face is unintended consequences from the complexity of the accounting.

For example, the standards require that the facilitated emissions be based on the fundraising company’s emissions in the year of facilitation. But that does not necessarily reflect how the proceeds were used, especially if the proceeds are deployed after the reporting year. An oil and gas company could use proceeds from an equity offering to acquire a renewable energy business a year after the deal, for example. In this case, the bank’s reported facilitated emissions would not properly reflect the greenhouse gas impact of the transaction.

Reported in the right spirit and consumed with proper understanding, facilitated emissions can shed light on a bank’s impact on climate change and on its exposure to climate risk. But those conditions are not a given. After going through all the trouble of reporting those numbers, it would be a waste for the banks if that information doesn’t improve stakeholders’ understanding of the business.

??Top ESG reads:

1. A unit of Sembcorp Industries has agreed to import up to 111 billion British thermal units per day of natural gas piped from Indonesia’s Mako gas fields for about 11 years from 2026.
2. A city’s resilience to heatwaves is increasingly a critical factor for foreign investors deciding where to allocate resources, says HSBC economists.
3. Climate Action Tracker has upgraded its score for Singapore’s climate targets, although the goals are still “highly insufficient” to limit global warming to 1.5 deg C above pre-industrial levels..
4. Morgan Stanley has ditched an earlier pledge to facilitate the prevention, removal or reduction of 50 million tonnes of plastic waste by 2030, citing challenges in data quality.
5. SP Group has deployed a 240 megawatt-peak solar project in China, its largest solar investment to date in the country.

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