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There isn’t yet consensus on the idea of financed emissions, but minds are already churning on how to make money from them. Matt Levine at Bloomberg wrote about one alternative investment expert developing “a new type of securitization he says would allow banks to cut the carbon footprint of their balance sheets.” Levine draws a parallel to credit risk transfer – an established practice in banking:

“For banks, repackaging and transferring the credit risk from their loan books to less-regulated private fund managers is nothing new. The appeal for investors on the other side of such deals is they can get double-digit returns, while banks get capital relief, freeing them up to do more business.”

According to Levine, this new mechanism would “transfer the credit risk, but at the same time transfer the so-called emissions risk to a third-party investor outside of the banking system” – such as a hedge fund – while allowing the original lender to retain the underlying loan and repayments. The key is pulling the emissions out of the banking system and putting them into “a private company that doesn’t have to report its emissions to anyone”. 

The concept separates emissions and related risk from the project/asset/investment generating the emissions – removing that as an impediment (or risk) from lending to major fossil fuel projects. Further, it creates new revenue opportunities for those willing to take on financed emissions. Indeed, Levine says:

“Like, with the right structure — one in which I took no credit or liquidity risk and put up no money — I would probably be willing to take all of JPMorgan Chase & Co.’s carbon emissions off their hands, and put them on my balance sheet, for, you know, one basis point of notional value? I feel like that would probably be a nice payday for me and cost me nothing except some time and effort to review the documents, which I would enjoy.”

If this takes off, it would create perverse incentives wholly in opposition to what financed emissions determinations/disclosures were intended to do. In practical terms, this could increase funding of emissions-heavy projects by pulling emissions risk out of the financing structure, and turning that into a standalone product with ready buyers. The consequences of that are pretty mind-bending – but it may happen – read the next blog.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for almost 40 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of environmental regulatory development, working across a range of disciplines. He was one… View Profile