Even though financial institutions tend to generate few Scope 1 emissions, they are in the crosshairs for “financed emissions” – increasingly called “Scope 4” emissions even though the GHG Protocol (source of the “scope” terminology and concepts) don’t go past Scope 3. In a way, it is kind of like “this one goes to eleven.” Coming out of COP26 in Glasgow, there was much activity in the financial community around their role in financing projects that result in high GHG emissions. But over time, things changed. Earlier this month, the Institute of International Finance published a Staff paper “Resetting the debate on the role of private finance in the net-zero transition.” The paper, intended to educate policymakers, discusses
“the complexity of achieving climate goals, particularly when governments are faced with a polycrisis of interlinked economic stressors, including geopolitical, energy and other price shocks as well as record high global debt levels [and] … progress depends on economic prosperity, without which the journey will take longer, be harder and could generate social unrest.”
Yes, the path to a transition economy is difficult and complicated but it also must be economically viable. Fair enough, and that is where the paper pushes back against the general perception of finance’s role in achieving global net zero:
“The prevailing finance-centric ‘theory of change’ for delivering the net-zero transition across the economy – which assumes that financial sector alignment with net zero goals will have a material impact on the decarbonization trajectory of the global economy – needs to be reassessed. Trillions of dollars in investment need do not equate to trillions in investment opportunity.” [Emphasis added].
Pretty harsh ideas dolled up in those carefully-chosen words. To support financial institutions’ net-zero progress, the paper offers three “key priorities for the way forward”:
1. Strengthening real economy policy frameworks and developing national-level transition strategies
2. Ensuring that financial sector policy remains risk-based, and that it is not used as a substitute for broader net-zero policy measures
3. Enhancing the international financial architecture in support of transition finance in EMDEs [emerging market and developing economies].
Not every financial institution is fully onboard with the paper’s position, as ING announced it will
“stop all new general financing to so-called pure-play upstream oil & gas companies that continue to develop new oil & gas fields. This policy is applicable with immediate effect. In addition, guided by the IEA World Energy Outlook 2023, we’ve decided to stop providing new financing for new LNG export terminals after 2025.”
If momentum around the paper’s position grows from policymakers and/or financial institutions themselves, that could have a domino effect throughout supply chain emissions reductions – and not in the right direction for the short term. What are Scope 4 emissions to financial institutions are other companies’ Scope 1, 2 and 3 emissions. That needs to be kept in mind.
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