Banking On Sustainability: Innovations In Financed Emissions Management

Banking On Sustainability: Innovations In Financed Emissions Management

Financed emissions – or Scope 3, Category 15 emissions – are drawing increased focus as they represent a significant portion of a financial institution's carbon footprint. These emissions stem from lending and investment activities and are under heightened scrutiny from investors and regulators, pushing institutions to address their substantial impact on global carbon emissions. According to the CDP, financed emissions are on average 700 times greater than direct emissions from financial institutions. Recognizing the importance of financed emissions management, Verdantix has released research identifying the most significant innovations among 15 providers in the space – Verdantix Smart Innovators: Financed Emissions Management.

As financial institutions pursue alignment with global sustainability commitments, they encounter the complex task of managing financed emissions. Here, they face challenges in:

• Data complexity: Managing emissions data is challenging due to the diversity of assets and jurisdictions, especially for large institutions with extensive portfolios and private investment holdings. The Partnership for Carbon Accounting Financials (PCAF) lists seven categories of asset class, with more to follow, and the four largest banks in the US alone have over $9 trillion in assets for which they need to collect data.
  
  
• Estimation inaccuracy: Without direct data, institutions often rely on estimates using methodologies such as those outlined by PCAF, which can vary significantly and lack accuracy.
  
  

• Regulatory and customer scrutiny: Increased incidents of greenwashing across the globe necessitate robust and transparent emissions reporting to maintain credibility and avoid legal issues.
  
  

As financial institutions grapple with these challenges, the market for providers to aggregate and analyse data for financial market participants is growing fast. Climate financial data providers such as Bloomberg, Moody’s, MSCI and S&P – as well as carbon management software vendors such as Persefoni, Sphera, Sweep and Watershed – have been leveraging and adapting capabilities and developing new functionality to try and address the specific use cases for buyers.

In the Smart Innovators report, Verdantix found that providers in the evolving and expanding financed emission management market are innovating in terms of:

• Utilizing AI and collaborative surveys to enhance the depth, breadth and accuracy of emissions data collection.
  
  
• Increasing the accuracy of estimates by leverging advanced analysis of proxy data sets that include benchmarks and span multiple sectors and geographies.
  
  
• Modelling tools to simulate various future climate scenarios to assess potential impacts on portfolios, guiding strategic adjustments.

Retail and commercial banks, institutional investors, asset managers and other financial market participants are on a journey to manage their financed emissions with increased sophistication and digital integration. Providers of financed emissions management capabilities are fundamental to this task. Their tools and insights are vital for those engaged in understanding and facilitating the global climate transition. This sector represents a dynamic area of growth and innovation, making it a key field for observers and participants interested in the evolving landscape of sustainable finance.