Trying to create a singular measurement of climate risk can distract from urgent efforts to address climate change

A short brief from the Environmental Defense Fund digs into some of the challenges of interpreting the financed emissions data released by financial institutions. It examines the disclosures made by two U.S.-based financial institutions on absolute emissions and emissions intensity, and it looks behind the numbers to illustrate a point about the way that financial institutions report their financed emissions.

The EDF’s paper is short and worth reading, but the key takeaway is that bottom-up data collection is difficult. The effort to attribute emissions to financial sector institutions is worthwhile because decisions they make today about what to finance will be determinative of the lifespan of emissions of capital assets that will be produced. The challenges come in identifying the most appropriate metrics (absolute emissions or emissions intensity) as well as surmounting the challenge of collecting emissions data that are contemporaneous with financial accounting data, or dealing with metrics that use data from different time periods.

The RFI Foundation has our own estimates of financed emissions at the financial institutions in OIC markets and we know about the challenges facing bottoms-up data. This is part of the reason that we took an approach of generating bank-level emissions estimates with a top-down methodology. We were motivated by the idea that providing a source of estimates where data were scarce will reduce climate risk exposure across the financial sector, which will drive more significant benefit for financial institutions than trying to calibrate their reported financed emissions just to meet internal targets.

One of the key takeaways from EDF’s analysis of those U.S. financial institutions, which is applicable across the financial sector, is that understanding what is behind the numbers can be more impactful than the numbers themselves. Reducing emissions intensity without bringing down absolute emissions does not address climate change. Lowering absolute emissions by divesting from high-emissions assets that are able to secure finance elsewhere does not drive decarbonization of the economy.

The adage that ‘we can only manage what we measure’ is sometimes erroneously applied to make measurement the destination, instead of management. With climate transition risk – represented by estimates of financed emissions – management can often be done better with a greater number of different sources of information, even if they are each less informative than could be achieved by striving to perfect the process of reporting before committing to action.