The full story of climate data for financial institutions isn’t just the numbers

The Network for Greening the Financial System has released a detailed overview of the state of emissions data and ways to improve them. This may seem like a niche concern, only relevant for those tinkering underneath the hood of financial institutions or within regulators or the databases used. Still, it is much more important than it seems at first glance. That’s because measurement and reporting are designed to guide how the data are being used, but no single metric or methodology provides a complete guide to Net Zero or Paris-alignment.

One of the throughlines in the report is how differences in methodologies — as well as the limited transparency about the methodologies — influence the accuracy and comparability of the data being produced for regulatory stress tests and mandated climate disclosures. This is important because it is unrealistic to assume the completeness of emissions at the source where they are released and then up and down supply chains to all whose produce enables or embeds these emissions.

Producing a single-point estimate for a company’s emissions, or the financed emissions for a bank, investor, or insurer, is just a compliance exercise. There will be a single disclosure requirement that every institution will follow and that will provide an estimate that is comparable for all users of the data, especially in reporting their own portfolio emissions or financed emissions.

However, for the issue of understanding how to mitigate climate change itself, as well as important questions associated with burden sharing or incentives for climate mitigation (especially in ensuring a Just Transition), the regulatory number will be merely a starting point. The story behind the number will reveal far more information than communicated numerically.

What does that mean? Different layers of emission go into a company’s reported emissions and a financial institution’s financed emissions. There can be the emissions directly released from the operations (Scope 1), including from the electricity used (Scope 2), then there is the connection of the supply chain or distribution to the rest of the economy, including through a company’s investments (Scope 3). There is sometimes mention (but rarely including for disclosure requirements) of Scope 4 for companies whose technologies enable others to avoid emissions they would otherwise produce.

The NGFS report highlights the differences in comparing between companies in the same industry or sector who report on different sets of emissions (or if they include Scope 3 emissions in what they report, different sub-sets of emissions, since Scope 3 covers a wide range of emissions across 15 categories). This relates to the challenge of comparing apples-to-apples among reported emissions.

Beyond the apples-to-apples comparison of current emission comes the question of emissions in motion over time; the transition from a Paris or global Net Zero by 2050 misaligned company or investment or portfolio to one that is aligned. Transition plans are designed to provide a roadmap for companies about how they will reach their stated climate objectives, but these are often difficult to evaluate, especially if they don’t outline the expected capital investments required to meet the goal.

From a climate data perspective, there is much more to the credibility of a company’s climate targets contained within its reported emissions. Because so many industries depend on other sectors for their climate action, or they fail to disclose how much of their emissions targets are reliant on carbon offsets, they can set much more or less accountable targets for their emissions trajectories in the future.

A financing entity such as a bank can produce a net zero alignment target based on its customers’ targets. It can move financing away from high-emitting entities, especially those that are not reducing their emissions, towards lower-emission companies to report a reduction in emissions where no emissions reduction occurs in the real economy.

Or it could set a trajectory based on the existence of transition plans among its customers, without providing a way to evaluate the credibility of individual counterparties’ and clients’ transition plans (for emissions reduction as well as for Just Transition criteria). It may not face the same accusations that it is ‘gaming’ the metrics as if it claims emissions reductions towards a target by moving financing from high- to low-emitting sectors, but it has nonetheless outsourced failures to meet targets to other entities.

The purpose of climate disclosures is to help users of its reporting to evaluate the degree to which the entity is protecting itself against future risks associated with its greenhouse gas (GHG) emissions from climate change, nature loss, and the achievement or failure to see through a Just Transition. The numbers only tell one part of that story, even if they are perfectly consistent in what is being reported between different entities.

The much more important information comes through identifying how much an entity can and expects to be involved in influencing changes to the emissions it reports today for future periods. If an entity — particularly a financial institution, because of their unique responsibility for raising finance used for new capital investments — is setting passive emissions reduction targets that remove them from responsibility and limit their accountability from a failure to reach targets, then what they report will be largely meaningless except to the degree they face liability for compliance failures for reporting.

If, however, they can clearly break down the emissions they report into buckets of emissions based on what they can and cannot influence, and then explain how they plan to influence others to reduce in line with their targets, then the report data become much more powerful. Instead of being just another metric to report, it becomes enriched with both information about the present and guidance about the future, which brings both value creation potential and accountability.