Each of the four steps in EY’s decarbonization approach poses major challenges for financial firms. To date, there has been significant focus on developing technical standards around baselining, target setting and reporting. Partnership for Carbon Accounting Financials (PCAF), a partnership aiming to establish common standards for gauging financed emissions based on carbon accounting, is a prime example. These activities rely on access to suitable data, appropriate methodologies and the right skills – all of which, while developing rapidly, still lag behind market demand.
In response, financial firms, companies, investors, data providers and public bodies are investing time and money on a range of initiatives. These include developing global carbon accounting standards; tackling challenging areas such as whether and how to include Scope 31 emissions; increasing the granularity of net-zero scenarios that can be used to set targets; and enhancing accreditation methodologies such as science-based targets. In addition to the requirement that GFANZ members have to publish transition plans within a year of announcing membership, a number of regulators are now considering whether or not to mandate the need to publish transitions plans.
Arguably though, it’s the implementation stage – where the industry’s actions have the greatest real-world impact – that’s the toughest step. Implementation requires difficult choices over how firms encourage their clients and investee companies to decarbonize existing activities, to scale climate solutions including new technologies and activities, and to ensure that executives throughout organizations are equipped to make informed decisions.
None of this is easy. Developing an informed and credible climate strategy requires financial firms to be able to form a view on:
- The current and future transition status of clients, investee companies and assets. To inform risk management and financing decisions, firms need structured frameworks that can help them decide whether a business is a green native, on a credible path to transition, a transition denier, or a potential stranded asset.
- The trade-offs between short and long-term economic, environmental and social considerations – illustrated by increasing awareness of the need for a “just transition.”
- The knock-on effects of decarbonization decisions on client relationships, business performance, growth strategies and brand reputation.
A number of external stakeholders including investors and NGOs are also applying scrutiny to financial institutions’ decision-making. For example, one recent report2 calls on leading tech companies to reduce the emissions they indirectly finance through their bank deposits.
In the US, Texas, West Virginia and Idaho are among the states seeking to boycott financial firms that divest from fossil fuels3, while Californian lawmakers want to do the opposite. The enduring prevalence of coal in some APAC portfolios can also give rise to over-ambitious net-zero targets.