Introduction
Global warming and climate change have become serious problems in recent years. If this trend continues, the natural environment and our lives will be severely affected. The role of financial institutions in solving these problems has been attracting a great deal of attention. While supporting the economy by lending money and making investments, financial institutions must also be proactive in creating an environmentally friendly society.
In particular, financing projects related to renewable energy and environmental protection is an important step toward long-term sustainability. This article will provide specific examples of how financial institutions can reduce their environmental impact and build a sustainable future.
Role of Financial Institutions
Financial institutions support the economy by lending and investing money in companies and projects. However, that money can also cause damage to the environment. For example, investments in companies that use fossil fuels can lead to increased greenhouse gas emissions. Therefore, it is important to know how financial institutions can act to protect the environment.
Investing with the Environment in Mind
There is a concept called ESG investing. This refers to investments that value the environment (Environment), society (Social), and governance (Governance). For example, by investing in companies that use renewable energy or promote recycling, you can help create an environmentally friendly society. over $35 trillion worldwide according to the Global Sustainable Investment Alliance (GSIA), and this trend is growing. This growth is fueled by investors’ growing interest in climate change and social responsibility. For example, data show that ESG investments account for more than 40% of all investments in Europe, with renewable energy-related projects in particular attracting funds.
The growth of ESG investments has also provided an impetus for financial institutions to promote environmentally friendly investments. It is hoped that the increase in such investments will help to combat global warming and make our lives more affluent.
Responding to Risks from Climate Change
Climate change causes natural disasters such as floods and droughts, which affect the lives of many people. When financial institutions provide loans, they must consider what risks the money will be exposed to. For example, it is said that in order to curb global warming by 2030, we need to reduce greenhouse gas emissions by 7% each year. Achieving this goal will require significant investments, with an emphasis on energy conversion and the development of clean technologies. These efforts are based on scenarios outlined by the Intergovernmental Panel on Climate Change (IPCC).
What are the emissions of the investments and loans?
The amount of greenhouse gases emitted by financial institutions as a result of the money they lend and the investments they make is known as “portfolio emissions. By properly measuring these emissions, financial institutions can consider specific ways to reduce their impact on the environment.
Types of Emissions
Greenhouse gas emissions can be divided into three categories
・Scope 1: Direct emissions (e.g., factory smoke)
・Scope 2: Indirect emissions (emissions from electricity use)
・Scope 3: broader indirect emissions (e.g., emissions from money lent by financial institutions).
Scope 3 is particularly important for measuring the environmental impact of financial institutions. This is because financial institutions do not directly emit emissions, but rather include emissions from corporate activities in which they are involved through loans and investments. For example, investments and loans to companies that use fossil fuels such as coal and oil indirectly support large amounts of greenhouse gas emissions. Therefore, reducing Scope 3 emissions is one of the most important steps financial institutions can take to contribute to the fight against climate change. Most of the emissions of financial institutions are included in this Scope 3 category.
In order for financial institutions to reduce their Scope 3 emissions, they must work together with their portfolio companies to promote environmentally friendly business activities.
Why are the emissions of the companies in which we invest and finance important?
To protect your money.
Companies that do not properly address climate change may suffer significant losses from future regulations or disasters. Therefore, it is important for financial institutions to carefully consider which companies to lend money to. For example, GFANZ, an international organization of financial institutions managing more than $130 trillion in assets, is working together to promote earth-friendly use of money [2]. Specifically, GFANZ is working to achieve net-zero targets by 2050 by financing renewable energy and decarbonizing technologies. In addition, GFANZ supports the diffusion of clean energy in developing countries and promotes capital inflows to emerging markets in order to achieve sustainable development on a global scale.
When financial institutions manage their environmental risks, they can increase the stability of their investments and secure long-term profits.
For society as a whole
Financial institutions have a responsibility to consider the interests of society as a whole, not just to pursue profits. For example, by supporting companies that have a low impact on the environment, we can prevent global warming and protect everyone’s livelihood. Also, by creating an environmentally friendly money flow, you can earn people’s trust.
Methods to measure emissions and their challenges
An initiative called PCAF
PCAF is an international organization that creates rules for financial institutions to measure the emissions of their investees. These rules include specific methods for financial institutions to calculate the emissions of each company in which they invest. For example, one method is to calculate emissions in proportion to the amount of investment or loan based on the energy used by the company and the greenhouse gases it emits. Using this rule, financial institutions can be clear about how much they are impacting the environment. Currently, 145 financial institutions in more than 40 countries around the world use this rule.
PCAF presents a methodology called Financed Emissions in its reports. This method is calculated by multiplying the emissions of each portfolio by the Attribution Factor of the financial institution.
The PCAF Financed Emissions methodology differs between listed and unlisted companies.
Why is it so difficult to measure?
Measuring emissions is not easy. For example
・Accurate data may not be available.
・Complex methods are needed to calculate emissions.
・Different countries and regions have different standards, and it is difficult to adapt to them.
To solve these problems, PCAF supports financial institutions by providing an easy-to-understand method.
Efforts are also underway to utilize digital technology to efficiently collect emissions data. This will enable financial institutions to more accurately assess their environmental impact.
Initiatives underway around the world
GFANZ (Glasgow Finance Alliance)
GFANZ is an international organization of financial institutions working together to stop global warming. Currently, more than 700 financial institutions are participating, managing more than $130 trillion in assets [2]. This money is used for projects to prevent global warming by 2050.
GFANZ is also strengthening its efforts to support sustainable growth by promoting financing for emerging markets. This is expected to promote equitable environmental measures around the world.
PRI (Principles for Responsible Investment)
The PRI is a set of rules to promote investments that care for the environment and society; by 2021, more than 4,000 financial institutions will be following these rules, with $121 trillion in assets under management [1]. By using these rules, we can promote the creation of a sustainable society.
Conclusion
Financial institutions play an important role in protecting our future. They are required to measure the emissions of their investments and loans in order to reduce their impact on the environment, and to promote efforts to reduce them. These efforts will not only protect the future of our planet, but also help stabilize our economy and society.
For example, by utilizing international frameworks such as GFANZ and PRI, financial institutions can more effectively address environmental issues. Let us hope that financial institutions will continue to contribute to the creation of an earth-friendly society.
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