Financed emissions metric might be a distraction rather than a solution

Here’s the intro from this Bloomberg Green article:

Pretty much every major western bank and asset manager, including BlackRock Inc., HSBC Holdings Plc and JPMorgan Chase & Co., discloses their financed emissions, or the greenhouse gas-pollution that they enable via the loans and investments they make.

The metric has grown in prominence over the past few years, with more and more financial firms committing to making annual disclosures about the most carbon-intensive areas of their balance sheets. Even the International Sustainability Standards Board, which sets global reporting standards, has made its own request for financed-emissions disclosures.

But according to Jonas Rooze, head of sustainability and climate research at BloombergNEF, the ubiquity of the metric in financial circles shouldn’t be mistaken as a measure of its utility. In fact, financed emissions might be a distraction rather than a solution.

“The way it has become this all-encompassing one-metric-to-rule-them-all for financial institutions to manage their transition can be a bit like focusing on the problem (emissions) at the expense of the solution (transition),” Rooze said. “You manage what you measure, and so financial institutions are trying to manage their financed-emissions number—not real-world emissions.”

Rooze isn’t the only one taking aim at the metric. A paper published this month by Ilmi Granoff and Tonya Lee for the Sabin Center for Climate Change Law and the Columbia Center on Sustainable Investment found that “despite widespread adoption,” financed-emissions metrics “face two key methodological challenges: lack of comparability of outputs within and between portfolios, and vulnerability of calculations to portfolio volatility.”

In a blog post to accompany the report, Granoff said the financed-emissions calculation has become popular because “it provides a single measure of portfolio progress” and offers third parties “a practical means to attribute emissions to financial institutions.”

But the problem is there is a “misguided intuition that financed emissions capture all the ways that you might connect financial activity to GHG-emitting activities of borrowers and investees,” Granoff said in an email. “It doesn’t.”

The most commonly-used method for calculating such emissions, developed by the Partnership for Carbon Accounting Financials, uses the outstanding amount of corporate borrowing as the numerator and the value of the company being financed as the denominator. The issue is this approach is prone to volatility and can lead to counterintuitive readings.