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Carbon targets for bonds: which side are you on?

With energy policy at a crossroads, cutting financed emissions could be decisive

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By the end of this year, HSBC will publish a target to reduce the carbon emissions of the bond and equity deals it underwrites for clients in the oil, gas and electricity industries.

It’s been a long time coming. The concept of a carbon footprint in the financial markets goes back decades. If investors can accept responsibility for the climate-damaging emissions inherent in the securities they own, why not the investment banks that bring those deals to market?

The idea is neither morally stretching, nor intellectually demanding, nor technically challenging.

If emissions can be assigned to companies (and governments) — and they have been for years — some simple maths can attribute them to the arrangers of financing for those organisations.

Banks have hidden behind the argument that there is no agreed standard on how to do it.

The real reason is probably more basic. As a friend remarked to one GlobalCapital journalist this week, in investment banking, “when there’s a fee, there’s a way”. In this case, the more relevant aphorism is the inverse: “when there isn’t a fee, there isn’t a way”.

Publishing numbers for the emissions of all the companies they finance would remove the fence that protects banks from having to go to the next stage — reducing those emissions.

Bearing in mind how urgent the climate crisis now is, and the speed of emissions cuts that the world must make — 7% of all emissions a year, according to many scientists — banks’ targets would also have to be steep.

And that means, at the very best, having tough conversations with clients, in which the bank makes clear that it wants them to transition rapidly to low carbon energy sources.

Quite likely, some clients will not be able to change fast enough, and banks will have to bid them goodbye.

Voluntarily cutting lucrative relationships and refusing deals is the last thing any investment bank can bear to do.

After years of procrastinating, however, banks have now got to this point in their engagement with climate change.

HSBC has been slower than the leaders to disclose its financed CO2, but has leapfrogged the pack, by declaring emissions from capital markets underwriting. Reduction targets will follow.

JP Morgan and Barclays are going the same way. Other banks should catch up and try and better them.

A competition of this kind is badly needed this year, for two reasons. After the initative fest of COP26 last year, when bigwigs including Mark Carney corralled financial firms into various groups under the Glasgow Financial Alliance for Net Zero, sustainable finance specialists are wondering what the sector can come up with this year. There will be another COP — how are bank CEOs going to look like they’re trying?

Much more importantly, the Russia-Ukraine war has made a unique rupture in the global energy market. For the first time since the 1970s, energy prices are a dominant factor in the economy and the whole political and business worlds are focused on the problem.

Decisions in the coming months could bend the curve of carbon emissions in the right or the wrong direction.

Green energy supporters are better armed than ever — they can point not just to the disastrous environmental effects of burning gas, but also its high and volatile costs. For generating electricity, renewables are simply cheaper — and can be so, even taking into account their intermittency.

Nevertheless, the fossil fuel camp is determined too. At this juncture, it is crucial for finance to show which side it’s on. “Finance wants green” is the simple and dumb message politicians have to hear.

Banks will be tempted to equivocate. After all, they have a century’s experience of turning oil into gold.

But if banks have to stare at a page of figures with promised percentage cuts in financed emissions, they are rapidly going to realise there can be no more fudges. Gas has to go.

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