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Banks have blown their cover: bond emissions ratio is a smokescreen

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Idea of counting securities underwriting emissions at 33% must be rejected

The concept of a carbon footprint is not new to anyone in capital markets. It is 22 years since the Greenhouse Gas Protocol was agreed as a way to standardise how organisations report their emissions.

It is easy to look up the carbon footprints of BP, ExxonMobil or Volkswagen, broken down into the bands and categories defined by the GHG Protocol.

Scope 1 is fuel an organisation burns, Scope 2 the emissions used to generate the electricity it uses, and Scope 3 all the emissions at other organisations, necessary for its business — whether at suppliers or customers.

You might be surprised to learn, therefore, that you cannot look up the carbon footprint of BNP Paribas, JP Morgan or HSBC. They don’t disclose them.

Banks, especially large ones, are some of the most legally, intellectually and technologically sophisticated organisations in the world. They have performed the financial equivalent of sending people to the moon.

Yet curiously, they cannot work out their Scope 3 emissions. And frankly, that is all that matters: the emissions to power the lights in their offices and even to keep their bankers flying — which they do disclose — are trivial compared with the emissions of their customers, made possible by the financial services they provide.

Playing for time

Banks have a host of excuses for their reticence. ‘We have thousands or even millions of customers,’ they say, ‘how are we to work it all out?’

Or: ‘What if we reported our figures one way, and our rivals did it differently — people would be confused.’

And: ‘We don’t really have control over what our customers do.’

None of these objections stands up to scrutiny. It is perfectly clear that banks could disclose far more of their emissions, if not all of them. Where there are difficulties being precise, they could use estimates, just as they do in many other aspects of their work. No one would object as long as the bases of the calculations were made clear.

Banks are dragging their feet for two reasons. When the full figures are released, they will look scarily large. And immediately, investors and the public will want them to start reducing them.

Banks can only do that by changing whom they do business with, or persuading customers to decarbonise their own activities. Neither is comfortable — or, necessarily, profitable.

Inching forward

However, the banks cannot do nothing. Society expects them, like every other segment of the economy, to reduce their contribution to climate change. That inescapably means cutting the emissions they finance.

Banks argue that they cannot develop plans to cut emissions until they know what to cut. So they must go through a complicated process of working out how to count the emissions.

In 2015 a group of forward-thinking Dutch financial institutions got together to collaborate on how to do this. They felt it would be confusing if every firm reported in a different way — but they were serious about getting the numbers out.

They formed what is now called the Partnership for Carbon Accounting Financials. As pressure on banks to go green mounted, more and more global financial institutions joined.

PCAF now has 404 members, including most of the top capital markets banks, such as Bank of America, Citigroup, BNP Paribas and Morgan Stanley. Big institutional investors like BlackRock and Norges Bank Investment Management are also members.

Banks have joined other movements, too, including the Net Zero Banking Alliance, formed by the United Nations in 2021. Although the language is a bit woolly, this essentially commits its 133 members to reducing their financed emissions to net zero, and setting specific targets to do so quite soon, starting with their finance to high emitting industries.

Bond block

Banks are now getting used to how they should report their financed emissions through the loans they hold.

But they are still reluctant to publish figures on the financing they do as underwriters and distributors of bonds, equity and commercial paper.

These emissions are classified by the GHG Protocol under Scope 3, category 15, which covers emissions associated with investments. “Corporate underwriting and issuance for clients seeking equity or debt capital” is declared as something firms can optionally report, but without much detail.

PCAF has been working on an agreed methodology for them to do this, and many of the big household name banks in NZBA have said they are waiting for the PCAF methodology before they will disclose the emissions they finance through securities markets, and set targets to reduce them.

To be clear: there are no complicated decisions to do with industrial technology or climate science involved here.

The banks are only wrestling with how much of their clients’ reported (or estimated) emissions they should report in their own figures. The issues at stake are theoretical, not empirical.

Capital puzzle

To be fair to the banks, there is no obvious one right answer. Each company — and every household — may have several sources of finance. How much of its emissions should be allocated to each of them? Should equity investors bear more responsibility than lenders?

A system for allocating emissions among an organisation’s investors has been devised: add the debt and equity capital together and share the emissions evenly among them. This has its drawbacks, notably that if a company’s share price goes up or down, the distribution of its emissions between its lenders and equity investors will change too.

But, when thinking about investors’ financed emissions, the advantages outweigh the disadvantages. Organisations do indeed require debt and equity capital for their operations, and the combined enterprise value is a reasonable measure of the size of the financial sector’s contribution to their activities.

Equity and debt investors might argue over the fairness of this, but it is hard to see any reason why loan and bond investors should be treated differently.

Lost in a maze

Thrashing all this out understandably requires work. But there is no need for it to have taken years.

Banks such as HSBC were waiting last year for the PCAF capital markets underwriting methodology, which they confidently expected by the end of 2022. It still hasn’t appeared.

PCAF’s working group of banks on the issue has been wrangling all this year too. According to ShareAction, the UK responsible investment NGO that has been tracking this issue and campaigning on it, some of the banks — including NatWest and Wells Fargo — were happy to count 100% of the emissions from bonds they lead managed, in the same way they would for loans the bank had made. Others thought that was too high; some pushed for 17%.

This week Reuters reported that the PCAF working group had voted on the issue, and although at least one bank supported 100%, the majority voted that financed emissions through securities underwriting should count for 33% as much as those from on balance sheet loans. The 33% ratio is already being used by Barclays. PCAF’s board will now have to decide whether to adopt this position.

Reuters gave three reasons why banks had pushed for a figure less than 100%: they did not have as much control over securities issuers as they did with loan borrowers; accepting 100% would lead to double counting, because the investors who bought the bonds and shares would also report these emissions; and the capital market emissions would be much higher than those from loans.

Of these, the last is probably the true reason — but is merely a plea for sympathy, rather an argument.

The other two reasons are equally unconvincing.

A friend in need

Anyone who understands modern capital markets knows that for companies big enough to issue bonds or shares, those forms of capital raising are every bit as important to them as loan capital.

The relationship between a bank and a corporate client is close, but respectful. A bank cannot command a company to do something — it certainly has less claim to authority than a shareholder.

But it has a great deal of practical power. The company needs its services.

Bigger, stronger companies obviously have more choice of banks to work with than weak ones. They are in a better position to shrug off or dismiss a bank that asks too many awkward questions about climate change and carbon emissions.

But only up to a point. Even highly rated blue chips manage their banking relationships carefully and know they need to keep a group of banks they can trust onside.

If more than one or two banks start asking companies to show them convincing low carbon transition plans, they have to oblige.

The crucial matter here is that how much power banks have in this relationship does not depend on whether they are offering the company bond finance, share underwriting or loans.

All these business relationships — and many others banks engage in, such as taking deposits and handling cash — give a bank a degree of influence over its client, and some responsibility for how it behaves.

There is no argument for treating underwriting bonds or shares as a less influential form of engagement by banks than loans.


The double counting argument is just as worthless. All greenhouse gas emissions reporting involves double counting — indeed, multiple counting.

A car factory’s Scope 2 emissions from consuming electricity are the Scope 1 emissions of the power company that supplies it. The factory’s upstream Scope 3 emissions, embedded in the steel it buys, are the same as the Scopes 1 and 2 emissions of the steelmaker.

The manufacturer’s downstream Scope 3 emissions from the petrol its cars consume are the Scope 1 emissions of its customers. They are also Scope 3 for the shopping malls those drivers visit. And so on.

Only if you consider Scope 1 on its own is there no double counting. Even then there is, because fuel consumption needs to be considered on the level of countries and regions, as well as organisations.

Society and the economy are webs of interrelationships. No one can do anything without a lot of other people and organisations. Each of us influences, supports and enables the behaviour of those we interact with.

The GHG Protocol’s system of scopes is designed to make climate reporting possible in such a network. If a consistent set of reports is used, the system makes it possible to compare the emissions of two similar organisations, and to track their evolution through time.

That is all that can be expected of it. Emissions reporting is not designed to pronounce judgments about the shares of responsibility borne by different links in an economic chain, such as producers and consumers.

No ducking out

It is quite clear that a bond or share issue creates an emissions responsibility for the investor. One can argue about whether debt and equity capital investors should share one set of financed emissions among them or both report the whole lot. But bond and loan capital are surely equivalent.

It is equally clear that bringing issues of securities to market creates a responsibility too. A bank that helps polluting companies issue $20bn of bonds is helping them finance their activities, just as it would by lending them the money.

Assigning an arbitrary ratio of 33% would not cure double counting, because all the investors will still have to report their holdings as 100%.

It would merely create a false, distorting way of blurring together underwriting and lending, which bore no connection with reality.

The rational answer is clearly that securities underwriting emissions should be reported at the full value attached to those securities, but under a different heading.

Underwriting a bond is not the same as investing in it, but both are crucial to the issuer’s capital structure, and both need to be reported.

Investors in a bank want to know how much risk it is exposed to from the low carbon transition, and what kind of risk. Is it doing a lot of lending to big polluters, or a lot of underwriting for them?

Both matter — as they do to society at large, which bears the effects of these decisions.

Later, banks may need to think about the emissions facilitated by their deposit, cash management and derivatives businesses, as well as undrawn loans.

From one perspective — that of the bank’s investors — the truest picture may be obtained by a different method altogether: evaluating all the bank’s revenues, from whatever product, according to the emissions intensity of the customer.

But these are battles for another day.

Go for the big ones

Right now, banks need to tackle the biggest elephants: their direct financing support for the polluting economy. In the modern financial system, that emphatically includes share and bond underwriting.

The fact that this needs to be reported under a different heading from lending is no objection at all.

In exactly the same way, insurance companies are beginning to report the carbon footprints of the activities they insure. No one complains that this is double counting or confusing because investors are also reporting emissions for the same companies.

In ShareAction’s view, anything less than a 100% ratio for the emissions content of securities underwriting is greenwashing.

It is a bitter fact that it should be left to an NGO and the media to police this issue. Five years and millions of person hours of effort have gone into regulating sustainable finance, yet this actually crucial question is being thrashed out by a few individuals in the private sector and civil society, with regulators barely aware of it.

NGOs including the Rainforest Action Network have been tracking banks’ bond financing for fossil fuel companies for years. The information is out there. Trying to hide it has made the banks look dishonest. Counting just 33% of it would confirm that suspicion.

Banks have delayed this moment long enough. It’s time for them to own up and start the difficult business of bringing down emissions.