Transitioning to Net Zero is now a strategic imperative for the financial sector. The trillions in capital that are now aligned towards meeting the Paris Agreement is without precedent. Initiatives such as the Glasgow Financial Alliance for Net Zero (GFANZ) that came together in advance of COP26 in Glasgow is a case in point. Comprised of banks, asset owners, asset managers, insurers, and service providers, it is predicated on a science-based commitment to Net Zero.
So how does this translate into the real economy? What is the impact on large businesses and corporations? It starts with measurement. Financial Institutions (FIs) are asking their borrowers and investees for their own greenhouse gas emissions data so that FIs can use that information to set their own carbon reduction targets. Through initiatives like the Partnership for Carbon Accounting Financials (PCAF), over 230 FIs with over $64 trillion in total assets in over 50 countries have committed to measuring and disclosing their financed emissions (the real economy carbon emissions attributed to a financial institution based on their lending and investing activities) in accordance with the PCAF Global Standard. With data, FIs can start to set baselines and develop reduction targets and pathways towards Net Zero.
As FIs execute on financed emission reductions, they seek to support their borrowers and investees (e.g., large corporates and building owners) in the real economy to, for example, reduce their emissions, change their processes to lower carbon, and develop new, lower carbon business. The capital required to affect a Net Zero world is substantial and is a massive investment opportunity. To this end, many FIs have announced sustainable finance lending and investment targets in the tens of billions of dollars level within the next decade or earlier.
Many of the initiatives and commitments by FIs to fund carbon reduction projects and to decarbonize their portfolios shows a clear link between carbon performance and the provision of capital. This strategic decarbonization focus from FIs aligns with similar interest from regulators, employees and civil society. For example, UK large corporates will be required to disclose climate change risks and opportunities per the Taskforce on Climate-related Financial Disclosures (TCFD) Recommendations starting this April. The U.S. Securities and Exchange Commission just released additional requirements on climate disclosure. The proposed rule is modeled on the TCFD Recommendations and would require registrants to disclose climate-related risks and specific as well as specific information relating to those risks.
This is a clear signal for companies to act. To move towards Net Zero will require a lot of private capital to fund upgrades. For example, there has been tremendous growth in the issuance of green and sustainability linked bonds and loans in the last few years. Another approach for corporates is to enter into an Energy as a Service (EaaS) agreement as a way to access third-party capital to fund projects and outsource their implementation and operation. EaaS allows corporates to meet carbon reduction and other corporate sustainability goals without the burden of capital investment.
