In the past decade, at the same time as the emergence of fintech, climate awareness has pushed to the front of the consumer agenda. According to Mambu’s Green Banking Report, 60% of consumers say they want every financial service they use to be sustainable. With the proliferation of APIs and integrations, and the move from bricks-and-mortar banking to digital banking, it’s tempting to think that finance today has a relatively light footprint – but the emissions associated with banking and finance go deeper, as Mambu’s Director of Sustainability Anna Krotova explains.
Krotova says: “The main cause of emissions in the financial services industry is not their day-to-day physical activities, but emissions related to the capital – loans, investments, underwritings – that the financial industry provides, or 'financed emissions'. The Carbon Disclosure Project (CDP) estimates that these financed emissions are on average 700 times greater than Scope-1 and 2 emissions generated from financial institutions' activities such as heating, cooling and powering office buildings.
“Unfortunately, progress to measure and manage these financed emissions has been slow. Just recently, the World Benchmarking Alliance (WBA) released a benchmark where they have assessed 400 major global financial institutions on their transparency and sustainability commitments. Of these, 37% have disclosed long-term net-zero targets, but only 2% of these commitments have been translated into interim targets applied across the institution’s financing activities.”
What does carbon offsetting actually involve?
As banks and financial institutions clamour to keep pace with consumer demand for decarbonisation, carbon offsetting has become an increasingly common practice. David Turner, Head of Environmental Data and Analytics at carbon management specialists Emitwise, explains what’s involved: “A carbon offset programme could involve paying for a separate company to execute carbon removals, in which carbon credits would be attributed to you per tonne of CO2 removed.
“However, because offsets focus on reduction and not necessarily removals, you're rarely going to be paying for the removal of CO2. It is more likely that you're paying someone else not to produce a certain amount of CO2. Carbon offsets intend to make it easier and more understandable for organisations to pursue greenhouse gas (GHG) reductions without necessarily having to do anything themselves, aside from a monetary fee. But it's important to note that you often don't know where or when these reductions will occur.”
With more companies relying on carbon offset, strategies will need to become more diverse. Turner explains that carbon offsetting could include reforestation, organic farming, ocean restoration and geoengineering solutions, alongside carbon capture technology. Indeed, it is much more than just planting trees; research has shown it could take more than 100 years to add enough mature forest to get sufficient levels of carbon reduction, Turner says.
“There is a misconception within the financial sector that, through carbon offsetting alone, a company can make claims to carbon neutrality or net-zero,” Coad says. “The most important action any company can take right now is to reduce its emissions. If the world is to have any hope of staying in the region of 1.5-2°C of warming, we need to see unprecedented cuts. But this won’t happen overnight.”
Is finance too dependent on carbon offsetting?
There is a growing concern, widely held among environmentalists, that corporate culture is drawn to quick-and-dirty action rather than meaningful, long-term change. Paying for carbon offsetting is usually an easier and cheaper way out. But should banks and FIs be ducking their obligations in this way, and have they become too reliant on carbon offset?
“Unfortunately, it has become all too common to default to offsets as a way to claim net zero targets,” Mambu’s Anna Krotova says. “Emissions reductions in the financial sector require active engagement of the capital provider with the capital receiver, conditionality attached to loans and investments. All of this is much harder than offsets, which is why we have seen an outburst of carbon markets in the past couple of years, where carbon itself has become a commodity.”
Mambu’s Green Banking Report also shows that customers are willing to pay a premium for sustainable services – but taking the easy way out risks alienating consumers and perpetuating “greenwashing”. “Greenwashing is all too common and problematic,” says Krotova, who believes the practice risks taking time and effort from consumers who have genuine intentions.
But David Turner of Emitwise continues: “Carbon offsetting is still considered 'good' where removal is not feasible, but businesses should focus on reducing GHG emissions from their own activities. When buying an offset from a verified provider, companies can be fairly confident that what they're paying for will reduce GHG emissions. However, this does not necessarily lead to a global reduction in emissions: if you're buying offsets, you're still producing emissions.
“Emissions are heavily coupled with financial revenue. Until this coupling effect is tackled, it is difficult to trust that any combination of offsetting and carbon removals in their current state will have a tangible effect on reducing global GHG emissions.”
One of the problems, as Elliot Coad explains, is that banks and FIs are simultaneously making efforts to reduce their own emissions while bankrolling the fossil fuel industry. “A ShareAction report from earlier this year found that the 25 banks that signed up to reduce emissions as part of the Net-Zero Banking Alliance had provided US$33bn in loans and other financing to 50 companies with large oil and gas expansion plans. This is despite the publication of an IEA report in May that said there should be no investment in new oil and gas fields in order to have a 50% chance of capping global warming at 1.5ºC above the pre-industrial average.”
What can finance do to have a positive impact?
Transitioning towards a green future can seem like a daunting prospect for any organisation. Carbon offsetting is one way to get started – but what other options are there for businesses that want to have a positive impact, but don’t know where to begin? It is still worth focusing on any business premises, Coad says, because commercial buildings alone make up 6.6% of global GHG emissions.
And David Turner says there are several steps that banks, fintechs and FIs can take to realise quick wins: “One of the simpler things any company can do is reduce its Scope-2 emissions, cutting its reliance on carbon-heavy energy providers. If every company did this one small fix, it would reduce supply chain emissions on a global scale. However, it is more complex; there isn't enough clean energy currently available in every market globally to power the switch to renewable energy. This can be changed through increasing demand, making it economical for providers to switch to renewable sources.
“Companies can look at their procurement activities for alternative suppliers that could provide the same goods they need or alternative goods that fulfil the same function, that report on and have lower emissions.
“There are also more local and small-scale solutions that can have an impact. For example, businesses ensuring that they are recycling correctly can affect up to 5% of a company's emissions.”
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