In the fast-moving world of ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More, you can be forgiven if you missed the announcement of the new Partnership for Carbon Accounting Financials (PCAF) standard. While it may fly under the radar compared with daily headline grabbing news in the climate space, the new PCAF standard might just be the most important new tool in the fight against global climate change.
PCAF Explained
PCAF is a coalition of more than 100 large financial institutions (e.g., Bank of America, Citibank, and Morgan Stanley) collectively managing more than $38 trillion in total assets. Working with climate-oriented nonprofits, PCAF developed a consensus approach to assess and disclose the carbon impacts associated with loans and investments. As an open-source accounting standard it enables transparency, comparability, and accountability for the carbon impacts of financial transactions.
For example, when a bank lends money to a business the loan may support new projects that have substantial carbon impact. The PCAF standard provides a method for the bank to measure – and importantly, manage – the carbon impacts associated with its portfolio of loans. And the standard covers more than just lending – it includes formulas to allocate the carbon associated with transactions in six asset classes: listed equity and bonds, mortgages, business loans, motor vehicle loans, project finance, and commercial real estate.
The potential of PCAF
While the details are technical, the implications are monumental. Banks and asset management firms typically emit very little greenhouse gas (GHG) from their own operations. By far, their biggest climate impact – and their biggest opportunity to fight climate change – is through their lending and investing practices.
A recent report from the climate nonprofit CDP (formerly the Climate Disclosure Project) revealed that the GHG emissions associated with financial institutions investing, lending, and underwriting activities are more than 700 times higher than the emissions from their own operations. By understanding the climate impact of its investments, the finance industry will be able to align its capital to sustainable business practices – and thus provide the funding needed to transition to a low carbon economy.
This is a game changer…
Unleashing the power of PCAF
The problem is that no one knows how to effectively apply this standard. Financial services firms make millions of transactions per year involving a myriad of companies across all industrial sectors. Without state-of-the art information technology, it’s impossible to account for the carbon impact of these transactions.
All that changes right now.
Persefoni, a fast-growing carbon accounting startup, is the first software as a service (SaaS) platform to encode the entire PCAF standard in its reporting platform. With this new feature set, financial services firms can assess the carbon risks associated with their portfolios – or their so-called “Financed Emissions.” This new real-time information enables strategic decisions to decarbonize and de-risk that simply were not possible before.
Funding the transition
Climate scientists warn that we have about ten years to take action to avoid the worst effects of climate change – but will we? The blueprints for this transition have been studied, prioritized, and published. With the U.S. back in the Paris Climate Accord (along with all other countries), governments seem now poised to take action in this year’s COP26 climate meeting in Glasgow. And with investors pressuring companies to act on climate, there is significant momentum.
Sadly, the 2021 Fossil Fuel Finance Report reveals that the world’s 60 largest banks worldwide have pumped more than $3.8 trillion into the fossil fuel industry since the Paris Agreement was signed, led by banks like JP Morgan Chase, CITI, and Wells Fargo.
The PCAF standard can help change this. When encoded in cutting-edge software, the standard will enable the global financial system to divert capital flows to support the transition to the low carbon economy we need to sustain this planet.
It’s hard to overstate the importance of this change. The Organization for Economic Co-operation and Development (OECD) estimates that $6.9 trillion of infrastructure investment is needed each year until 2030 to meet the goals of the Paris Agreement. Applying the PCAF standard to financial transactions will shine a light on the investments needed to fund the transition.
And not a moment too soon.
About the author:
Tim Mohin is the chief sustainability officer for Persefoni. Formerly, Mohin served as chief executive of the Global Reporting Initiative; he also held sustainability leadership roles with Intel, Apple, and AMD and worked on environmentalEnvironmental criteria consider how a company performs as a steward of nature. More policy within the U.S. Senate and EnvironmentalEnvironmental criteria consider how a company performs as a steward of nature. More Protection Agency. He is the author of Changing Business From the Inside Out: A Treehugger’s Guide to Working in Corporations.
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