Investment banks dispute carbon footprint of underwriting deals

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Some of the world’s largest investment banks are lobbying to exclude a portion of their underwriting activity from the net zero target, which threatens to slow their progress on decarbonisation.

Banks in a standard-setting group led by Barclays and Morgan Stanley are voting this week on how to measure the carbon footprint of such deals, according to people familiar with the discussions. Last year, infighting stalled publication of the first voluntary rulebook on the issue, which was due to be published last November.

More than a third of the $669 billion in financing provided by the world’s 60 largest banks to oil, gas and coal companies in 2022 was through underwriting bonds and equity sold to investors, not banks, according to one Through self lent. Tally by nonprofits including Urgewald and the Rainforest Action Network.

But bankers have been reluctant to acknowledge the climate impact of their underwriting work and have never agreed on how best to account for the carbon emitted as a result. Unlike loans, underwriting deals typically don’t stay on their balance sheets for long.

A key issue bankers on the so-called “convenient emissions” working group in the Partnership for Carbon Accounting Financial have been debating in recent months is the proportion of emissions associated with underwriting deals that banks should take responsibility for.

Some banks have argued that this ratio should be at least 17 or 33 per cent. Others, such as NatWest, also a member of the working group, already disclose investment banking emissions on a 100 per cent basis, mimicking a stricter approach that banks already use for their loan books.

Any weight under 100 can lead to an accusation of hypocrisy. Investment bankers count every penny raised in “green” bond deals toward their annual green financing goals.

Jean Martin, head of the banking standards team at responsible investment charity ShareAction, said: “We think there are too many double standards happening, where banks are exaggerating green targets and on the one hand under-reporting adoption elsewhere. trying.”

Talks reached a tipping point in an online meeting last Friday when bankers rejected the most controversial option of 17 percent but failed to reach a consensus, according to two people familiar with the discussions.

Banks are voting on the weightage over email this week ahead of Friday’s deadline to submit votes, the people said.

If they fail to reach a two-thirds majority, the decision will be taken out of their hands and passed on to the board of directors of the accounting body. This back-up plan was introduced in April because bottlenecks such as easing emissions are becoming more common, said a person familiar with the reform.

“As you get into the more sophisticated or esoteric parts of the accounting puzzle, it becomes harder to reach a consensus,” the person said.

UK-based bank HSBC, another member of the PCAF working group, has said it will not publish underwriting emissions data until the banks agree on a methodology. When it published these last year on an outright basis, it used 100 percent weighting, showing that carbon and equivalent gases associated with its capital markets activity reached 29.5 million tonnes in 2019, while its borrowings compared to 35.8 million tonnes associated with the oil and gas sector.

Another source of tension in recent weeks, according to people familiar with the discussions, has been whether to club decarbonisation targets for underwriting with existing net zero targets for lending by sector, for example for oil and gas. As proposed by some European banks.

“Some organizations find it would be more convenient to have one target per sector,” said Caroline Haas, head of climate and ESG capital markets at NatWest. Banks that add underwriting emissions to lending emissions in a target, he said, would be reluctant to use the same percentage for both types of activity when calculating carbon footprint as this could cause emissions figures to “balloon”.

The Science-Based Targets Initiative, a voluntary oversight body that signs off on the integrity of banks’ net zero targets, has told PCAF members it may reject joint targets that give less importance to underwriting than lending , people said. SBTI declined to comment. PCAF did not respond to a request for comment.

Adding together loan and underwriting emissions calculated using different methodologies would be “greenwashing,” said ShareAction’s Martin.

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