New Standard Mandates Banks to Report Emissions Involving Stocks and Bonds Underwriting

A street sign in the Canary Wharf financial district, London, Britain. Source: Toby Melville/Reuters

On Friday, Dec. 2, the Partnership for Carbon Accounting Financials (PCAF) launched the first Global GHG Accounting and Reporting Standard for Capital Markets, a new standard that will account for carbon emissions associated with capital markets deals done by banks across the world.

PCAF is a partnership between international financial institutions to work toward a comprehensive assessment and disclosure of greenhouse gas (GHG) emissions related to their loans and investments. Since the creation of PCAF in 2015, the initiative has been working on a more progressive step toward a low-carbon economy, through measuring and disclosing the emissions associated with financial institutions' loans and investments. The new standard published this Friday will require banks to report their carbon footprints — which accounts for 33% of the emissions associated with their capital market deals — including equity and bond underwriting. The standard is not only influential, directly impacting the 452 global financial institutions with memberships in PCAF, but it also provides the first rigorous and concrete methodology for banks to report their greenhouse gas emissions. 

Although PCAF has been a global partnership since 2019, it has kept from launching the long-waited methodology until this Friday due to disagreements between banks. As a group voluntarily joined by global banks and asset managers, PCAF has been aiming to finalize the Global GHG Accounting & Reporting Standard — more commonly referred to as "the Standard" — since last year. Specifically, part B of the Standard, Facilitated Emissions, is pending finalization. Part B concerns emissions generated during underwriting-related activities; an example of this would be lenders, usually large investment banks, advising a company to issue its equity. This July, banks involved in developing the Standard voted to exclude two-thirds of the emissions linked to their capital markets deals, finalizing the methodology. 

Under the new methodology, the Standard mandates capital markets advisors to "report their facilitated emissions using a 33% weighting factor and disclose the applied weighting factor clearly in its public reports." Lenders who help issue bonds and stocks also have the option to report without weighting, meaning reporting emissions at 100%, given a clear rationale. It is worth noting that the above standard applies to all financial institutions, whether they were signed up for PCAF or not. Banks with PCAF memberships must already account for 100% of their financing-related emissions for any activities kept on the balance sheet, while asset managers also need to account for 100% of emissions generated by their stocks and bonds holding on their investment portfolios.

Environmental groups mostly welcomed the Standard from PCAF, although some groups, such as ShareAction, criticize it for only requiring banks to report 33% of the emissions associated with their financing activities. According to a report from Sierra Club this July, capital market deals are responsible for two-thirds of U.S. bank financing for fossil fuels’ growth. Adlle Shraiman, a senior strategist from Sierra Club, said, "Banks have an enormous and overlooked climate impact from underwriting investment in big polluters, and disclosure of these impacts is long overdue." 

Although the Standard still has many steps ahead in its future revision, the first edition's launch this past week showed the financial industry's commitment to voluntary climate initiatives. In the words of Angélica Afanador, the Executive Director of PCAF, "This Facilitated Emissions Standard marks a significant milestone in enhancing transparency within the financial sector, adding more depth and granularity to disclosures that will guide financial institutions toward informed climate action."

Organizations such as ShareAction are concerned with the exclusion of two-thirds of the GHG associated with capital markets deals in the Standard. Source: Chung Sung-Jun/Bloomberg

However, economists and China's policymakers are mostly concerned with deflationary pressure. Prices in China have largely stalled as the consumer price index (CPI) remained unchanged in September. However, the economic output and production were collapsing at an alarming rate as the factory-gate price fell at a pace that was faster than expected. The year-to-year producer price index (PPI) dropped 2.5%, marking one full year of consecutive PPI decline in China. 

The International Monetary Fund (IMF) shares a similar pessimistic forecast. The IMF corrected China's annual growth rate forecast from 5.2% to 5% while the global growth rate held at 3%. Even then, some economists still cast doubt on whether China can hit its 5% growth rate target by the end of this year. 

China is set to announce its third-quarter GDP figure and retail sales on October 18th, which will be yet another glimpse at the outlook of the world’s second largest economy. State officials remain optimistic and continue to push for initiatives, such as infrastructure projects and railways to improve its trade activities. Overall, it's unclear at this stage if the slower economic decline truly means China has made a full recovery.