Blog: Billion-dollar blowout looms over bank carbon bills – The Australian Financial Review

The size of scope 3 emissions is far larger than scope 1, which across the big four averaged 9768 tonnes in 2021, and scope 2, which averaged 80,480 tonnes, according to Emmi. Including banks’ financed emissions moves them into the top 15 heaviest emitters on the ASX, in the company of heavy emitters such as Ampol, Qantas and BlueScope.

ANZ Bank is set to conduct an environmental, social and governance (ESG) briefing on Monday afternoon, as global regulators intensify their focus on the disclosure of financed emissions. Emmi, which works with financial institutions to quantify their exposures to carbon risk, says CBA’s publication of financed emissions has set a baseline for other lenders to disclose previously hidden carbon risks to the market.

“Currently, Australian government regulations don’t require company disclosures for scope 3 but many Australian companies who operate globally have been ahead of the government in quantifying and disclosing scope 3 emissions,” said Emmi co-founder Ben McNeil. “It is encouraging that CBA have made that first step.”

CBA’s historic disclosure last month was eye-opening because banks’ scope 3 emissions were previously thought to be around 700 times larger than scope 1. Emmi estimates CBA scope 1 emissions for 2021 were 10,600 tonnes – making scope 3 larger by 2300 times.

CBA made its latest disclosures under the Partnership for Carbon Accounting Financials (PCAF) standard.

None of the other major banks are members of the PCAF, despite 307 global institutions committing to measure and disclose the greenhouse gas emissions associated with their portfolio of loans and investments. Great Southern Bank is the only other Australian commercial bank to have joined this group.

Westpac has also made some disclosures around scope 3 emissions, which relate to its supply chain and are more limited than CBA’s. Westpac said its scope 3 disclosures are in line with the PCAF, but it is not a member on the PCAF website.

Emmi’s system uses machine learning to predict scope 3 emissions for 47,000 global listed companies and also capital losses due to carbon costs as the world attempts to limit global warming to different temperatures.

It estimates CBA faces potential costs of 4 per cent of its market capitalisation (currently $6.48 billion) by 2030 – and 33 per cent, or $53.4 billion, by 2050 – under a future scenario in which strong action is taken to limit global post-industrial temperature increases to 1.5 degrees celsius.

(Costs are assumed based on the potential for enforced global carbon regulations requiring banks to buy carbon credits or pay carbon taxes for loans to companies or households with ongoing emissions).

Emmi Co-Founder Ben McNeil: “It is encouraging that CBA have made that first step.” 

To provide financial markets with a fuller sense of the carbon risk in banks, New Zealand has already said it will mandate disclosure of financed emissions from later this year, while the US Securities Exchange Commission said in March scope 3 emissions should be counted in lenders’ targets.

Australian Prudential Regulation Authority chairman Wayne Byres warned banks last week that regulators expected them to develop more sophisticated climate risk data sources.

“Empirical measurement, rather than a subjective judgment, is going to be needed fairly urgently,” he said.

CBA said in its climate report, issued separately to its annual report on August 10, that it sees a “significant potential to support the transition by tracking and influencing the emissions of the customers we lend money to (financed emissions).”

It said its financed emissions in the 2021 financial year of 24.4 million tonnes of CO2 was down 18 per cent on the 2020 level of 29.9 million.

“While we anticipate further improvements in coverage and data quality over time, we believe this year’s calculation represents a step forward. It covers 87 per cent of our drawn lending exposures of which 80 per cent is PACF aligned,” CBA said.

The ANZ ESG update on Monday will come after Westpac said in July it would cut financed emissions by nearly a quarter by 2030 but did not disclose detailed data. Westpac’s sustainability report included disclosure of ‘total scope 3 supply chain emissions’ of 71,738 tonnes, but its total scope 3 emissions, including ‘financed emissions’, would be significantly higher.

ANZ said in its annual report last year it would introduce targets and metrics to reduce scope 3 emissions by 2030 and has started measuring ‘financed emissions’ for two sectors of its loan book – commercial property and power generation.

CDP Global, an international non-profit organisation, said last year that financed emissions could be, on average, more than 700 times larger than direct emissions – a number that now looks too conservative in light of CBA’s scope 3 disclosures.

“Credit and market risks have a much higher reported potential financial impact, over $US1 trillion ($1.46 trillion) combined versus just $US34 billion for the operational risks reported,” CDP said. “This shows that many financial institutions do not yet report and/or manage their most significant climate-related risks – those associated with financing.“

Banks via the Australian Banking Association made a submission to the International Sustainability Standards Board (ISSB), which is considering global standards for disclosures of financed emissions, in July pointing to “significant limitations at the present time with sustainability related metrics”.

The ABA argued banks are highly dependent on customers reporting of their scope 1 and 2 emissions to report accurately on their scope 3 emissions and “such reporting by bank customers and suppliers is nascent”.

“Presently, much of the work effort in producing extended external reporting is based on manual effort and non-systematised data feeds,” the ABA said.

“We estimate that significant information systems resources will be required to develop the systems to support sustainability reporting to the same extent that financial and account systems support financial reporting.”

”Limitations include data quality, availability, comparability, methodological approaches are nascent and evolving, financial modelling which reflects sustainability risks are at a very early stage,” the banks said, adding they are also “experiencing limitations in human resource availability”.

This, combined with the need to upskill bankers to incorporate climate risk into their daily processes, places a significant burden on all banks but especially the smaller [banks]. Therefore, we recommend phased, or transitional approach will be required.”

The banks said the passing of the climate change bill last week, to cut emissions by 43 per cent by 2030 and deliver net zero by 2050, would provide certainty for investors and clarity for businesses as the energy transition continues.

“No matter how you slice and dice it, climate change is, and will remain, a core economic issue for Australian banks,” ABA chief executive Anna Bligh said on Friday.

Correction: An earlier version of this story said none of the other banks had made scope 3 disclosures. Westpac disclosed some scope 3 data relating to its supply chain in its 2021 sustainability report. The copy above has been amended to reflect this.

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