The financial sector has a pivotal role to play in steering the
global automotive industry towards sustainability. However,
inconsistent methodologies for measuring emissions, varying data
quality, and poor visibility are all critical challenges that make
industry-level comparisons difficult.
What Are Financed Emissions?
Financed emissions have emerged as a critical concept in
understanding the environmental impact of financial institutions,
including banks, investment firms, and insurance companies. These
emissions are defined as the greenhouse gas emissions that arise
from the financial activities of these institutions, specifically
linked to the projects and companies they finance through various
means such as loans, investments, or underwriting.
Unlike direct emissions produced by an institution's own
operations, financed emissions represent the broader climate
footprint resulting from the allocation of financial resources to
entities that may contribute to greenhouse gas emissions through
their operations.
Understanding the Full Scope of Greenhouse Gas Emissions
Understanding the full scope of emissions that are produced by
the world economy – as categorized under the Greenhouse Gas (GHG)
Protocol – is essential for companies to assess and manage their
carbon footprints effectively:
- Scope 1: Direct emissions from company-owned or controlled
sources, such as factory emissions. - Scope 2: Indirect emissions from the generation of purchased
energy, like electricity. - Scope 3: All other indirect emissions that occur in a company's
value chain, including material extraction and processing,
transportation, waste management, and the use and end-of-life
treatment of sold products.
Measuring Financed Emissions for the Automotive Industry
Measuring financed emissions typically involves calculating the
carbon footprint of the entities receiving financing. This process
can include evaluating the emissions produced by the funded
projects or companies, which is essential for understanding the
environmental impact of financial activities.
However, when calculating financed emissions for the automotive
industry, for example, there is significant variance in whether the
entire lifecycle aspect of vehicles is considered, with some banks
only including tailpipe emissions (tank-to-wheel). Further, the
quality of data used to measure and report emissions varies widely,
with some banks not disclosing the data quality scores they
use.
The assessment of financed emissions is increasingly becoming a
focus for regulators, investors, and the public, as there is a
growing demand for transparency and accountability in the financial
sector's role in addressing climate change.
How Financial Institutions Can Drive Decarbonization in the Auto
Industry
Financed emissions represent a vital metric for evaluating the
environmental impact of financial institutions. Understanding this
concept is crucial for stakeholders aiming to promote
sustainability within the financial sector.
S&P Global Mobility's recent whitepaper,
Decarbonizing Finance: Unveiling Hidden Carbon Emissions in
Financial Markets, explores the complexities of carbon
emissions within the financial sector — focusing on their
investments in the automotive industry — and examines the
critical role of financial markets in driving decarbonization. The
financial industry's commitment to enhancing emissions measurement
frameworks and influencing corporate sustainability strategies is
vital for driving the automotive sector's decarbonization.
Through an analysis of emissions measurement frameworks,
regulatory drivers, and the financial industry's influence, we aim
to shed light on hidden carbon within finance and outline the path
forward.
Collaboration between OEMs, financial institutions, and
regulatory bodies offers significant opportunities for innovation
and progress. By adopting more uniform and transparent accounting
practices, financial institutions can play a pivotal role in
accelerating the automotive sector's transition to a low-carbon
future.
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