Less Than Half of Asset Owners Aligning with Two-Degree Climate Goal

GHG emissions from finance sector’s investing, lending and underwriting activities are on average 700 times higher than direct emissions, says CDP.

Only 48% of asset owners have taken steps to align their investments with the Paris Agreement goal of keeping climate change well below a two-degree rise from pre-industrial levels, according to a new report on financial institutions’ portfolio emissions.

In its first survey of finance sector emissions, non-profit climate disclosure platform CDP also found that 45% of banks and 46% of asset managers are taking action to align investments with the two-degree goal, with just 27% of insurers doing so for underwriting purposes.

The report highlights the impact of portfolio versus direct emissions by the finance sector, finding that greenhouse gas (GHG) emissions from investing, lending and underwriting activities are on average 700 times higher than direct emissions.

Overall, a quarter of the 332 financial institutions disclosing in 2020 through CDP’s financial services climate change questionnaire reported their portfolio emissions. More than half of these 84 institutions, which hold approximately US$27 trillion in assets, included less than 50% of their portfolios in financed emissions reporting.

The report, which examines governance, strategy, risk management and target-setting by participating institutions, found that asset owners are more focused on climate risks than other environmental risks.

Of the 142 asset owners covered by the report, 73% assess climate risks in portfolio, but only 47% assess water risks and 32% assess deforestation risks.

In terms of working with portfolio companies to reduce portfolio emissions, 46% of asset owners and 50% of asset managers reported some level of engagement.

According to the report, board level oversight of climate risks by asset owners focuses on ‘climate-related risks and opportunities to our own operations’ (76%), followed by risks and opportunities to investment activities (69%). Less than half said board level oversight covers the impact of investment activities on climate.

“In focusing on the impact on financial institutions and not the impact of financial institutions, boards may be neglecting one side of the ‘double materiality approach’ at the heart of the EU Non-Financial Reporting Directive,” the CDP said.

The CDP report also found that most financial institutions are not yet reporting climate-related credit and market risks, although the majority are reporting direct operational climate risks, such as physical damage to their operations. “This shows that many financial institutions do not yet report and/or manage their most significant climate-related risks – those associated with financing,” said CDP.

Last week, banks, insurers, asset managers and owners all made new net-zero emissions pledges as part of the launch of the US$70 trillion Glasgow Financial Alliance for Net Zero (GFANZ).

For financial institutions that do not currently measure their financed emissions the message from this flagship report is clear – they must start doing so, now, to understand their overall climate-impact and the risks they face,” said Emily Kreps, Global Director of Capital Markets at CDP.

“We urge all financial institutions to commit to de-carbonise their portfolios by setting science-based emissions reduction targets, aligning all activity with the Paris Agreement and disclosing the impact of their financing activities.”

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