Company financial investments as a major source of carbonisation

Anna Triponel

June 10, 2022
Our key takeaway: Companies are making ambitious and large-scale investments to reduce their contributions to climate change (e.g. using renewable energy, electrifying fleets, investing in carbon removal technologies.) But hang on - what about all of the cash that these companies hold, and how they are investing it? Are the climate impacts of these investments included in a company’s climate change efforts? No - and yet, new research finds that this financial footprint can be significantly worse than a company’s emissions - including scope 1, 2 and 3 combined. To illustrate this, PayPal’s financial footprint is so much larger than the company’s cumulative emissions (Scope 1, 2, and 3) (55X to be precise) that it would take until 2076 for PayPal to generate the cumulative emissions that the company’s cash and investments generated in just one year alone. Companies have an important role to play in selecting the right banking partners, and pushing these partners to reduce their contribution to climate change. Now we know. So action on financial supply chain decarbonisation must follow.

The Climate Safe Lending Network, Outdoor Policy Outfit and BankFWD, with research partnership from South Pole, published The Carbon Bankroll: The Climate Impact and Untapped Power of Corporate Cash (June 2022). This research calculates the greenhouse gas emissions that are generated by a company’s cash and investments (including cash, cash equivalents and marketable securities): 

  • “Previously hidden emissions source is substantial”: The report found that, “[f]or some of the world’s largest companies, including Alphabet, Meta, Microsoft, and Salesforce, their cash and investments are their largest source of emissions. In fact, for Alphabet, Meta, and PayPal, the emissions generated by their cash and investments (financed emissions) exceed all their other emissions combined.” For example, “in 2021, PayPal’s financial footprint was 55X larger than the company’s cumulative emissions (Scope 1, 2, and 3). That means at its current emissions rate, it would take until the year 2076 for PayPal to generate the cumulative emissions that the company’s cash and investments generated in just 2021.” As another example, “[I]n 2021, Google’s financial footprint was 38X larger than the company’s total direct operational emissions (Scope 1) over the last five years (2016-2020).” This is striking when considering the ambitious and large-scale investments these companies have made towards reducing their contributions to climate change, “[f]rom utilizing 100% renewable energy to electrifying fleets to investing in carbon removal technologies.” 
  • How banks become a major source of emissions: The report points out that, “[c}orporate cash and investments do not just sit passively in bank accounts accruing interest. Rather, this money is used to finance everything from energy development to construction projects to small-business loans, all of which generate emissions that banks and companies contribute toward.” This chain is especially consequential when considering the significant amount that large banks invest in fossil fuel development. Despite the growing drive towards ESG and climate-conscious investing, the report emphasises that "many banks are still major suppliers of capital to carbon-intensive sectors and the fossil fuel industry—providing loans as well as underwriting and issuing bonds to maintain the flow of funds into these sectors. In fact, across the Group of 20 leading industrial and developing nations, banks have $13.8 trillion of exposure to carbon-intensive sectors, which constitutes 19% of on-balance sheet loans.” What’s more, the emissions generated by investing, lending and underwriting are “more than 700 times higher than their direct operational emissions” on average.
  • Ten possible strategic solutions: The report points out that this challenge can be tackled unilaterally by companies with respect to their own investments—but the immense power of corporations in directing financial flows means that collaborative solutions could create exponential change on a scale needed to limit emissions in line with the Paris Agreement. The report highlights 10 potential strategies that show how companies can take action across four buckets of financial supply chain decarbonisation: selecting, innovating, advocating, and engaging. Companies can: (1) “Demand emissions reporting and transparency” on their banking partners’ total emissions (Scopes 1, 2 and 3); (2) “Explore moving some money to lower-emitting banks,” which can help companies “reduce the emissions of every dollar by more than 60%”; (3) Ensure that green bonds actually deliver by keeping a close eye on the terms of bonds, specifying how they can be used and asking issuer financial institutions to bid on green bonds; (4) Use their resources and expertise to develop “new targeted financial products and bank-specific loans that scale climate solutions”; (5) “Fuel green demand” by focusing engagement on “funds and financial products that banks offer customers, in turn fueling customers’ transition to net zero”; (6) Change how their banks operate: “As major customers, companies can pressure banks directly and advocate for real change in their decarbonization efforts—for example phasing out fossil fuel finance and deforestation-linked lending”; (7) Generating green competition by “promis[ing] to move a portion of their business to the bank(s) that commits to the highest environmental standards”; (8) “Put high-carbon banks in ‘the freezer box’”: “The practice entails developing a methodology for rating banks’ climate performance and then placing the bottom two banks in the “freezer box,” which would prevent member companies from conducting all or select business operations with those banks. Those banks would remain in the “freezer” until they improve their climate performance. At that time, the two lowest-rated banks would then cycle into the freezer (and so on)”; (9) Focus on investing 401(k)s in climate-conscious funds; and (10) Model full accountability in their own accounting, putting pressure on banks to “properly account for their financed emissions and work to reduce them.”

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