Crypto News: Flawed emissions accounting

Today's newsletter looks at why calculating financed emissions is inherently duplicative. You can also read and share this story on Bloomberg.com. For unlimited access to climate and energy news, please subscribe.

By Alastair Marsh

A frequent critique of carbon accounting is that Scope 3 emissions, those that arise from a company's customers and supply chains, are essentially double-counted.

Since one company's Scope 3 emissions are comprised of other companies' Scope 1 emissions, which are those that occur from sources controlled or owned by an organization, by definition Scope 3 accounting involves multiple actors counting the same emissions.

And when it comes to the financial industry, it gets worse. The way in which investors calculate emissions they are responsible for having financed—the Scope 3 category most relevant to asset managers and banks—can allow for even more layers of duplication. So says Richard Manley, chief sustainability officer at CPP Investments, the $632 billion investment arm of the Canada Pension Plan. (Financed emissions cover the greenhouse gas pollution enabled by financial activity—namely lending and investing.)

"The emission is only emitted once, but by overlaying investments and loans to companies in the same value chain, you start to double, triple and even quintuple-count the same emission," Manley said. But of course, investors also can use this dynamic to their own, greenwashing advantage—claiming multiple times their actual emissions reductions, he said.

To make his point, Manley poses this hypothetical:

Imagine an investor that holds shares of Vinci SA, an owner and operator of airports; TotalEnergies SE, an energy company and jet-fuel supplier; airline Air France-KLM and aircraft manufacturer Airbus SE, plus a host of other big corporates who send their employees on overseas business trips.
For every ton of carbon that's emitted from an Air France A350 plane that takes off from Vinci's Lyon-Saint Exupéry airport, that investor would count its share of Air France's Scope 1 emissions (those generated from aircraft engines), TotalEnergies's downstream Scope 3 (as Air France is its customer), Vinci's Scope 3 (as it operates the airport), Airbus' Scope 3 (as Air France is its customer) and the Scope 3 from business travel of all the companies that have passengers on the plane.
Conversely, the day (if it ever comes) that a plane takes off from Lyon powered by a zero emissions fuel, the emissions of Air France, TotalEnergies, Vinci, Airbus and business travelers would all go away, meaning the investor could claim a fivefold reduction in financed emissions for each ton of emissions reduced in the real world.

Photographer: NurPhoto

Manley's synopsis feeds into a broader discussion around the potential disconnect between the real economy and the financial economy. A question that's increasingly being asked by financiers is what's the utility of targets tied to and disclosures of financed emissions?

Although the financed emissions' metric has become the primary yardstick for measuring the financial industry's progress on climate goals, it's been shown to be misleading, and even deeply flawed, due to its volatility and sometimes counterintuitive results.

And Manley isn't the only one raising the issue. When the Institutional Investors Group on Climate Change published its updated net zero guidance for fund managers last month, it said it aimed to "better support" an emphasis "on 'financing reduced emissions' rather than 'reducing financed emissions.'"

That small change in wording reflects a big shift in world view.

"Fixating on a linear reduction of financed emissions is misguided at best, and at worst, it can starve climate solutions of funding, as they may come with an upfront short-term increase in emissions to enable a dramatically positive impact over time," said Adrian Fenton, senior investor strategies program manager at IIGCC in London.

Manley's aviation example is just a hypothetical. But similar examples in other sectors are already happening, allowing for the overstatement of emissions reduction, he said.

Take selling stuff on the Internet:

An investor would report the Scope 1 emissions of the freight-forwarding companies they own, the downstream Scope 3 of the truck manufacturers in their portfolios that ship the goods, the downstream Scope 3 from the fuel consumed for shipping and the online retailer's and the product manufacturer's Scope 3 from transportation.
But given the increasing electrification of the transportation industry, these emissions could all go away. That's potentially another five-times reduction in financed emissions.

"There are many ways to optimize financed emissions" that do nothing to address actual emissions in the atmosphere, Manley said. What investors need to do is "focus on absolute emissions" so as "to reduce climate risk in the real economy."

There's yet more evidence that the combined efforts of Big Oil, the industrial lobby and Republican politicians are successfully crushing ESG in America. And in Europe, now that companies are less able to greenwash their way to an ESG gold star, they're backing away as well. At some of the world's biggest asset managers, ESG fund launches are stalling. BlackRock Inc., Deutsche Bank AG's DWS Group, Invesco Ltd. and the asset management arm of UBS Group AG are among firms that have cut the number of new funds with environmental, social and governance mandates. This year through the end of May, just over 100 ESG funds were launched globally, putting the industry on track to fall well short of levels seen in recent years, the data show.

US Vice President Kamala Harris may end up being tougher on the fossil fuel industry than President Joe Biden.
Russia needs to ramp up liquefied natural gas exports to fund its war on Ukraine. Western pension funds may be helping.
T. Rowe Price Group Inc. is targeting a corner of the sustainable debt market that it sees growing fast over the next decade: blue bonds.

£1.5 billion

This is the size of the gap between finance being offered and what's required by UK climate-tech companies in their growth stage, according to Barclays, which has called on the British government to help address the issue.

"The way it has become this all-encompassing one-metric-to-rule-them-all for financial institutions to manage their transition can be a bit like focusing on the problem (emissions) at the expense of the solution (transition)."

Jonas Rooze

Head of sustainability and climate research at BloombergNEF

Some critics of the financed emissions metric argue that focusing only on that measure can arguably disrupt funding that would otherwise go to facilitating future real-economy decarbonization programs.

The three Chinese automakers singled out by the European Union in its anti-subsidy probe have sought and received additional hearings with regulators from the bloc.

SAIC Motor Corp., Zhejiang Geely Holding Group Co. and BYD Co. have protested duties that were announced by the EU, which has accused Chinese EV makers of receiving state subsidies that give them an unfair advantage. Beijing has criticized the EU, saying the move is a breach of World Trade Organization rules and launched an anti-dumping investigation of its own into European goods, including pork and brandy.

Beijing and Brussels are continuing to negotiate ahead of a November deadline to finalize the tariffs.

Photographer: Nathan Laine/Bloomberg

The UK is warned of the risks of relying on carbon capture. The nation's reliance on the technology to reach its net-zero goals poses risks as potential costs escalate and rollout lags behind target, according to the National Audit Office.

Eskom is swapping coal for cleaner energy. The South African utility, which is adding more solar, wind, hydro, battery, gas and nuclear, says coal will only make up 48% of supply in 2035, compared with 83% today.

GE Vernova expects revenue to rise due to climate fight. The newly independent supplier of power-generation equipment is raising its full-year guidance as global electrification and decarbonization trends drive demand, according to Chief Executive Officer Scott Strazik.

Germany must revamp its clean air policy. The government failed to take into account the latest data and information when drawing up new legislation, a Berlin top court ruled.

By Sing Yee Ong, Cindy Wang, and Manolo Serapio Jr

Severe floods and landslides triggered by an intensifying storm Gaemi claimed the lives of at least four people and forced the evacuation of hundreds of thousands in the Philippines, even as it strengthened into a super typhoon hurtling toward Taiwan.

With sustained winds of up to 185 kilometers (115 miles) per hour, Gaemi has shut financial markets, schools and offices, and forced cancellations of flights and ferries in both places. China has also issued its highest alert for the system, its first such warning for a storm this year.

Upgraded by Philippine and Hong Kong authorities to a super typhoon, Gaemi is expected to make landfall in Taiwan late Wednesday, before crossing the Taiwan Strait toward the southeastern coast of China. It is expected to cause billions of dollars in damage in the region.

People walk along a flooded street in Manila on July 24. Photographer: JAM STA ROSA/AFP via Getty Images

Elsewhere:

Mediterranean: Spain will bear the brunt of a Mediterranean heat wave over the next few days, while fires and storms lash Greece. Temperatures will climb as high as 44C (111F) around Seville and Cordoba in southern Spain on Wednesday. Most of the country will also face an extreme risk of wildfires, according to Spanish forecaster AEMET.

Canada: Wildfires in Canada's energy-producing Alberta province are threatening almost 10% of the region's oil production and forcing the evacuation of one of the country's largest national parks during the peak summer tourist season.

--With assistance from Eamon Akil Farhat, Paul Tugwell and Robert Tuttle

Lucie Pinson is a climate activist focused on the banks that fund fossil fuel projects. She and her team at the Paris-based nonprofit Reclaim Finance get to know corporate social responsibility officers, trawl through company statements and portfolios, and join shareholder calls in order to find ways to pressure big financial institutions from the inside — and it works. This week on Zero, she tells Akshat Rathi about some of the successes her organization has had, and why even bank employees who don't care about green issues might find reasons to work with her. Listen now, and subscribe on Apple or Spotify to get new episodes of Zero every Thursday.

How can the world drive meaningful change in sustainability? Join Bloomberg for the Sustainable Business Summit in Singapore on July 31 to explore important topics like ESG disclosures, supply chain innovations and urban sustainability. We'll sit down with industry leaders and experts from Ayala Corporation, CDP, Welspun Living and many more. Get your discounted ticket here.

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