According to the 2022 Financial Services Disclosure Report, greenhouse gas emissions linked to global financial institutions' investment, lending, and underwriting activities are approximately 750 times higher than their direct emissions. However, at the same time, while the role of finance as a driver of the ecological transition is increasingly clear, less than half of financial institutions and only 27% of insurers claim to have undertaken actions to align their portfolios with the scenario advocated in the Paris Agreement: to keep global warming below 2°C compared to preindustrial levels.
So what is the best approach to helping steer sustainable finance in the right direction and support companies in the decarbonisation process? Renewable Matter put this question to Carbonsink, a leading consulting firm in the Italian market for matters of climate mitigation and risk management in the private sector.
Decarbonising investors’ portfolios
Finance can help the climate in various ways. It can require governments to implement stricter climate policies, such as setting a price for carbon emissions or banning the funding of projects based on fossil fuels. It can also develop instruments to finance projects with a positive environmental impact, such as green bonds, or transfer investments from more carbon-intensive assets to more climate-friendly ones.
Such strategies should be adopted as soon as possible. “If we look at climate scenarios, there is a window of opportunity that is closing quickly. According to the CDP, financial institutions are underestimating the most significant climate-related risks, with a potential impact of over 1.1 trillion dollars for the largest 260 companies in the world,” explains Blanca Moreno, a Managing Consultant at Carbonsink, which has been part of the South Pole group since January 2022.
“To meet net-zero targets, investors must decarbonise their portfolios and, with the remaining companies, launch a strategy to promote the reduction of the emissions intensity of their activities,” Moreno continues. “Carbonsink assists businesses and investors in calculating emissions, to identify intervention hotspots. We do this by analysing data, interpreting them, and developing the best short or long-term goals in a way that is credible and aligned with climate science.”
The risks of greenhushing
Once a strategy has been set out, there is a second step that, according to Moreno, cannot be overlooked. “It is vital to assist clients in the public reporting of their initiatives, using the CDP questionnaire, and in developing decarbonisation targets that are aligned with the science through the methodology of the Science-Based Targets initiative (SBTi) for the financial sector. Both initiatives are centred around disclosure, encouraging the financial sector to adopt a transparent approach in external stakeholder communication.”
Currently, according to the Net Zero Report 2023 published by South Pole in January, most companies in 10 of 14 main sectors are actively reducing their climate-related communications. The phenomenon is known as greenhushing and, according to researchers who interviewed over 1,400 sustainability managers globally, it underlies a clear misalignment between companies’ conviction regarding the value of communicating their climate targets and their trust in doing so.
Despite the vast majority (81%) of sampled companies believing that communicating their climate targets is beneficial in terms of profits, almost half (44%) find it harder than before. Reasons for this include a lack of clarity and difficulties in following legislative updates, which is compounded by a fear of scrutiny from investors. Investors, meanwhile, are hindered by greenhushing, the lack of data, and overly long timeframes. Therefore, they are adopting a wait-and-see approach that risks slowing down both progress and the open sharing of data.
“This is why, at Carbonsink, we believe that investors’ engagement role towards companies is crucial, and we support both parties in the decarbonisation process,” Moreno concludes. “This serves to spark the cascading effect that the market needs to increase climate action in the private sector and tackle the urgent climate challenge we are facing.”
This article is also available in Italian / Questo articolo è disponibile anche in italiano
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