New research from Bain & Company finds that many banks have the opportunity to build a more accurate baseline of emissions from their loan portfolios and other funded portfolios, as there is a risk of overstating or understating funded emissions up to double when using loan data that is not granular enough. This critical but complex task of measuring financed emissions makes it difficult to understand where and when value will emerge in the carbon transition and what strategy is best for a bank to take advantage of it.
Bain & Company experts predict that banks that tackle these challenges head-on—that Bain calls “pioneer banks”— will see its profits increase by 25 to 30%. In contrast, banks that delay or adopt a passive approach related simply to meeting regulatory requirements will see their profits eroded by 10-20%.
Pioneering banks will ensure they invest in high-calibre emissions tracking to help their clients make the transition and make smarter strategic decisions, actively steering their portfolios based on both financial metrics and carbon footprints. . By acting quickly, pioneer banks will redirect a much larger percentage of their portfolios to green assets—up to 85% by 2050. In turn, their cost of funding and risk will be much lower than slower competitors, who will increasingly be penalized by markets and investors for greater exposure to traditional industries and projects.
“Banks have a central role to play in limiting global warming to 1.5 degrees Celsius, and industry-wide initiatives, such as the Glasgow Financial Alliance for Net Zero, are critical,” said Camille Goossens, Bain & Company’s global leader in sustainability and responsibility in financial services. “We are seeing positive momentum both on commitments by 2050 and 2030 and on increasingly transparent and accurate disclosures. However, this critical topic requires banks to invest in reliable granular data and to increasingly adopt strategic thinking adaptable to the longer term. Each bank will also have to decide on the posture it wishes to adopt to unlock value, by asking itself ‘Are you ready to be a pioneer?'”
For any questions or to request an interview, please contact Gary Duncan at [email protected] Where Katie Ware at [email protected].
Notes to Editors
Bain & Company examined the top 15 banks by assets in Europe, Asia Pacific and North America using data from PCAF, PACTA, S&P Global Market Intelligence and banks’ annual reports to determine where banks are in terms of disclosure and target setting. Bain & Company measured both the disclosure of a bank’s funded emissions and the percentage of portfolio value covered by this study. In addition, it measured whether the bank disclosed its 2030 targets, as well as the number of sectors it measures to assess whether it reports absolute emissions.
Bain & Company also conducted a study to determine if data granularity has a significant impact on measurement reliability. This study calculated the carbon footprint of four representative loan portfolios: power, metals, automotive, and mortgage, using three PCAF-compliant methodologies. The Partnership for Carbon Accounting Financials (PCAF) establishes a data quality score that takes into account the granularity and specificity of emissions data. The score ranges from 1 to 5, with 1 representing very certain data and 5 representing very uncertain data (non-specific and general).
Bain & Company modeled a theoretical bank with a representative portfolio (e.g. international business, balanced sector exposure and product mix). Based on volume and probability factors, the model simulated the evolution of a bank’s earnings by 2050, excluding inflation or market growth and according to three different strategies:
1. Pioneer. The bank shows an early and strong commitment to climate transition.
2. Follower: The bank is taking on the climate transition, but not quickly or aggressively.
3. Latecomer: The bank is latecomer and adopts a passive approach, linked to regulatory requirements.
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