ECB to weigh in on controversial ‘facilitated emissions’ indicator

It comes just months after banks came to an agreement on a voluntary disclosure standard.

The European Central Bank (ECB) is considering whether to mandate the disclosure of emissions linked to capital market deals, Responsible Investor can reveal.

Banks have traditionally excluded emissions which result from investment banking and brokerage services – known as facilitated emissions – from their climate plans on the basis that they do not have direct financial exposure to clients.

There are also concerns over the lack of mature and consistent disclosure methodologies around facilitated emissions. Banks including HSBC have previously said they will not reveal this information until an industry standard becomes available.

But shareholder groups and NGOs have argued against this omission because of the fossil fuel sector’s reliance on capital markets financing. ShareAction said in 2022 that 57 percent of financing received by the top 50 expanding upstream oil and gas companies was arranged by banks but did not come from banks themselves.

At the same time, some major banks have continued to count their underwriting activities for renewables or other green activities toward sustainable financing targets, leading to accusations of hypocrisy.

The ECB has previously acknowledged the “double standards in the disclosure of targets for financed and facilitated emissions… leading to a potentially flawed or misleading representation of a bank’s contribution to climate change”, but stopped short of saying it would mandate such disclosures.

But RI understands the ECB is currently developing its own position on how banks should measure their facilitated emissions.

This is despite the December announcement of a voluntary standard by the industry-led PCAF initiative.

The PCAF standard will see banks claim responsibility for a third of emissions originating from capital market deals, after lengthy and often fractious negotiations on whether that proportion should be higher.

The development has largely failed to placate green NGOs, which have described the proposed metric as a “a get-out-of-transparency-free card”.

Possible intervention

A possible intervention by the European banking regulator could scupper the progress made in these talks and reopen the debate around facilitated emissions – potentially bringing in a much broader range of stakeholders compared to PCAF’s bank-only membership.

There has crucially been no indication from the ECB that it intends to stray from the PCAF standard, yet the regulator did not include the voluntary standard as an example of best practice in two recent publications which addressed climate transition planning by banks.

When asked to comment on the development, PCAF executive director Angélica Afanador stressed the importance of getting industry support behind any decision by the ECB.

“A common accounting approach with industry buy-in not only increases the level of disclosure, but in time also elevates the quality of disclosure – and the same is true of facilitated emissions,” she said. “The more straightforward we can make frameworks for financial institutions to follow, the higher the level of implementation.”

PCAF would be happy to support the ECB if it decides to incorporate the KPI into any disclosure requirements, she added.

The ECB declined to comment.

E3G policy adviser Pietro Cesaro said that the ECB should focus on developing a more robust measure than the standard put forward by PCAF, which he described as “not being in line with a credible accounting approach”.

RI understands that the ECB is monitoring the outcome of a separate consultation by the Basel Committee on a future global banking disclosure framework for climate-related risks, which contains a template dedicated to facilitated emissions.

Financed emissions is one of a series of climate alignment metrics the ECB is looking at potentially adding to the list of indicators that it monitors.

Global banks are increasingly wary of what they see as climate activism by the ECB, according to numerous background conversations.

Banks have until this year to meet the ECB’s extensive expectations on climate and the environment, which includes requirements to assess the impacts of such risks on their operations, establish a risk management framework in accordance with those risks and disclose meaningful information.

Failure to do so will result in stricter capital requirements.

The ECB has defended its approach as “reasonable” and has said that it is “open to listen to arguments of banks that may render this not feasible in individual cases”.

The ECB published its expectations in 2020, and have given banks four years to work towards compliance.