PCAF to look at carbon intensity metrics and transition finance in 2024

Separately, the ECB has published research on different types of carbon emissions regulations and what these could achieve,

The banking climate disclosure body PCAF is due to examine the use of “financial attribution metrics, such as EVIC” for greenhouse gas emissions as part of its 2024 work priorities announced Tuesday.

Banks and financial sector organisations have in recent years gravitated towards reporting their carbon intensity based on EVIC or Enterprise Value including Cash, following the metric’s adoption by the EU for its fund disclosure regime and its official line of climate-focused investment benchmarks.

EU financial institutions are not under any obligations to use the metric internally when making financing decisions.

However, critics have argued that an EVIC-based intensity metric, which incorporate market capitalisation, makes it difficult for investors to properly judge how well a company is reducing emissions due to share price volatility. (Read Responsible Investor’s coverage of this debate here.)

Using EVIC, a rally in share prices would have the effect of reducing a company’s carbon intensity even if absolute emissions have remained level. The same is true of the reverse, a decline in share prices will have the effect of boosting intensity.

Historically, measuring carbon intensity using revenues has been the more common practice and was championed by the TCFD for its disclosure framework, prior to the EU changing tack. It is viewed in some quarters as a better gauge of a company’s activities due to the relationship between revenue and production – which unlike share prices, are under the direct control of a company.

A recent analysis by Abrdn show that the revenue-based emissions intensity of Orsted in 2021 and the first half of 2022 would have increased by 45 and 25 percent, respectively, but would have fallen by 38 and 15 percent using EVIC-based intensity due to a rise in share prices.

PCAF has separately identified transition and green finance as another priority area for the year.

It comes amid growing regulatory and government interest in the best ways to encourage the financing of transition activities in carbon-intensive sectors.

In Japan, one of the most vocal advocates for more transition financing, the government has developed principles for the green transition, and has established a pipeline of “model” companies that meet its requirements. It has also set out industry-specific transition road maps to assess Japanese companies on their progress.

The sole Japanese market representative is Mizuho Financial Group, represented by vice-president Yu Takita. Mizuho also chairs PCAF’s regional implementation team for Japan.

Meanwhile, the EU has recently set out its own formal definition of transition finance and provided examples of how the bloc’s existing sustainable finance framework can be used to facilitate the transition in a regulatory package announced last year.

PCAF has been contacted to provide more details on the scope of its work on transition finance and carbon intensity disclosure metrics. The body also named securitisation and “additional insurance products” as its two remaining priority areas for 2024.

ECB carbon pricing study

In other emissions-related news, a research paper published by the European Central Bank last week has warned that putting a tax on carbon could limit investments in green technology and innovation.

Researchers analysed the merits of a carbon tax regime compared with an Emissions Trading System (ETS) and found that companies would respond to a tax by “tilting their green investment mix towards more immediate yet short-lived options – such as solely reducing emissions instead of investing in green innovation… [which] has an uncertain and delayed outcome”.

The paper suggested that governments introducing green subsidies could counteract the effect of taxes and “boost the firm’s engagement to becoming greener”.

In contrast, researchers said that data showed “firms adopted a precautionary approach under an ETS and “became less committed to curbing their emissions when holding large balances of carbon credits”. Limiting the distribution of free carbon credits would make the policy more effective, they said.

The paper follows research from the NY Fed which has suggested that imposing a significant price on carbon may not be politically feasible for governments.

Chaitanya Kumar, green transition head at finance NGO the New Economics Foundation said that the ECB paper showed the importance of developing smarter policy which could “gradually render the dirtier technologies more expensive, as we are currently seeing with electric vehicles and heat pumps”.

“It’s clear that if the UK and other countries are to achieve their climate commitments then carbon pricing will definitely have a role, particularly in cross border trading,” said Kumar. “However, we must ensure this cost is not borne by the emerging economies that lack the necessary capital to meet the stringent carbon targets of the nations they are exporting to.”