Without better emissions data, Canada’s banks face challenges living up to their net zero commitments.
What’s new?
Banks play a significant role in financing Canada’s transition to net zero. Specifically, they can shift their lending activity and investment decisions towards lower carbon projects to reduce the emissions they finance.
To date, all Canadian banks are a part of the UN’s Net Zero Banking Alliance (NZBA), a voluntary pledge which requires them to establish commitments to reach net zero emissions by 2050. But currently, banks lack the necessary data to track financed emissions — emissions associated with their investment or lending activities — and set reduction targets for many parts of their portfolios.
What are financed emissions?
Financed emissions, which are also known as Scope 3 Category 15 emissions, refer to the greenhouse gas emissions linked to investment or lending activities. They represent the largest portion of a bank’s carbon footprint, comprising up to 700 times more than the emissions from a bank’s operational — Scope 1 and 2 — emissions. In other words, they matter significantly for assessing a bank’s climate action.
A bank’s financed emissions can shrink by either divesting away from carbon-intensive companies or investing in lower-carbon technologies. For example, if a bank financed 30 per cent of an oil production plant, the bank’s financed emissions would typically be calculated as 30 per cent of the total annual emissions from that facility. The bank can reduce emissions if it sells its portion of the ownership in the facility or invests in helping it decarbonize.
On aggregate, Canada’s largest banks reported a total of 213.9 megatonnes of financed emissions from their most recently available estimates, broken down into six categories: oil and gas, power generation, transport, agriculture, industry, and real estate (Figure 1).
The NZBA typically considers these sectors to represent the largest areas of a bank’s financed emissions activities, and members of the NZBA are required to establish interim emissions reductions targets for these sectors for 2030 or earlier.
Oil and gas emissions represent the largest source for emissions across investment portfolios. However, significant portions of financed emissions can also be attributed to agriculture, transport, aviation, and automotive manufacturing sectors. Yet, the emissions across these sectors are still the least disclosed, with only half of the banks reporting their financed emissions across these sectors.
Shining a light on data gaps in financed emissions
Overall, banks frequently cite data quality issues as a primary barrier to setting short-term financed emissions reduction targets.
As mentioned above, there are still several sectors where financed emissions are not yet reported by all banks. Even for reported emissions, the quality of estimates also remains low on average. Banks typically self-report the quality of their financed emissions using the PCAF’s data quality score. A score of 1 reflects the highest quality of data by using a company’s verified reported emissions. By contrast, a score of 5 represents the lowest data quality, often given for estimates that rely on sector-wide activity-based emissions that often contain margins of error that may significantly under- or over-estimate actual financed emissions.
Figure 2 provides an aggregate of the average PCAF scores across all banks in each sector category, and also compares data quality scores with the number of banks that have set interim financed emissions targets for each sector.
Unsurprisingly, there is an inverse relationship with the number of interim targets and data quality, where poor data quality leads to fewer interim targets. For example, the data quality for agriculture and industrial sectors are particularly low and there are currently no banks that have set any short-term targets for these sectors.
Poor data prevents banks from obtaining accurate baselines needed to set their financed emissions reduction targets. It also increases the risks of over/under-investment when margins of error for estimates are significant.
As data quality improves, banks can be more confident that their estimates are accurate reflections of their financed emissions. Subsequently, they can use the data to inform their financed emissions reduction targets.
However, obtaining high quality emissions data for all sectors is easier said than done. Certain sectors, such as the agricultural sector, have historically faced challenges in accurately reporting emissions, which is reflected both in the low data quality score and the lack of interim targets for the sector.
For other industrial sectors, emissions data for Scopes 1 and 2 may already be available for facilities that are required to report their emissions to the Federal Greenhouse Gas Reporting Program.
Filling data gaps for more comprehensive target setting
To address issues around data gaps, securities administrators and other regulatory bodies have introduced some regulations to improve the availability of data.
One way of improving the availability of company-level emissions data is to simply make it mandatory for companies to disclose their emissions. For example, the Canadian Securities Administrators is considering proposals to require companies to disclose at least their Scope 1 emissions.
Expanding mandatory disclosures to include Scope 1, 2, and 3 emissions would further equip banks by providing more comprehensive data to estimate the full footprint of their financed emissions. Adopting greater emissions reporting standards would also align Canada with international peers, such as California, which recently passed a first-of-kind bill for mandatory disclosures, as well as Europe, which adopted the European Sustainability Reporting Standards.
Another option is to require banks to develop emissions reduction targets and incorporate them under their climate transition plans, in line with the federal government's guidelines on climate risk management. This work is already being developed. Requiring banks to publish and update their transition plans to include financed emissions targets can increase investor demand for more company-level data, which can drive more companies to pursue better disclosures.
Improving data quality is especially important to equip banks with the information to set sector-wide targets and, in turn, invest in lower-carbon projects across the Canadian economy to meet them.
Arthur Zhang is a Research Associate with the Canadian Climate Institute.