Publicly-funded development banks are lagging behind some of the major private companies in disclosing their carbon footprint.
Given that these large institutions are publicly funded, they ought to be taking the lead on these issues – especially given that virtually all governments have agreed to take action on climate change under the Paris Agreement. There is a need for the multilateral development banks (MDBs) to report emissions over their whole portfolio, as well as harmonise methods for tracking emissions.
Among the main six development banks, the Inter-American Development Bank (IDB), European Bank for Reconstruction and Development (EBRD), and European Investment Bank (EIB) are the leaders in this regard, as they report on their emissions over their portfolio. The Asian Development Bank has recently committed to do this, but the World Bank and African Development Bank have some way to go.
A host of companies are already reporting on their direct and indirect emissions and setting science-based climate targets. This includes several large companies. Kellogg has committed to reduce emissions across its value chain by 20% from 2015-2030, for example, while Sony has a long-term vision of reducing its environmental footprint to zero by 2050.
In contrast, the World Bank and other development banks are currently failing to match up to the private sector in this area. You might ask, is it harder for development banks due to their size? Probably not, since Sony’s total sales and operating revenue were over $67 billion in 2016 – which is actually larger than the World Bank’s total $64 billion commitments in 2016. This shows size should not be a barrier.
The ‘Big Shift’ campaign, recently launched by Christian Aid and Climate Action Network in partnership with other organisations, is calling on the World Bank to provide greater transparency about the impact of its investments, and phase out funding for fossil fuels. Providing transparency about its carbon footprint will be vital to track progress. Strikingly, given that the World Bank is the largest development bank, it currently appears to be lagging behind.
Moreover, the Task Force on Climate-related Financial Disclosures, led by the Governor of the Bank of England, recently recommended that banks and insurers disclose all of their greenhouse gas emissions. This includes indirect emissions – including emissions from projects.
Are the banks’ methodologies for calculating carbon footprints comparable?
The figures on emissions (shown in the chart above) may not be directly comparable, because the Bank’s use different thresholds to decide which projects are included in the assessment. Within EBRD, the environmental and social policy mandates the greenhouse gas assessment for all projects whose emissions are expected to exceed 100kt (thousand tonnes) CO2-equivalent per year. In IDB, all direct investment projects with emissions, or emissions savings, exceeding 25ktCO2e are assessed – a lower threshold which means that in theory more projects should be included. EIB’s carbon footprint methodology uses different thresholds for total and relative emissions.
An important global standard is the ‘GHG Protocol’, used by 90% of the companies that report to the CDP (previously known as the Carbon Disclosure Project). But this standard does not set a threshold itself about which emissions should be reported, instead, it suggests that reporting companies should develop their own threshold.
Of course, metrics can be misleading, particularly in terms of what they do and don’t include. For example, fossil efficiency projects can extend the lifetime of otherwise uneconomic plants. While an efficiency upgrade to a coal plant may appear to have decreased annual emissions, upgrading to supercritical steam conditions could add at least 20 years to a plant’s service, greatly increasing the lifetime emissions from the plant and creating a net negative impact on the climate.
The six major development banks have agreed on a common approach for efficiency projects, which involves calculating emissions for a representative year of operation, aiming to take into account emissions from a longer lifespan. However, this fails to consider whether plants need to close early to prevent dangerous climate change. Even efficient fossil-fuel plants will need to be closed to align with a pathway of 2-degrees of warming. Fossil plants are therefore at risk of being ‘stranded assets’ sooner than might be expected. For example, recent analysis has found EU and OECD countries would need to stop using coal-fired power plants by 2030, China by 2040 and the rest of the world by 2050. Banks must ensure that efficiency projects do not extend the lifetime of fossil-fuel plants.
Transport, energy and land use: Which sectors are included?
Different sectors are covered to different degrees. The major development banks have developed harmonized approaches for measuring emissions from transport, renewable energy and energy efficiency. In other important sectors, such as agriculture and forestry, a shared approach has yet to be agreed. As for energy projects, investment in so-called ‘efficient’ transport may not be in line with global climate goals if it locks-in dependence on fossil fuels over the long term.
Meanwhile, it is impossible for global climate goals to be met without considering forests and agriculture. None of the banks yet have any policy committing them to zero deforestation. In agriculture and land use there are uncertainties in tracking emissions, so it would be useful if the banks agree on a harmonised method for tracking emissions.
Action starts with transparency
According to the old adage, “you can't manage what you don't measure” – and having the right data is crucial for development banks to better manage their impacts. Along with measuring their impact, there is a need for the development banks set targets for decarbonising their portfolio. The only bank to do this so far is the Asian Development Bank – which has set itself a relatively weak target of ‘peaking’ its portfolio emissions by 2030.
Many businesses around the world are already setting science-based targets. According to data from the CDP, 85% of the 1089 high-impact companies that disclosed data for their 2016 report have already set targets for emissions reduction. The same report found that 23% (253 companies) have already self-reported on emissions from their investments.
However as mentioned above, simple metrics have limitations, and efficiency can extend the lifetime of polluting assets. Safeguards are needed that rule out projects which are certainly not in line with the Paris goals, such as fossil fuel exploration, or projects that extend the lifetime of fossil fuel assets. It’s also difficult to measure the impact of investments in financial intermediaries. Banks must look at their lending to ensure they do not invest in high-carbon companies.
Despite its limitations, reporting on emissions over the whole portfolio is a first step towards aligning with global climate goals. We need a clearer insight into the overall impact of these banks on climate change. The information and tools are already out there – so it is really the least they could do.
A similar version of this blog was published on the Huffington Post.
Since this article was published, the EBRD’s methodology document was recently updated for clarity which now notes that the EBRD is collating emissions from all projects over 25kt per year in line with best practices.