From carbon accounting to carbon accountability: It’s time for banks to step up

The Partnership for Carbon Accounting Financials recently welcomed its 100th member, a milestone that reflects banks’ growing focus on measuring financed emissions. But while robust carbon accounting is necessary for the long term, it is no substitute for action now. To pick up the pace of Paris alignment, banks must begin targeting financed emissions in carbon-intensive sectors immediately.

Improving data and disclosure is a valid long game, with mandatory climate risk disclosure and corporate leadership playing important roles. But financial institutions already have many of the tools and much of the data points needed to ramp up action in carbon-intensive sectors.

Using the best available data to begin turning net-zero commitments from promises to priorities is the essential task for banks in 2021. Banks are well positioned to accelerate corporate climate action and can begin by using relationships, knowledge and capital to shift business practices across carbon-intensive sectors, including oil and gas and transportation, among others.

In the immediate term, banks can work to end the routine flaring of natural gas, which — while not the largest source of oil and gas emissions in the long-term — represents an especially actionable, visible and cost-effective decarbonization opportunity.

Flared natural gas: An immediate decarbonization opportunity

Flaring is as risky as it is unsightly.

As major sources of greenhouse gas emissions, flares expose banks to substantial ESG concerns. In the Permian Basin, for example, flaring is one of the largest sources of methane emissions. EDF’s recent scientific field work in the Permian revealed that 11% of flares were either unlit or only partially burning, venting uncombusted methane and exacerbating local air pollution in communities. Although Permian methane emissions declined during the start of the pandemic, new research shows that methane levels have returned to pre-COVID highs.

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These needless emissions contradict the wave of Paris and net-zero pledges sweeping the banking sector.

Risk management on carbon is an essential function for banks in the 2020s and beyond. Banks that hope to maintain healthy loan books should push their oil and gas clients to end routine flaring by 2025 or earlier, and to tackle episodic flaring. As BlackRock wrote in its recent commentary, “In order to track a net-zero goal by 2050, a near elimination of flaring, with government policies and industry commitment, must occur by 2025.”

Flaring also creates waste, as gas that could be monetized is burnt for no gain. In 2019 alone, operators in the Permian Basin flared over $400 million of natural gas. That number represents lost revenue for corporates and financial risk for lenders, given that 84% of routine flaring can be abated at zero cost.

Fortunately, the technology and governance strategies needed to solve flaring already exist. In 2019, companies like Occidental, Chevron and Pioneer all reported flaring intensity levels of 1% or less thanks to management attention and use of best practices, with Diamondback most recently reporting an intensity level of 0.9% and Apache committing to end routine flaring for U.S. onshore operations by the end of 2021.

Constructively supporting operators to end routine flaring in the next four years is both realistic and achievable, and banks can play a leading role.

How banks can limit routine flaring

Financial institutions can tap into their relationships with oil and gas producers to accelerate the phase out of routine flaring. Banks could begin by initiating engagements with their oil and gas clients on flaring, establishing zero routine flaring by 2025 as an explicit performance benchmark and integrating these climate concerns into equity research and analysis.

Banks can support clients with information on best practices to eliminate flaring and improve flare monitoring and performance in the meantime. Critically, banks must also begin to hold firms accountable to flaring targets and timelines through loan eligibility, adjusted cost of capital or other tools.

After all, in the new world of net-zero financed emission pledges, an operator’s flaring problem is also a problem for the banks from whom it borrows.

JP Morgan, Bank of America, Citi, Goldman Sachs and Morgan Stanley are among those well positioned to drive positive impact at scale given their outsized lending to oil and gas companies. These five banks provided approximately $789 billion in financing to fossil fuel producers between 2016 and 2019, almost 30% of new financing to the sector.

Through active engagement with operators and time-bound performance expectations backed by consequences, the banking community can help end flaring ― a tangible win on the longer path to energy system change and the achievement of net-zero emissions economy wide.

Carbon accounting should not get in the way of carbon accountability. It’s time for banks to put their muscle where their mouth is.

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