Leading up to COP26, financial institutions around the globe have committed to aligning their lending and investment portfolios with net zero emissions by 2050. Today, over 40% of global banking assets are committed to the Net Zero Banking Alliance. Turning targets into tangible actions requires banks and insurers to establish a clear understanding of their starting point. And most importantly, it requires them to adopt a forward-looking perspective. Despite sheer unlimited IT and business resources from enterprises, they struggle to implement greenhouse gas accounting processes and tools. We see this especially for their most important category, scope 3 (financed) emissions. If large financial institutions struggle, how could smaller ones succeed? In consequence, despite an acknowledgment of the importance to fight climate change, resistance from the financial services industry is growing. In this article by Guido Klose, we discuss how notable proven concepts and solutions from greenhouse gas accounting can help to overcome this dilemma.

There are four main reasons why the implementation of greenhouse gas accounting often becomes a resource-intensive and costly exercise:

Limited data availability

Banks and insurers may not have complete data on all the activities and investments they finance, particularly when it comes to the emissions associated with their lending and investment portfolios. This can make it difficult to accurately quantify and report greenhouse gas emissions.

Multiple and unreliable data sources

Banks and insurers have complex value chains, which can make it challenging to track and measure emissions across different sectors and geographies. They may need to work with data sources of questionable quality, ranging from different external data providers of their customers to collect data on the emissions associated with their activities and investments.

Knowledge gap

Banks and insurers often focus on sustainability and environmental experts to implement green house gas accounting. These experts have a deep understanding of climate change, environmental science, and sustainability issues. However, they usually have limited accounting knowledge, are not proficient in data quality management and lack the understanding of how they can utilize already existing processes and tools. Hence, the implementation of greenhouse gas accounting becomes a costly science project, resulting in the implementation of often disjunct & insufficient processes and tools.

Regulatory uncertainty

Banks and insurers may face uncertainty around how greenhouse gas accounting and reporting requirements will be implemented and enforced. They may also face challenges in aligning their reporting with evolving regulatory frameworks.

Facing all these challenges, it is easy to get lost in the details and resist, rather than enact changes to make this world a better place for generations to come.

So let us take a step back and refocus on what the greenhouse gas accounting challenge is really about. It is an accounting challenge!

Greenhouse gas accounting for financial services

Greenhouse gas accounting can be implemented using proven accounting concepts and solutions. In fact, greenhouse gas accounting uses many of the same principles and techniques as expectations-based financial accounting and steering. Combined with integrated data management capabilities, banks and insurers today use this accounting for financial assets and investments.

From past to future expectations

Expectations-based greenhouse gas emissions accounting and steering is a method of measuring and managing greenhouse gas emissions. It is based on the future expectations of an organization rather than solely relying on past actual emissions. Future expectations of emissions directly correlate with future expected cashflows and outstanding balances, which are already known from the valuation of financial assets and investments. In the same way, actual financed emissions are correlated to financial business events.

Hence, with an integrated accounting and steering solution, greenhouse gas accounting just becomes another GAAP accounted for a parallel ledger denominated in “T of CO2e”.

This approach involves a shift from a traditional emissions accounting method, which focuses on historical emissions data. Expectations-based emissions accounting and steering also incorporates the use of planning and scenario analysis. This helps organizations to model potential future emissions and identify actions they can take to reduce them.

Better data, better decisions

The concept of expectations-based emissions accounting and steering recognizes that organizations make decisions based on their expectations of future outcomes. This includes their expected greenhouse gas emissions.

By considering these expectations, supported by an integrated greenhouse gas accounting and steering solution, banks and insurers can make more informed decisions about their emissions reduction strategies. It allows for a more proactive approach to emissions management. By focusing on future emissions, organizations can identify opportunities for emissions reductions. And they can take action to reduce their carbon footprint before it becomes a problem.

Forward thinking approach to achieve net zero

Overall, expectations-based emissions accounting and steering is an important tool for banks and insurers looking to reduce their carbon footprint and become more sustainable. It involves taking a forward-looking approach to emissions management. This can help banks and insurers to identify and take advantage of opportunities for emissions reductions. And they can do this while also preparing for future regulatory requirements and market changes.

Guido Klose is a seasoned advisor, helping customers find the right SAP Fioneer, SAP and SAP partner solutions which add business value. With 20+ years consulting experience in Financial Services and a vast network of SAP and SAP-Partner colleagues, Guido has run large SAP Core Banking, SAP Finance & Risk Management, and SAP ERP Corporate Finance & Risk Management projects/programs, giving deep insights into corresponding business processes.

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