Receive free Investment Banking updates
We’ll send you a myFT Daily Digest email rounding up the latest Investment Banking news every morning.
Some of the world’s largest investment banks have been lobbying to exclude chunks of their underwriting activity from net zero targets, in a debate that threatens to slow their progress on decarbonisation.
Banks in a standard-setting group led by Barclays and Morgan Stanley have been voting this week on how to measure the carbon footprint of such deals, according to people familiar with the discussions. Infighting over the past year has held up the publication of the first voluntary rule book on the issue, which had been due last November.
More than one-third of the $669bn of financing provided to oil, gas and coal companies in 2022 by the world’s 60 biggest banks was through underwriting bonds and equities sold on to investors, rather than loans made by the banks themselves, according to a tally by non-profits including Urgewald and the Rainforest Action Network.
But bankers have been reluctant to acknowledge the climate impact of their underwriting work and have never agreed on how best to account for the carbon emitted as a result of this. Unlike loans, underwriting deals typically do not remain on their balance sheets for long.
A key sticking point that bankers on the so-called “facilitated emissions” working group at the Partnership for Carbon Accounting Financials have spent recent months debating is the proportion of emissions linked to underwriting deals that banks should take responsibility for.
Some banks have argued that this proportion should be as little as 17 or 33 per cent. Others, such as NatWest, also a member of the working group, already disclose investment banking emissions on a 100 per cent basis, mimicking the stricter approach that banks already use for their loan books.
Any weighting lower than 100 could lead to accusations of hypocrisy. Investment bankers count every penny raised in “green” bond deals that they underwrite towards their annual green financing targets.
“We think there’s a lot of double standards taking place, with banks hyperinflating green targets and on the other hand fishing for a low weighting to be adopted elsewhere,” said Jeanne Martin, head of the banking standards team at responsible investment charity ShareAction.
Negotiations reached a crunch point at an online meeting last Friday when bankers ruled out the most controversial option of 17 per cent but failed to reach a consensus, according to two people familiar with the discussions.
Banks have been voting on weightings over email this week ahead of a Friday deadline for votes to be submitted, the people added.
If they fail to reach a two-thirds majority, the decision will be taken out of their hands and put to the accounting body’s board of directors. This back-up plan was introduced in April because stalemates, such as the one over facilitated emissions, are becoming more common, said one person familiar with the reform.
“As you get into more sophisticated or esoteric pieces of the accounting puzzle it becomes harder to reach consensus,” the person said.
UK-based bank HSBC, another member of PCAF’s working group, has said it will not publish underwriting emissions data until banks agree on a methodology. When it published these on a one-off basis last year, it used a 100 per cent weighting, which showed carbon and equivalent gases linked to its capital markets activity in 2019 hit 29.5mn tonnes, compared with the 35.8mn tonnes linked to its lending to the oil and gas sector.
Another source of tension in recent weeks has been whether to lump together decarbonisation targets for underwriting and existing net zero goals for lending by sector, for instance for oil and gas, as proposed by some European banks, according to people familiar with discussions.
“Some of the organisations feel it would be more convenient to have one target per sector”, said Caroline Haas, head of climate and ESG capital markets at NatWest. Banks that add underwriting emissions to lending emissions in one target would be reluctant to use the same percentage for both types of activity when calculating the carbon footprint as this could cause emission figures to “balloon”, she said.
The Science-Based Targets Initiative, a voluntary oversight body that signs off on the integrity of banks’ net zero goals, has told PCAF members it could reject joint targets that give underwriting a lower weighting than lending, the people said. SBTI declined to comment. PCAF did not respond to a request for comment.
Bundling together loan and underwriting emissions calculated using separate methodologies would amount to “greenwashing”, said ShareAction’s Martin.
Where climate change meets business, markets and politics. Explore the FT’s coverage here.
Are you curious about the FT’s environmental sustainability commitments? Find out more about our science-based targets here