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Banks Relying on Carbon Intensity to Manage Climate Change Risk

Author: Maria Butler
by Maria Butler
Posted: May 12, 2022

With nearly 200 countries signing the deal to prevent catastrophic effects of climate change, the Paris Agreement was deemed a success. The time to take action is now, but lofty aspirations of reducing emissions are not enough. As businesses continue to expand, it is becoming increasingly important to determine if and how to decouple economic and carbon growth.

Total carbon emissions, as a metric system is unsatisfactory because it can only assess total emissions and not resource efficiency. Carbon Intensity (CI), on the other hand, may determine the total carbon emissions emitted per unit of activity, which is expressed in KgCO2 per unit. This opens up new improvement paths, as CI can be used to find more efficient processes or upgrade existing ones to make them less intensive. The use of Gross Domestic Product (GDP) or revenues has been supported by entities in their CI indices. GHG emissions per unit of revenue is a popular intensity used in financial services and investment analysis.

The carbon emission metric system comprises the following elements:

  • Basic

GHGs involved in material production or end-of-life processes are not taken into account when carbon emissions are computed for a single operation. This can disguise a product's total carbon footprint, perhaps resulting in a greenwashing effect.

  • Life Cycle Assessment (LCA)

The environmental impact of everything that goes into manufacturing a product is examined using Life Cycle Assessment, which includes everything from car production to fuel production to materials utilized in the process. This method is complicated since it involves multiple variables, but it delivers a comprehensive carbon audit because it calculates all of the emissions.

  • Well-to-Wheels (WTW)

The Well-to-Wheel (WtW) method is used to evaluate the LCA of fuels, taking into account all phases of their life cycle, from raw material extraction to use. The WtW assessment has two parts - Well-to-Tank (WtT) and Tank-to-Wheel (TtW). The stages of fuel production are captured by WtT, while the phases of fuel use are captured by TtW.

  • WTW-LCA Hybrids

This incorporates the WtW methodology's basic hypothesis with the LCA that occurs during the product's production process. By using a hybrid WTW+LCA approach, the WTW methodology utilized in policy support to measure energy content and GHG emissions of fuels and powertrains can generate results that are closer to the LCA methodology.

This allows banks to accurately assess the amount of GHG emitted by entities, allowing businesses to cut emissions at every stage of production. Banks can calculate their 'Scope 3' emissions using the scientific formulation of 'CO2e tonnes per $m revenue' as their CI calculation base. This enables financial organizations to calculate the amount of GHG they are financing through loans and investments. Banks are coming under increasing regulatory and economic pressure to safeguard themselves from the effects of climate change while also aligning with the global sustainability agenda. This has had an impact on business models and credit profiles, prompting banks to consider climate risk into loan pricing.

GreenCap's 'Risk as a Service' (RaaS) solution assists banks in calculating the risk-based capital as the green economy evolves. Based on IPCC pathways and well-understood risk measures, the system converts climate research into identifiable risk management outputs.

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Author: Maria Butler

Maria Butler

Member since: Dec 21, 2021
Published articles: 17

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