Hidden Carbon Emissions: Discovering How Companies Impact the Environment
What is the financial supply chain?
(written around Nov 2022, the gas market has changed alot now)
This 2nd is the series of reports about the fintech space that Aaron McCreary kindly gave me.
This report introduces the concept of financed emissions. Where a company’s balance sheet is used to fund fossil products. Their emissions can be missed in their sustainability reports. Best to think about it as the type of scope 3 emissions.
The paper expands this concept with the financial supply chain. A company may not purposely want to invest in fossil fuel companies. But what happens is that company gives their money to the investment bank. Where money is used on their behalf. That bank may use the company’s money to provide loans to a new coal mine or gas field. This is where the financed emissions come in.
If you’re interested in how this dynamic plays out at the customer level.
Check out climatetowns video: What Your Bank Really Does With Your Money | Climate Town
The paper highlights some companies:
PayPal reported 24 KtCo2 of emissions, whiles financed emissions were 1,345Ktco2e. A difference of 5,512%.
Disney reported 1,190 KtCo2 of emissions while financed emissions were 2,011 KtCo2e 169%.
Why Fossil Fuels are not Going Away in the Short Term
My issue with the paper is that assumes that fossil fuel investments are all bad. Or even if you do, the organisation will still have an incentive to invest in fossil fuels. After the Ukraine war, the lack of energy is getting very acute for many countries. Germany needs to increase supply ASAP. While they added renewables, they also added coal and natural gas. This is the only way for the nation to survive. Germany’s companies were happy to talk about Net Zero. Now the Russian gas taps were turned off. Now ordered by the government to invest in fossil fuels and more renewables.
Because of this, the government is providing incentives to build more of these LNG terminals. If you’re bank how are going to say no to this?
In the short-term investing in gas is unavoidable. But can steps be taken to reduce the damage of these projects? Yes
Policy could help, like making sure these LNG terminals can be converted to hydrogen terminals in the near future. This idea has to be government-backed in my opinion.
The biggest issue here is corporations have bigger incentives than saving the world. AKA making more money. This is where policy comes in, suggested later in the report. In shareholder capitalism, the only legal obligation is to make more money for shareholders. Your fiduciary duty is the most common phrase.
In my opinion, the report slightly sides steps this issue. A CFO is not going to invest in sustainable projects if the next quarter has his job on the line.
Corporations have other incentives that may affect shareholder value. Like a government breathing down your neck. Maybe for legitimate reasons like antirust or the government needs political favour from you.
The 4 Buckets for Solutions
The paper lists out 4 mental models for solutions:
Select: identify financial institutions and products that are environmentally sustainable and socially equitable from the existing landscape.
Engage: their existing finance providers in their financial supply chain on climate and sustainability, making clear requests and incentivizing good practice.
Innovate: develop innovative new products, mechanisms, incentive schemes, data insights, behavioural drivers, etc., that enable companies to accelerate the decarbonization of their financial supply chains.
Advocate: push for climate-aligned financial regulation and policy that will increasingly drive the financial system toward progressive sustainable products and services.
This is a good mental model to think about various climate fintech ideas. The buckets have wider scope compared to the The climate fintech paper by New Energy Nexus. Where it delved into the sub-categories and touched on some of the tech used in the solutions.
1st bucket “Select”, suggests finding solutions already on the market. You don’t have to invent the wheel. So, finding products that you can use for your company and ideally on the shelf is great.
The “Engage” bucket similar to select is looking at existing providers in the market. As see how you can improve their processes for sustainable solutions. This can implement frameworks like SASB. Or promoting sustainability internally in the company.
The “Innovate” bucket talks about creating new products and business models. If you’re interested in founding a start-up this bucket will be of the most interest to you. Recommend checking out the last paper to read more.
The “Policy” Bucket is where the big stick and carrot of government are used. There could be carbon taxes or climate disclosure rules. The inflation reduction act is a classic example of the carrot approach. (Fancy billions of dollars for your new factory, Uncle Sam has got you covered 👍.) NGOs like GANFZ provide industry guidance for decarbonising.
Suggestions from the report
The first solution from the report was “Demand emissions reporting and transparency”.
This idea has been screamed from the rooftops in the industry for good reason. Getting climate data can be very shaky at times. The more reliable the better.
The financial industry needs the tools if you want to decarbonise. I can know about your financed emissions if know they exist or don’t track them.
Luckily the carbon management space is one of the most popular areas of fintech. Multiple products are offering companies to check their emissions for their supply chain. With better tech, it can become more reliable. An example TransitionZero was able to track real-time emissions of coal plants in China using satellite imagery and AI. There should be many cool examples like this as time goes on.
Green bonds are another solution suggested by the report. One of the ways companies can get financing for their green projects.
The report mentions:
“it is difficult for bond purchasers to determine the true impact of green bonds. To ensure green bonds are delivering a measurable climate benefit, companies can issue a mandate to hold their money in a green bond with specific terms and ask issuer financial institutions to bid on the funds”
If you’re interested check this video by CNBC explaining green bonds.
“Fuel green demand”
Creating new financial products that let customers make carbon-friendly decisions was suggested by the report. It provided ideas like “sustainability-linked loans [that] offer discounted lending for taking climate-aligned action”. These ideas can be a win-win for a tech company that needs to use customer data to provide products.
“Move the money where you can”
This a simple and important suggestion. Corporations move billions of dollars. Many climate-friendly banks don’t have the scale nor infrastructure in place to do that. The report suggests partly moving corporate money into more simple funds like philanthropy funds.
Patagonia to this advice to the extreme. By making the whole company a trust where all money does to environmentalism and fighting climate change. What a baller move!
Most corporations can’t do that. But with smart accounting practices, you could make a lot of progress. The authors mention that companies can reduce 60% of every dollar spent by doing this.
Conclusion
The report gives a great rundown on the climate fintech space. Touches on the challenges and opportunities in the space. I mentioned the issue of big banks still having an incentive to invest in fossil fuels explaining why that’s the biggest bottleneck and how it can be solved. The report introduces the concept of “financed emissions”. A new way looking into Scope 3 emissions using financial data.
The paper shows you can corporations can make much more progress with their climate goals. If more work was put in to prevent their holding from funding more fossil fuel projects.