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The following article was originally published on February 9, 2022 by the Global Financial Markets Center of the Duke University School of Law.

With the rapid expansion of corporate net-zero commitments and the recent pledge by financial institutions (FIs) – with over $130 trillion in assets – at COP26 in Glasgow to hit net-zero emissions by 2050, a credible mechanism to measure these commitments and hold companies accountable for meeting them is of critical importance. To that end, two organizations, the Science Based Targets initiative (SBTi) and the Partnership for Carbon Accounting Financials (PCAF), have recently drafted quantifiable methods for FIs to demonstrate meaningful emissions reductions and have asked for public comment. We submitted comments on these proposals and summarize them here.

Founded in 2015, SBTi has emerged as a critical player in the push to have the private sector aggressively reduce greenhouse gas (GHG) emissions in order to achieve the Paris Agreement’s goal of limiting global temperature rise to well below 2°C above pre-industrial levels. SBTi has developed two methods to help companies develop their science-based targets: the Absolute Contraction Approach (used by four out of five companies with approved science-based targets) and the Sectoral Decarbonization Approach (SDA). Thus far, SBTi has finalized sector-specific guidance for the following sectors: apparel and footwear, aviation, financial institutions, information and communication technology, and power. Several other sectors are in either the scoping or development phase.

In November 2021, SBTi released its Net-Zero Foundations for Financial Institutions Draft for public consultation. This draft builds on SBTi’s Criteria and Recommendations for Financial Institutions as well as their Corporate Net-Zero Standard by “presenting guiding principles, definitions of net-zero for FIs, metrics for developing targets, and tracking performance, and target formulation considerations such as fossil-fuel financing and use of carbon credits.” It also marks the first step in the SBTi net-zero finance standard development process. 

The other organization seeking public input on its methodologies is PCAF. Originally created in 2015 by 14 Dutch FIs, PCAF has now evolved to be a global partnership of FIs seeking to assess the GHG emissions associated with their loans and investments. PCAF has developed the Global GHG Accounting and Reporting Standard for the Financial Industry (the Standard), which provides guidance on GHG emissions measurement and disclosure for six asset classes including listed equity and corporate bonds, business loans and unlisted equity, project finance, commercial real estate, mortgages, and motor vehicle loans. 

In November 2021, PCAF launched a public consultation on two reports: (i) Draft GHG accounting methods for green bonds, sovereign bonds, and emissions removals (“New Methods” consultation); and (ii) Discussion paper on capital market instruments. The former expands on the Standard with two more asset classes – green bonds and sovereign bonds – and narrative guidance on measuring and reporting emissions removals. The latter explains “the difference between capital markets instruments and loans and investments” and proposes “framing the GHG emissions assigned to capital markets activities as facilitated emissions rather than financed emissions.” It also presents key challenges and next steps for developing a facilitated emissions methodology. 

SBTi Feedback

For SBTi’s draft, we support their recommendation that FIs meet net-zero targets through direct finance, rather than through the purchase of carbon credits on behalf of companies. Many FIs and corporates have indicated they plan on buying carbon credits to achieve net-zero targets. However, the carbon market is riddled with poor-quality offsets. Relying on these offsets as an alternative to achieving GHG emissions reductions by working with client portfolio companies to decarbonize operations risks increasing emissions instead of curtailing them. 

SBTi’s recommendation that FIs, as well as companies, engage in “beyond value chain mitigation” is also praiseworthy. SBTi does not define the term, but it presumably includes all mitigation finance not reported in FI-audited financial statements, such as FI financing of university research and charitable activities applied to mitigation in the countries and communities of FI subsidiaries. Even though the Standard would not include such mitigation efforts to meet the net-zero target (p. 39), FIs and companies with hundreds of subsidiaries should engage in, and will benefit from, “beyond value chain mitigation” and make that engagement known in the countries and communities in which they operate (p. 39). 

Finally, while it is laudable that SBTi identifies the need to research “how net-zero definitions can apply to different FIs,” it assumes that FIs are “more regulated than other parts of the economy” (p. 45). This assumption is debatable for many types of FIs, such as private equity firms, credit rating agencies, cryptocurrency firms, swaps dealers, high-frequency trading firms and trading venues – collectively referred to as “shadow banks” – who continue to evade traditional bank-like regulation despite being backstopped by central banks during the Global Financial Crisis and again at the onset of the pandemic. 

SBTi should study whether or how government regulation, self-regulation, and voluntary guidance from international organizations will enable FIs to achieve net-zero targets and influence their corporate clients to also achieve net-zero. Admittedly, different kinds of FIs have different forms of influence with their corporate clients but having clear metrics for common application should make engagement more effective and coordinated across FI client portfolios. We strongly agree when SBTI states: “The metrics should ideally enable a clear understanding of what parts of the portfolio are [net-zero target] aligned and which are not, helping to drive an engagement first approach” (p. 34).

Our suggestions for improvements to the SBTi net-zero finance standard development are as follows. First, SBTi needs to clarify how carbon credits may be used to address “residual emissions.”1 Given the integrity problems with many carbon credits, SBTi should explain how FIs will ensure the integrity of the credits they and their portfolio companies buy, and minimize financial risks associated with those purchases. While the draft paper includes a good strategy for how FIs should influence their corporate clients towards achieving net-zero targets, SBTi lacks any discussion of how FIs should monitor their own net-zero strategies and make adjustments if they are found to be weak or non-performing. A recent study found that the world’s 60 largest commercial and investment banks poured a total of $3.8 trillion into fossil fuels from 2016–2020. Given this track record, poor FI progress towards achieving net-zero targets is a real concern. 

Second, SBTi should explain how it will adapt the FI standard to evolving climate science findings. Both the SBTi Corporate Net Zero Standard and the FI Net Zero Standard should include an annex describing: how corporates and FIs should adapt their metrics; monitoring, reporting, and verification (MRV); credit, liquidity, and operational risk assessments and investment strategies to evolving climate science. For example, the IPCC 6th Assessment, chapter 5 includes a “medium confidence” conclusion that negative emissions do not offset positive emissions on a 1:1 ratio; corporates and FIs should be using this finding to update their approaches to carbon offsets.

Finally, SBTi should explain its assumption that carbon removal technologies will function at scale. The following questions need to be addressed: Does SBTi assume that corporates and FIs should, or even must, receive carbon credits to finance these technologies? And what government policies and subsidies will removal technology developers demand to “de-risk” private FI and corporate investments in removal technologies?

PCAF Feedback

For PCAF’s New Methods consultation, we focused our comments on emissions removals. Overall, given the proliferation of low-quality offsets in the voluntary carbon markets, and the risk that such offsets pose to financial stability, we urge PCAF to provide detailed guidance on both emissions removal and avoidance offsets. In addition, PCAF proposes to add emissions removal disclosure requirements to three out of six asset classes in the Standard. We encourage addressing the remaining three remaining asset classes at the earliest opportunity. Lastly, we support PCAF’s emphasis on deep decarbonization of the operations of FIs and portfolio companies, with investments and lending for carbon removal reserved for “residual emissions” after such decarbonization has taken place. At this point, “anthropogenic emissions in the atmosphere are balanced by anthropogenic removals over a specified period.”

We propose several recommendations for PCAF to consider. First, it should explain how to measure the differences between emissions removals with “short-lived” and “long-lived” carbon storage in its proposed updated framework for addressing financed emissions. Ensuring that the expected duration of carbon storage is disclosed will be critical to evaluating the quality of offsets projects.

Second, PCAF should insist that FIs disclose which carbon credits are for avoided emissions and which, if any, are for carbon removal. Given the extensive scientific literature on how the emissions-reduction value of offsets has been overstated, financial institutions (and regulators, investors, and the public) can only assess and mitigate climate-related financial risk if they have detailed information on the nature and purpose of projects that corporates are using to offset their emissions. PCAF acknowledges differences between carbon removals and “avoided emissions” projects, such as renewable energy projects, which are problematic due to (among other things) the difficulty of demonstrating additionality.

Third, PCAF should explain how emissions avoidance and carbon removals offsets purchased by companies in the FIs’ investment and lending portfolios are recognized and included in financial institutions’ Scope 3 reporting. Detailed disclosures about such emissions removals will be essential to ensure visibility into offsets’ contributions to the buildup of risk in the climate and the financial system, which we have previously detailed in a comment letter to the Commodity Futures Trading Commission.

Finally, PCAF should require FIs to measure and report their investments and trading in carbon offset derivatives. As the carbon market expands, FIs will likely play a major role in trading derivatives built on offsets. The financial crash of 2008 teaches us that failure to track the growth of an opaque derivatives market leaves us exposed to unmonitored and unregulated expansion of systemic risk.

For PCAF’s discussion paper on capital market instruments, we support the development of a standard for “[f]acilitated emissions from capital market instruments.” Financial institutions facilitate activities in the capital markets when they engage in securities underwriting. Of the fossil fuel financing carried out in 2020 by 60 leading banks analyzed in the 2021 Banking on Climate Chaos report, the amount of underwriting exceeded the amount of lending. Thus, fossil fuel underwriting is both a significant threat to the climate and a major driver of climate-related financial risk. The first step toward reducing these risks and achieving alignment with the Paris 1.5° target is measuring and disclosing emissions from underwriting. This disclosure can also improve our understanding of the role of private equity and investment funds in fossil fuel finance. In addition, as noted above, one of the major obstacles to achieving net-zero targets is companies’ reliance on low-quality offsets to reduce their GHG emissions. Disclosure of underwriting should include information on any role played by financial intermediaries in advising issuers on the use of offsets. 


This paper is part of an ongoing collaboration by the authors to assist financial regulators, private sector standard-setters, and others with initiatives aimed at reducing climate-related financial risk from the voluntary carbon markets. We believe that the above recommendations, if implemented, will greatly increase transparency and accountability by financial institutions and corporations, thereby reducing risk to the financial system as well as our planet’s health. We welcome feedback on these recommendations and ideas on future research needs and priorities. 

1. Emissions sources that remain unabated by the time net-zero is reached in scenarios that limit warming to 1.5°C with low or no overshoot.

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