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The huge and uncounted sums of cash-linked carbon emissions

New research finds the carbon emissions of large US-listed corporates could be thousands of times higher than currently reported.

By Polly Bindman

Carbon emissions, cash-linked investment
Invisible carbon emissions. Corporate cash-linked investments have not prevously been accounted for. (Image by allvision, via iStock)
  • New research takes the novel approach of calculating the size of large companies’ exposure to carbon emissions by looking at their cash investments.
  • In doing so it reveals the footprint to be huge multiples higher than their Scope 1, 2 and 3 emissions combined.
  • This approach to emissions counting has the potential to revolutionise current emissions counting methods.

Overweight in many traditional ESG screening indexes, the technology sector is known as having relatively low Scope 1, 2 and even 3 carbon emissions, which household names like Microsoft and PayPal are particularly meticulous at reporting.

Yet up until this point, nobody has thought to count the emissions of the huge piles of cash and short-term investments these and similar corporates sit on while they plot their next big acquisition or other capital expense.

To this end, three NGOs have sought to provide an answer. Climate Safe Lending Network (CSLN), The Outdoor Policy Outfit (TOPO) and BankFWD revealed that, for some large corporates, cash holdings and liquid investments possess a carbon footprint much deeper than their current Scope 1, 2 and 3 emission calculations combined.

Across ten cash-rich US-listed companies, the average emissions ‘uplift’ – or difference between reported emissions and reported emissions, including financed emissions – is 632%.

Scope 1 and 2 emissions under the Greenhouse Gas Protocol refer, respectively, to direct greenhouse gas emissions and those generated indirectly by the likes of electricity, heating and cooling. Scope 3 emissions are those connected with a company but outside its direct control.

All the results of this research can be found in the jointly published ‘The Carbon Bankroll’ report. For example, if you apply its methodology to calculate the financed emissions of PayPal, its emissions footprint increases by more than 5,000%, from 24 ktCO2e from its operations and supply chain, to 1,345 ktco2e when its cash and investments are taken into consideration.

While the authors of the report cover only the ten corporations, all companies could in theory start counting their cash-linked emissions.

While the methodology behind the report is complex, the overarching idea is simple. Across 20 leading industrial and developing nations, banks have $13.8trn of exposure to carbon-intensive sectors, which makes up 19% of on-balance sheet loans.

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As of February this year, 13 of the world’s biggest non-financial companies cumulatively held cash and investments via banks exceeding $1trn. This means, say the authors, their cash and investments indirectly generate emissions “at a globally meaningful and previously underappreciated scale".

The link between a bank’s emissions and the corporate cash that finances them is so intuitive that, to the researchers, it seemed odd nobody had thought of it before. When they put this notion to the companies involved in the report, the reaction was striking: “We've never been asked that before,” they told James Vaccaro, executive director of the CSLN.

The methodology

The report’s conclusions rely on two key pieces of field research.

The first was conducted by the Partnership for Carbon Accounting Financials (PCAF), a group responsible for developing a global greenhouse gas (GHG) accounting standard. PCAF establishes emission factors (the average emission rate of a given greenhouse gas for a given source per unit of activity) for different sectors and activities; for example, an activity could be ‘credit exposure’ and the industry could be the food and beverage industry.

It is this methodology that underpins the second piece of research conducted by the Center for American Progress and Sierra Club’s December 2021 report focused on the global emission of the US financial sector.

The report identifies the intensity of the financed emissions of ten top US banks, which make up 60% of the economy, using activities in their 10-K reports, mapped to the GICS industry taxonomy.

The researchers mapped the classification of banks’ financial activities to an industry taxonomy, and then mapped these activities to carbon emissions data, providing greenhouse gas emission factors per sector. A climate solutions provider called South Pole then worked out an average emissions share for the banks in the report.

Based on the above calculation methodology, the average carbon intensity per unit of cash deployed by the US financial sector is around 86.83 ktCO2e/$bn. This average is used as the basis in The Carbon Bankroll report. At the final stage in the process, South Pole multiplies this intensity per unit of cash figure to the amount each company holds within the banking sector.

While the companies don’t typically disclose their banking relationships, the report takes the amount of cash and investments they have in the banks through their consolidated balance sheet and other sections in their 10-K forms, including the total sum of each company’s cash, cash equivalents, marketable securities, short-term investments and long-term investments.

‘Philosophical’ accounting considerations

One important consideration is that data gaps mean these figures are likely to be a large underestimation. South Pole’s calculations do not cover underwriting, which is estimated by the Rainforest Action Network to account for up to 65% of all fossil fuel financing.

Another important omission is that PCAF’s methodology of calculating a bank’s Scope 3 emissions only focuses on the Scope 1 and 2 carbon emissions of companies. This is significant when you take into account the fact that most of the oil and gas sector’s emissions are downstream Scope 3.

However, as Vaccaro notes, there are some “philosophical and accounting” considerations to make here. For example, anything beyond Scope 1 emissions is to some extent “double counting”, as supply chains overlap.

So while the figures in the report could be an under-estimation, there’s also the worry that a detailed conclusion of exactly how many emissions each company is responsible for, isn’t practical – or even possible.

The authors of the report anticipate that banks will soon themselves conduct a more granular self-assessment through PCAF, as they have already committed to doing. “We feel like there’s enough clarity… to stimulate systemic change,” says Vaccaro.

Cash-linked carbon emissions. What can be done?

So, what could systemic change look like? Given the relative sway these large corporates have, Vaccaro suggests they could leverage banks to reduce the carbon intensity of their portfolios and lending books. They could even threaten to break their relationship and move to a lender with a greener reputation.

Another option would be to issue a mandate for banks to hold their money in more green liquid securities or cash services.

There are signs that the market is responding to the desire for sustainable solutions to storing cash. For example, Citi announced last week the launch of new deposit solutions, aimed at helping clients to invest excess cash as part of their sustainability agenda. 

While this research may appear daunting from an accounting perspective, crucially it opens up the potential for collaboration and engagement between banks and corporates, who could take a dual responsibility to reduce the carbon intensity of trillions of dollars' worth of financed emissions.

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