The world’s leading financial institutions just took an important step to combat climate change. For the first time, major commercial and investment banks, asset managers and insurers adopted a common metric to account for the greenhouse gas emissions they finance.

A shared accounting standard might not sound like a big deal – but it is. The financial industry makes modern society possible. Without the capital that financial institutions provide, it would be impossible to produce everything from the electricity that powers cities to the mortgages that allow people to buy homes.

Global capitalism is fiercely competitive. Companies push the envelope to boost profits without accounting for the environmental impact of their decisions. And they’ll continue damaging the environment unless they’re held accountable by their lenders and investors.

When financiers get serious about climate action, companies in every other industry have no choice but to follow.

That’s where the new accounting standard comes in. It enables financial institutions to measure the carbon intensity of their portfolios, which is an important prerequisite for target-setting that will ultimately steer capital towards the most responsible companies. This shared standard will help prevent an environmentally destructive ‘race to the bottom’ among companies in a variety of industries.

Simply put, money talks. When financiers get serious about climate action, companies in every other industry have no choice but to follow.

Many financial institutions have recently started to care about the threat of climate change. Larry Fink, CEO of BlackRock, the world’s largest asset manager, said earlier this year that climate change is now ‘almost invariably the top issue that clients around the world raise with BlackRock.’ His company and some peers have implemented various policies to reduce greenhouse gas emissions at the companies they fund.

But it’s not easy to measure a portfolio’s climate impact, also called ‘financed emissions.’ Up until now, different financial institutions used different metrics, which makes it difficult to make apples-to-apples comparisons across asset classes and industries.

To align their portfolios with the Paris Agreement, financial institutions first need a way to accurately and uniformly measure their financed emissions. For example, while selecting an asset manager, an institutional investor would need an easy way to compare not just financial performance but also the carbon footprint of eligible asset managers’ portfolios. That way, it can determine which has the lowest financed emissions.

That common standard now exists, thanks to the Partnership for Carbon Accounting Financials (PCAF), which was founded in 2015 by Dutch financial institutions. 

PCAF just unveiled the ‘Global GHG Accounting and Reporting Standard for the Financial Industry.’ It allows lenders to measure the carbon emissions associated with investments in six asset classes, including bonds, business loans and commercial real estate. The PCAF standard will be available for free for any financial institution to use.

To align their portfolios with the Paris Agreement, financial institutions first need a way to accurately and uniformly measure their financed emissions.

Central banks cheered the PCAF standard at a launch event on 18 November. ‘From our small country in the Netherlands, PCAF has evolved into a global initiative,’ said Frank Elderson, chairman of the Network of Central Banks and Supervisors for Greening the Financial System.

PCAF now boasts over 90 member institutions located across every continent. In total, PCAF members have $17.8 trillion in assets under management. Financial behemoths such as Bank of America, Citi, Barclays, TD Bank Group, and Lloyds Banking Group have already signed onto PCAF’s standard. Each has over $1 trillion under management. 

It’s crucial that more banks, investors and insurance companies join PCAF. For these financial institutions, joining is the first step toward putting the global economy on a far more environmentally sustainable path.

This article was first published by International Business Times on 27 December 2020.

Nando van Kleeff is a programme manager for Climate Action at the IKEA Foundation, which has supported PCAF with a grant to build its membership base and develop its accounting standard.