534
Views
0
CrossRef citations to date
0
Altmetric
Special Section on Sustainable Finance / Climate Finance

Overcoming misleading carbon footprints in the financial sector

, , &
Pages 817-822 | Received 28 Sep 2021, Accepted 24 May 2022, Published online: 13 Jun 2022
 

ABSTRACT

Financial institutions, including pension funds and insurance companies, are key investors in financial markets and important providers of funding to companies. Their investment decisions can steer the transition towards a more sustainable economy and can ensure that sufficient capital is made available for the investments needed to achieve the goals of the Paris Agreement. The development of robust carbon disclosure metrics is key to measuring the sustainability of these institutions’ investment portfolios. However, common carbon disclosure metrics are unreliable, since they are prone to macroeconomic effects, such as inflation and exchange rate fluctuations. This becomes relevant when one wants to consider the change in these metrics over time. In this study, we show that when the metrics are adjusted for inflation and exchange rate fluctuations, one can observe the real sustainability improvement over time. We find that sustainability improvements based on existing metrics are notably one-quarter to one-third smaller when adjusted for these effects. Hence, more than one-quarter of the observed ‘greening’ is ‘non-real’; rather it is a consequence of macroeconomic fluctuations. We propose an adjusted metric that is robust to such fluctuations and illustrate its use in evaluating pension and insurance sector investments. Various international organizations, such as the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) and the Task Force for Climate-Related Financial Disclosures (TCFD), are working together to create harmonized climate-related disclosure frameworks. This study aims to contribute to the ongoing work on carbon disclosure by identifying and solving methodological issues that are currently hampering the potential of carbon disclosure metrics, such as Weighted Average Carbon Intensity (WACI).

Key policy insights

  • Although carbon disclosure metrics are currently recommended in international reporting standards, presently there is no commonly agreed set of metrics in place.

  • Adjusting relative carbon disclosure metrics for inflation and exchange rate fluctuations makes a significant difference to the level and dynamics of these metrics over time.

  • Adjusting carbon disclosure metrics for inflation and exchange rate effects contributes to establishing a harmonized global framework, which can help steer the transition towards a more sustainable economy and can ensure that sufficient capital is made available for the investments needed to achieve the goals of the Paris Agreement.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Reprints and Corporate Permissions

Please note: Selecting permissions does not provide access to the full text of the article, please see our help page How do I view content?

To request a reprint or corporate permissions for this article, please click on the relevant link below:

Academic Permissions

Please note: Selecting permissions does not provide access to the full text of the article, please see our help page How do I view content?

Obtain permissions instantly via Rightslink by clicking on the button below:

If you are unable to obtain permissions via Rightslink, please complete and submit this Permissions form. For more information, please visit our Permissions help page.