Carbon Finance

Net Zero Finance Industry: A System-Wide Approach To Decarbonize Finance

April 4, 2022

Rae Oliver

The world has seen a significant movement towards decarbonization in recent years, and the financial sector is not exempt. Businesses and corporations are increasingly being subjected to stricter regulations. This is driving their steps towards a net-zero finance industry alongside a desire to stay ahead of decarbonization standards. 

For many financial institutions, including banks and other large-scale lenders, the real estate lending market forms the foundation of their business. This provides the finance sector with a unique opportunity to facilitate transformation in the built environment and meet modern demands and regulations simultaneously. By analyzing their needs for low-carbon solutions in built environment projects and portfolios, financial entities can help to reduce their carbon emissions.

In this article, we’ll take a look at how lenders are being driven towards a net-zero finance industry, and what needs to be done to decarbonize finance.

Net Zero Finance Challenges Unique to the Finance Industry

Today the built environment represents over 13% of the global GDP, as well as half of all global wealth and 12% of global employment. Because of this, it has a significant impact both on natural environments and on societies as a whole. Especially since the built environment today demands over a third of global final energy use. It also generates 40% of energy-related carbon emissions on a worldwide scale.

Financial organizations shape the industry through their respective market transactions and decisions. Considering the size, scope, and importance of this market, the finance sector cannot afford to delay action. Financial risks and opportunities relating to climate change are driving the sector towards more sustainable practices. These practices mitigate the risks of investing in poorly performing stocks and financial losses caused by contractions in commercial real estate markets. 

Regulatory risks are also becoming a concern. Major markets such as the EU and the United States are planning to implement stricter regulations. Failure to use a system-wide approach to decarbonize finance could exacerbate the climate crisis. This would negatively impact social inequality and the loss of vital natural resources.

How Trading is Contributing to Emissions

At its core level, trading doesn’t generate significant emissions or cause emission levels to rise or fall, separating it from investment decisions. However, organizations that engage in trading activities must look towards the future for the commodities they trade, whether it’s coal, natural resources, or cryptocurrencies.

Trading in commodities that have significant environmental impacts can contribute to an organization’s emissions. There is much attention on commodities that create impacts from mining, such as coal; and deforestation, such as timber and palm oil. These commodities are being subjected to increasingly tight regulations. This is to direct sectors towards their goals of reaching net zero finance targets.

Reaching Net Zero: Finance Industry Best Practices

There are several technologies and solutions available that offer the potential to reduce emissions in the built environment. But there is still a need for financial assistance and legislative support to transform the market. 

Best practices for a system-wide approach to decarbonizing finance include:

#1: Measuring and reporting on asset-level emissions

Measuring and reporting on asset-level emissions and whole life carbon performance should be conducted using a widely-utilized metric. These metrics must align with standard reporting frameworks like the Sustainability Accounting Standards Board and Task Force on Climate-Related Financial Disclosures. This will enable financial institutions to obtain consistent and accurate data at asset levels. This way,  they can make more informed investment decisions in line with their net-zero finance goals.

#2: Extending the scope of carbon accounting

The scope of carbon accounting needs to be extended from current points of focus to whole life carbon, including both operational and embodied carbon. This should be done using a popular tool such as the Carbon Risk Real Estate Monitor

Several financial organization networks, such as the Institutional Investors Group on Climate Change, are researching how a whole life carbon approach can be adopted. This will help set sustainable targets for the commercial real estate market.

#3: Embrace sustainability-aligned financial instruments

Financial entities can update their business cases to develop risk-adjusted return opportunities. This will drive financial instruments such as ETFs, bond issuance, and equity portfolios to move towards a circular, net-zero finance infrastructure. 

This can be achieved by connecting future-focused financial organizations with ‘best-in-class’ firms. Together they can address social and environmental inequities through several carbon reduction strategy-aligned financial instruments.

#4: Improve ESG reporting

Built environment ESG reporting and research should be enhanced. This will help financial institutions assess the environmental, social, and governance impact of their portfolios. Based on the ESG reports, the finance industry can better operate in line with wider sustainability goals.

#5: Align evidence and science-based targets with policymakers

Financial organizations should also collaborate with policymakers across crucial jurisdictions. This way, they can gain industry-specific perspectives and policy requests based on evidence and science-based targets

The implementation of the EU Taxonomy regulation has meant new classifications for financial activities. This will provide market leaders with a basis to identify the most sustainable investments and boost transparency.

Take Action

By adopting a progressive, leading stance on carbon emission reduction, financial organizations can meet their net-zero finance commitments. They can manage risks at every level, and protect their investments from climate-related impacts. Using a system-wide approach to decarbonization will ensure that financial organizations become as resilient as possible in the face of the climate crisis.

SINAI Technologies offers climate-positive strategy development solutions to help your organization reach its net-zero finance targets. Our approach follows the guidelines outlined by the Science-Based Targets initiative. 

Our digital technologies for investors include:

  • Portfolio management tools to build value, improve ESG performance and identify and mitigate transition risks and GHG exposure
  • Corporate value creation tools that enable corporate operators with GHG measurement, reporting, and decarbonization capabilities
  • Capital deployment solutions to originate capital-efficient investment strategies across portfolios and company operations.

Now is the time to take action. Talk to us today about how we can help you to work towards net zero.

SINAI Decarbonization Platform

Measure, consolidate and report on company impact
navigation arrow
Project future emissions and explore business scenarios
navigation arrow
Low-Carbon Scenarios
Model emissions reduction
navigation arrow
Quantify targets, emissions gaps, prices, & budgets
navigation arrow
Value Chain Management
Work with your
supply chain to decarbonize
navigation arrow
Back to All Articles