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Understanding Financed Emissions and Their Impact on Climate Change
Climate change has presented its challenges to the world, and financial institutions are conspicuous in either aggravating or mitigating effects of climate change. Another related topic that mirrors the emergence of finance at the juncture with climate action is that of "financed emissions." What are financed emissions, however, and how do they impinge on climate change? This article explores the concept, its meaning, and how financial institutions and asset managers-contribute to global carbon footprints.
What Are Financed Emissions?
Financed emissions refer to GHGs resulting from emissions linked to financed activities of investments or loans by financial institutions. For instance, if a bank finances the extraction of fossil fuel companies or manufacturing firms that rely extensively on non-renewable energy sources, the resulting emissions linked to such activities traced back to the financial institution that encouraged funding. Put in simpler terms, climate change indirectly arises in the form of emissions influenced by funded activities.
Financed Emissions: Going by the global fight against climate change, reducing financed emissions is as important as shaving off the direct emissions from industries. The financial sector in the world basically comprises banks, investment firms, and asset managers that determine the future of this planet. As they finance projects, businesses, and industries, they have the power to either enable harmful practices or initiate sustainable initiatives.
Why are Financed Emissions Important?
Thus, understanding financed emissions is very important because they represent a significant share of global GHG emissions. Most environmental policies and corporate strategies are fixated on direct emissions, Scope 1, and indirect emissions from purchased energy, Scope 2. Financed emissions however fall under Scope 3 emissions. These are often much larger in size than a company's direct emissions and even harder to measure but are pertinent toward knowing the full environmental impact of a financial institution.
There is concern about financed emissions because financial institutions can influence their customers. In cases where the financing practice embraced by financial institutions provides for the facilitation of sustainable activities, businesses have no option but to become greener. On the other hand, funding projects that have a high emission level results in increases in global carbon footprints as climate actions suffer a blow in their efforts.
Financed Emissions and Its Association with Climate Change
Financed emissions are a major contributor to climate change since they finance industries that are responsible for generating most global emissions. They include oil and gas, coal, cement, and heavy manufacturing. Continued financing would lock us in an ever-increasing reliance on fossil fuels, which feeds global temperatures and acts as the primary source of climate instability.
The most direct impact of financed emissions is climate-related risk expansion, including extreme weather events, sea-level rise, and biodiversity loss. The more extensive the financial institutions expand their support to high-emission corporations, the less feasible it is for international climate goals, not even the objective set by the Paris Agreement: limiting global warming to 1.5°C above preindustrial levels.
The Role of Financial Institutions
Financed emissions are increasingly brought into the purview of financial institutions. Stakeholders will, however lead governments, regulators, investors, or consumers to seek accountability in financing decisions and necessarily push for transparency with responsibility on financed emissions reportings and, more than ever ask banks and investment firms to report on their financed emissions as part of their ESG strategies.
In contrast, however, such institutions are faced with reputational losses, divestments, and regulations. Conversely, the institutions that will align their investment strategies to climate goals have a potential advantage, will attract environment-conscious investors, and be part of a sustainable future.
There are several other initiatives across the globe on these initiatives, like the Net-Zero Banking Alliance and the Partnership for Carbon Accounting Financials, with which financial institutions are being equipped with a framework that will guide them in measuring, managing, and reducing financed emissions. These kinds of initiatives provide banks and investment firms with the ability to set net-zero targets, monitor their progress, and ensure that they are not contributing to climate destruction.
How to Approach Financed Emissions
For the financial institutions to institute their effective strategy to finance emissions, the following are some of the primary actions that are necessary for adoption:
Measurement and Reporting of Emissions: For the purpose of calculating financed emissions, the financial institutions must put forth standardized procedures or framework, for example, PCAF framework. Transparency in reporting is critical for the purposes of tracking progress and holding firms accountable.
This is followed by divesting from emitting industries and reinvesting in clean energy, energy-efficient technologies, and sustainable projects to reduce the financed emissions. It doesn't just curb carbon-footprint reduction's green footprints but also opens up new scopes for growth in green industries.
Science-Based Targets: In addition, science-based targets are to be set, measurable and aligned to the goals of the Paris Agreement. They ought to show commitment to climate action by committing to a net-zero financed emission by a certain date.
Engaging clients: Financial institutions must also engage their customers and encourage sustainability. In this aspect, sustainability-linked loans and investment products provide banks and asset managers with the right opportunity to hold the organizations under their portfolio accountable for their reduction of emissions.
Partnership with Policymakers: In financial terms, there is a need for institutions to collaborate with the governments and policymakers to provide an enabling environment for sustainability finance. Regulation support can push the industries toward cleaner operations and ensure that financed emissions are managed at a systemic level.
The Way Forward
Financed emissions is another critical global climate effort that cannot be ignored anymore. With a low-carbon economy, financial institutions should move to change their portfolios in line with the policies of climate goals in their financing practices. Trends on sustainable financing are ethical not only because they make business sense too, as more ESG-compliant investments gain in demand.
This is one such commitment to raising awareness regarding the environmental impact of financed emissions and fostering good change into businesses that don't desecrate the earth. At Olive Gaea, we are convinced that financial institutions have a responsibility and opportunity to influence and drive change: this lies in various strategic actions. The need to steer capital away from high-emission industries and towards a greener, more sustainable future has been the central focus of the Finance initiative at OLIVE.
By concentrating on financed emissions reductions, banking, asset managers, and many other financial institutions may well find themselves becoming a major part of the solution to the problem that will later host humanity's existence on a planet not at all livable. Here at olive gaea, we encourage the inhabitants of this world to learn more about the small implication financial decisions bring to the environment and take proactive steps toward sustainability.
Conclusion
Overall, finance emissions translation provides a clear perspective on how the financial sector is linked to climate change. Such measurement and management of financed emissions result in emission reductions, which financial institutions support very strongly and, in this way, help achieve global climate targets. The task is not limited to just individual companies but is an obligation of the whole finance ecosystem to contribute constructively to a healthier planet.



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