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Australian banks face billions in liabilities for Scope 3 emissions

© Shutterstock / Frederic MullerPost Thumbnail

Carbon data analyst EMMI says Australian banks could face billions of dollars in liabilities for scope 3 emissions from loans to carbon intensive companies.

  • Carbon data analysis by Emmi estimates that the Commonwealth Bank of Australia (CBA) could face $6 billion in liabilities for its scope 3 emissions by 2030.
  • If scope 3 emissions reporting becomes mandatory in Australia, CBA and other big lenders will have a high price to pay.
  • Although the banks are unlikely to face these liabilities any time soon, Australia’s increased focus on addressing climate change suggests that they would be unwise to ignore the possibility in the long-term.

Scope 3 emissions reporting could become mandatory

Scope 3 emissions are those generated outside of an organisations direct operations, either in the supply chain or in an investment portfolio. For banks and other lenders, this includes the emissions generated by borrowers.

At present, there is no legal requirement for Australian lenders to disclose their scope 3 emissions. This could, however, be set to change.

Australia’s markets and financial services are regulated by the Australian Securities and Investments Commission (ASIC). It, alongside the Australian Prudential Regulation Authority (APRA), have been mulling the introduction of mandatory scope 3 disclosures and have publicly acknowledged the recommendations of the Taskforce for Climate-Related Financial Diclosure (TFCD) as an example of best practice.

APRA and ASIC have so far released guidance materials inspired by, but less prescriptive than the US Security and Exchange Commission’s (SEC) proposed rule for the enhancement and standardisation of climate-related disclosures.

The SEC’s proposed rule, based on broadly accepted frameworks such as the TFCD’s is expected to come into force from December 2022. In addition to its mandates for scope 1 and 2 emissions disclosure, it will also require scope 3 emissions to be reported if they are deemed material to the business at hand.

“A registrant would be required to disclose its scope 3 emissions if there is a substantial likelihood that a reasonable investor would consider them important when making an investment or voting decision,” explained the SEC in a statement.

This means that only the largest of companies would be required to disclose their Scope 3 emissions, and only if those emissions were both ‘significant’ and contradictory to the company’s climate commitments. Smaller companies, meanwhile, will continue to be excluded from scope 3 liability rulings.

The SEC’s ruling is likely to have an impact on larger Australian companies, which may need to include climate-related information in their filings under the Exchange Act. Regulatory law firm Gilbert + Tobin predicts that this initial introduction could influence Australia to follow the SEC’s lead in expanding the scope of its own disclosure requirements.

Climate-related risk disclosure has a significant bearing on Australian banks

For Australia’s largest banks, the SEC ruling on climate-related disclosure could pose a significant material risk. Australia’s oil, gas and mining industries are well-established, thanks, in part, to loans made by big banks.

If scope 3 emissions disclosure becomes mandatory, then the emissions of these resource intensive customers will be included in lenders’ reports.

Carbon data analyst EMMI, has estimated the CBA’s (ASX:CBA) scope 3 emissions to be around 24.4 million tonnes of CO2, or 2,300 times higher than its direct (scope 1) emissions.

The CBA’s 2022 Climate Report details the measures it has taken to reduce its upstream scope 3 emissions, alongside future plans to extend its assessments, presumably to include the downstream emissions of its borrowers. Its voluntarily disclosure of emissions, however, is currently limited to its scope 1 and 2 activities.

EMMI has also estimated emissions figures of between 18 million and 24 million tonnes of CO2 for the other large three Australian banks – the Australia and New Zealand Banking Group Ltd (ASX: ANZ), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC).

If the four banks combined were to be made liable for scope 3 emissions, they could face tens of billions of dollars in carbon costs before the end of the century.

This is not guaranteed to happen, however, as Australia shelved its carbon tax several years ago and there is currently no indication that it will be reintroduced. The country’s carbon market prices have fluctuated drastically and took a severe downward turn at the start of 2022.

As of September 2022, however, Australia’s carbon prices are on an upward trajectory, which could be a source of concern for banks facing possible liabilities.

New government strengthens Australia’s climate targets

Since the Australian Labour Party has come into power, the country has strengthened its climate targets. Its commitment to cutting emissions by 43% by 2030, for example, is far more ambitious than the outgoing Liberal-National coalition government’s target of between 26% and 28%.

Shifts in Australia’s financial environment reflect its strengthened climate targets, as demonstrated by NGS Super’s recent divestment from the oil and gas sector. The fund’s analysis of its portfolio found that companies with revenues reliant on oil and gas were “at risk of becoming stranded assets as the world decarbonises”, highlighting an increased awareness of carbon-related risks.

As Australia accelerates its sustainable transition, the risks to big lenders become all the more urgent. Whether or not the CBA and its associates will be made to pay for their scope 3 emissions remains to be seen, but it would be unwise of them to ignore the possibility.

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