The investment banking sector is largely committed to achieving net-zero carbon emissions in the current era which is marked by climate changes and global warming. This industry has been playing a significant role in driving a sustainable future. However, according to Accenture, only 12% of banks are taking steps to lower their emissions by the 2050 net-zero target. It is high time for us to strategize impactful ways and contribute immensely to lowering the bank’s overall carbon footprint.
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The term ‘decarbonization’ refers to removing or lowering carbon dioxide emissions from a system. Every company in every part of the world should consider decarbonization. They should comply with global regulations to significantly reduce greenhouse gas emissions and achieve sustainable development goals.
Decarbonization is the process of reducing carbon dioxide and other greenhouse gas emissions, primarily carbon dioxide or CO2, as they are produced in different sectors such as industry, transportation, and energy production. The collective effort forms the backbone of the fight against global warming. This is done to ensure that the planet is stable and turns nothing into chaos. The call for a net zero transition has acquired a sharper tone as the world is faced with the escalating effects of climate change, from sections of the globe constantly being visited by severe weather occurrences to sea level rise, and consequently the loss of biodiversity.
The link between finance and environmental sustainability has given rise to a brand-new investment approach: investing that is based on both financial returns, as well as societal and environmental improvements. Introducing impact investing to decarbonization brings in the same value just as it refers prominently to investments in clean energies, clean technologies, and green projects. The investment banks perform a key function of redirecting the capital resources towards such portfolio companies so that the impact of the transition to the low carbon economies is accelerated while investors not only reap value from such activities but the society.
The process of having more understanding of investment banks’ role as a key driver of decarbonization indicates that sustainable finance is now a trend but also ultimately a strategic choice for the global economy. They can develop solutions that are useful for their clients through their financial expertise, market insights as well as collaborative networks and help create a more enchanting future and resilient community.
After the Paris Climate Agreement, signed by 196 countries at the UN Climate Change Conference in 2015, people started realizing the need to reduce greenhouse emissions. Since then, ESG (environmental, social, and corporate governance) became increasingly popular and investment banking started focussing on nonfinancial impact investing strategy as one of the strongest responsibilities. Even the Covid-19 pandemic established the importance of decarbonization.
Several firms are tracking greenhouse gas emissions at the corporate level. The business managers are measuring emissions during the supply chain and building effective decarbonization strategies.
Financial institutions must select the correct techniques to assess portfolios and goals. Asset managers must determine the best way to price climate risk and achieve sustainable returns. It is vital to consider whether allocating resources away from high-risk emissions is better or whether focussing on transition plans in carbon sectors is the way forward.
Various stakeholders, like investors and regulators, challenge the institutions’ decisions. Handling and managing their expectations need active engagement, maintaining a transparent conversation, and providing regular updates. Understand whether the investors need impact funds.
Greenwashing can be a risk for green projects. Fake environmental claims litigation is also becoming popular. Green finance must support projects that create a genuine impact to prevent trust from being eroded. To avoid being accused of greenwashing, institutions must remain transparent about their commitment to ESG, responsible investing, and decarbonization strategies. Some may choose an ESG reporting approach, while others may rely on another unique approach.
Carbon performance must be measured using a common metric that can remain consistent with larger reporting frameworks. This will create reliable and comparable data. Depending on the report, financial institutions can make better investment decisions. One can use one of the effective monitoring and reporting tools to gather information on the carbon impact.
In this complex business landscape, the investment banking industry has been facing these difficulties in maintaining decarbonization:
Despite huge challenges, we all must work towards effectively addressing our operational emissions and strategically using capital. Banks must adopt an intersectional approach to determining, dedicating, and engaging in achieving net zero carbon emissions. Measuring Scope 3 financed and supply chain carbon emissions is crucial, setting realistic and achievable climate targets, empowering corporate customers to decarbonize, providing sustainable products to clients, and committing to a decarbonized planet.
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