I wrote the other day about hypothetical ways that a bank could “transfer” its carbon emissions to somebody else. The basic idea is that there are standards — mainly from the Partnership for Carbon Accounting Financials — for calculating the greenhouse gas emissions attributable to a bank’s financing activities (that is, loans that it makes and holds) and its facilitation activities (that is, offerings that it underwrites). Banks face public and regulatory pressure to report low numbers under those standards, but they also want to lend money to oil companies. There is, perhaps, an opportunity for financial engineering: Is there a way for a bank to make those loans, but get the emissions off its books for PCAF accounting purposes?
So I wrote about a Bloomberg News story about some hedge funds who have some ideas, and I proposed some crude ideas of my own, but let’s be honest: My post was mostly a call for financial engineering, a request for my readers to come up with ideas. And of course they did. Reader Andreas Seidel suggested a few, of which my favorite might be:
Deflating the emissions by inflating debt. The “base case” PCAF works is by multiplying emissions with the outstanding debt amount and dividing by equity and debt [I am oversimplifying a little]. If a bank lends $100 to a company with $50 equity and $50 other debt, it would get 50% of the emissions. However, what if at the same time, the company borrows a billion from an off-balance-sheet SPV that invests all the money in money market instruments and uses these as collateral and essentially funds itself with the interest from the money market? Financed emissions drop to practically zero.
I love the idea of massively grossing up every company’s balance sheet just for carbon-accounting purposes: “You can borrow $100 from us to build an oil refinery, but only if you also set up a subsidiary that borrows $1 billion from a special-purpose vehicle and invests it in money-market funds, for pure accounting reasons.” Maybe you could make the economics work, but the accounting for the borrower sure would look weird.
More generally, one wants some sort of intermediation. Like, a bank that lends money to an oil company is going to have a lot of financed emissions on its books. But what about a bank that lends money to an investment firm named Green Investments Ltd., which then lends it to an oil company? (What if Green Investments is only nominally an investment firm, and really just a pass-through vehicle with one asset and one liability — just a way to structure the loan to the oil company?) We have talked about this approach in the past, as a general way to make oil-company investments seem more environmentally friendly (and get them into environmental, social and governance investing indexes). I’m not sure it specifically works with PCAF standards for banks — “‘Follow the money’ is a key tenet for GHG accounting of financial assets,” says PCAF, “meaning that the money should be followed as far as possible to understand and account for the climate impact in the real economy” — but I’m sure someone is working on it.
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