Carbon management start-up Sweep is to help greening finance by providing a new platform that measures, analyse and reports on financial institutions’ portfolio emissions.
Sweep’s platform will enable financial institutions to assess carbon emissions across their portfolios and develop targeted, transparent decarbonisation strategies.
Financial institutions have struggled to monitor their indirect emissions, which can be up to 700 times greater than their direct operational footprint.
Emerging technologies will enable the enforcement of regulatory requirements applied to the financial sector, and will therefore be crucial in holding institutions to account for the decarbonisation of their portfolios.
Greening finance by providing a new emission monitoring tool
The Sweep for Finance platform enables real-time carbon data to be shared across the value chain, allowing users to visualise the emissions of their entire portfolio on a single dashboard.
Built on portfolio analysis following the methodology recommended by the Partnership for Carbon Accounting Financials (PCAF), the platform also includes automated benchmarking against Climate Disclosure Project (CDP) standards. It can be used to interact directly with portfolio companies, identify emission ‘hotspots’ and prioritise the most high-risk investments to address.
Users can set science-based targets for individual companies, funds or entities, monitor progress towards their goals and generate consistent reports that align with international accounting frameworks such as the Taskforce for Climate-related Financial Disclosure (TCFD), the Greenhouse Gas Protocol or the Science-based Targets Initiative (SBTi).
These reports are also compliant with industry disclosure standards including those of the US Securities and Exchange Commissions (SEC), the EU’s Sustainable Finance Disclosure Regulation (SFDR) and the Global Reporting Initiative.
Initial adopters of Sweep for Finance include impact-focused venture capital fund 2050, US investment manager Coatue and sustainable investment specialist Mirova (NASDAQ:MRVNX), with Sweep planning to extend its reach across the financial sector.
According to CEO Rachel Delacour, “the finance industry can no longer afford to rely upon inaccurate estimates and assumptions. They need the right tools to accurately track emissions and inform their investment decisions and carbon reduction strategies. With access to reliable data, financial institutions will be able to confidently move towards their climate targets and report emissions following the latest reporting regulations and frameworks.”
Marie-Anne Vincent, Sweep’s vice president of climate finance adds that, “whether dealing with potentially time-consuming emission reporting or navigating changing regulations, investors need to support their portfolio companies in the low carbon transition. Collaboration in carbon data will be key to tackling these challenges, ensuring companies and investors can work together to track and reduce emissions.”
What role can financial institutions play in accelerating decarbonisation?
Investments made by financial institutions contribute significantly to the shaping of the global economy. As it stands, their portfolios are littered with unsustainable operations that have a severe impact on the environment.
Pension schemes alone are estimated to fund around 330 million tonnes of CO2 emissions each year, while recent reports have identified several major private equity firms that are channelling billions of dollars into the oil and gas industry.
Despite the fact that the majority share of the financial sector’s environmental impact is driven by indirect portfolio operations, a 2020 report by CDP found that 49% of its surveyed financial institutions were not conducting any analysis of how their investments affected the climate.
Of the 25% of its respondents that were reporting on their financed emissions at the time, indirect emissions were, on average, 700 times greater than those from direct operations.
These findings highlight the immense difference that could be made if financial institutions were to measure, disclose and address the emissions generated by their portfolios. The benefits of their action would extend beyond reducing emissions, as by mitigating the cascading risks of climate change, the entirety of the global financial system would be better prepared to manage price stability and inflation.
Although every company within every sector must contribute towards the global transition, financial institutions are particularly crucial as it is their funding that enables the activities of their portfolio companies. The finance sector can use this feedback loop to its advantage, by engaging with the recipients of its investments to accelerate decarbonisation across the board.
Indeed, the role of the financial sector is recognised directly within the 2015 Paris Agreement, with the alignment of global financial flows with pathways to emissions reduction and climate resilience described as one of its core priorities.
Climate disclosure and climate action to encourage the greening of finance
Recognising the financial sector’s role in accelerating decarbonisation, national governments are increasingly holding institutions accountable with the introduction of mandatory disclosure regulations.
The UK made TCFD-aligned disclosures obligatory in April 2022, while the requirements of the EU’s SFDR will come into force from January 2023. The US SEC and the Monetary Authority of Singapore are among others planning to make climate disclosures mandatory within the coming years.
These obligations will add to the reputational and regulatory pressures facing financial institutions, but their compliance will rely on accurate data, which could come at a significant cost. The challenges of compliance risk diminishing the effect of new legislation, as institutions are likely to be shown lenience provided they can demonstrate some degree of effort.
Technological solutions such as Sweet’s could be crucial in upholding the expectations of financial institutions. As they continue to emerge, regulatory measures will be strengthened as new emissions reporting capabilities become normalised. The strengthened enforcement of legislation will increase pressure on financial institutions, demonstrating the potential impact of enabling technologies on the decarbonisation of their portfolios.