Align investment portfolio to net-zero goals

Research from the Carbon Disclosure Project (CDP) showed that on average, the portfolio emissions of global financial institutions were over 700 times greater than their direct emissions (1). As the need for a low-carbon economy becomes clear, this finding highlights the necessity for financial institutions to assess financed emissions.

In 2020, the Partnership for Carbon Accounting Financials (PCAF) (2) developed a transparent and accountable methodology alongside an emission factor database for financial institutions to assess their portfolio carbon emissions. The Global GHG Accounting and Reporting Standard, developed by PCAF, provides detailed methodological guidance to measure and disclose GHG emissions associated with seven asset classes and insurance-associated emissions. As the first financial institution in Taiwan to join PCAF and serve as the Asia-Pacific Chair, CTBC Holding calculates its portfolio’s financed emissions in accordance with the PCAF methodology twice annually. In accordance with the methodology, CTBC Financial Holding assesses its portfolio emissions in a standardized and robust way, covering asset classes like business loans, listed and unlisted equity and corporate bonds, power plant project finances, domestic personal mortgages, commercial real estate, and sovereign debts.

Figure 1: CTBC Holding Carbon Footprint

The portfolio emission outcomes further laid the foundation for setting the near- and long-term science based targets of financial institutions, which are in line with what the latest climate science deems necessary to meet the 1.5°C goal. CTBC applied its financed emission outcome to set its asset class specific and near- and long-term SBTi targets (3), which provide CTBC a net-zero pathway to develop and modify the business strategy to reduce portfolio emission.

Figure 2: CTBC Holding Financed Emissions (4)(5)

Assessing portfolio emissions in line with the PCAF methodology and using the SBTi methodology allow CTBC to:

1. Identify portfolio hotspots and assess material transition risks: Twice annually, CTBC conducts portfolio emission assessment to examine its exposure to carbon-intensive sectors. The assessment allows the company to identify potential risks induced by transition risks associated with its portfolio, and leads CTBC to proactively manage its risk profile.

2. Accelerate green finance to allow allocation of assets toward low-carbon opportunities: Assessing portfolio emissions pinpoints the clients/investees CTBC should focus on while setting up SBTi targets to accelerate the development of green products and services. With portfolio emission data and clear science-based targets, CTBC can strategically allocate assets to low-carbon or carbon neutral opportunities and develop green financial products and services, such as sustainability-linked loans, green building mortgages, renewable energy project finance, and more, which are inherently focused on environmentally sustainable sectors, including but not limited to electric vehicles and renewable energy. For example, in 2022, CTBC Bank engaged in green loans with a loan balance of NT $19.372 million and sustainability-linked loans (SLL) with a loan balance of NT $19.925 million, and have coordinated and overseen four syndicated loans for renewable energy projects, with financing totaling approximately NT $19.9 billion. It was also estimated that CTBC Bank and Taiwan Life’s (subsidiaries of CTBC Holding) renewable energy project financing have led to an estimated annual carbon emission reduction of 3,561,000 metric tons, providing enough clean energy for approximately 1.656 million households.

3. Lay the foundation for client engagement in decarbonizing investment and lending portfolios: Assessing portfolios using the PCAF methodology and setting SBTi targets can lay a solid foundation for engagement in several ways. First, it helps companies like CTBC identify and select climate high-impact sectors, especially the heavy-emitting sectors, for engagement. Second, the quantitative portfolio assessment outcome can enhance portfolio emission transparency and provide a basis for engagement, which allows clients – especially ones that do long belong to the supply chain of big brands or haven’t conducted GHG inventories to understand their climate impact – to make informed decisions that align with their values and sustainability goals. Third, by adopting PCAF and SBTi, CTBC can engage with clients on climate-related topics, offering green financial products and services that cater to their preferences as clients, especially those interested in sustainable finance, which are increasingly interested in seeking financial institutions that align with their values.

4. Spur collaborative Initiatives: PCAF and SBTi are part of broader networks of financial institutions, NGOs, and stakeholders working together to address climate change. By participating in these two initiatives and applying their methodologies, CTBC can engage in collaborative efforts, share best practices, and contribute to a collective global response to climate challenges.

Climate impact

Targeted emissions sources

Scope 3, Category 15, Investments

Decarbonization impact

PCAF developed the Standard for Financial Institutions in response to the industry’s demand for a global, standardized portfolio GHG accounting approach. The methodologies set forth in the standard help financial institutions measure and disclose finance and insurance-related GHG emissions, which is defined as Category 15 investment emissions. PCAF also helps financial institutions better understand and manage climate-related risks and opportunities. Nevertheless, the aim of applying the PCAF methodology will lead CTBC to its goal of Net Zero by 2050. The transparent and accountable portfolio emission data allows the company to align its lending and investment activities with its SBTi emission reduction goal. By measuring and setting emission reduction targets, CTBC can work to reduce the emission footprint throughout its value chain and provide clients and other stakeholders with the information needed to make informed decisions about their sustainability.

Business impact

Benefits

Other than the climate benefits described above, having a ‘greener’ portfolio benefits CTBC in the following aspects:

1. Risk mitigation: Investing in and financing companies with lower carbon footprints reduces exposure to regulatory risks. By avoiding businesses with high carbon footprint, financial institutions can better protect their investments from potential carbon pricing, fines, or stranded assets.

2. Stable financial performance: Low-carbon investments are often aligned with long-term sustainability goals. These investments may have a more stable financial performance over time, as they are less susceptible to the potential negative impacts of climate change and carbon-intensive industries.

3. Increasing market demand: While many investors are increasingly seeking ethical and sustainable investment options, offering low-carbon portfolios can attract a broader client base and address the growing demands for low-carbon and environmentally responsible financial products.

Costs

The cost of assessing portfolio emissions and setting up SBTi targets arise mainly from:

• Data collection, processing, and analysis

• Personnel costs: CTBC’s Risk Management Department is in charge of portfolio carbon accounting. Altogether, three employees have been trained and are capable of performing these calculations

• Training and capacity building: PCAF provides its members with an online learning platform that helps build capacity for portfolio carbon accounting. For SBTi, the initiative also provides the tools necessary for target setting

• Auditing and Verifications: Every year, CTBC hires third-party auditors to certify its portfolio emissions and validate its SBTi target.

Impact beyond climate and business

Co-benefits

While PCAF allows financial institutions to understand their portfolio’s carbon footprint, its sister initiative PBAF (The Partnership for Biodiversity Accounting Financials) helps the financial industry transparently assess and disclose their impact and dependency on biodiversity. The initiative has released the Biodiversity Accounting Standard for the Financial Industry, and as one of the first financial institutions to join the initiative, CTBC is beginning to conduct a pilot assessment of its portfolio’s biodiversity impacts.

Typical business profile

This solution is most relevant to financial institutions such as banks, insurance companies, investment companies, etc. Moreover, it can be applied to different business functions, including risk management, strategy planning, and decision making. While measuring financed emissions differs for banks, asset managers, and insurers, PCAF has developed corresponding methodologies tailored to different asset classes. Similarly, financial institutions may follow SBTi’s guidance on financial sector science based targets to set up their emission reduction targets based on the assessment outcome.

Approach

In accordance with PCAF’s methodology, CTBC Holding started to carry out GHG inventory of its portfolio in 2020. Throughout its portfolio carbon accounting journey, the greatest challenge was the lack of carbon emission data. To fill the data gap, CTBC adopted databases from PCAF and other vendors, such as Formosa Climate Smart Service (FCS). In addition, government reports published by Taiwan’s Architecture and Building Research Institute and Ministry of the Interior were referenced. As PCAF continued to release methodologies for GHG accounting for different asset classes, CTBC also expanded its scope of GHG accounting to include business loans, equity and corporate bonds, power generation project finance, domestic mortgages, commercial real estate loans, and sovereign debt. The periodically assessed portfolio GHG emission outcomes became the foundation for setting CTBC’s SBTi targets. Taking SBTi guidance for target setting and the characteristics of different sector within its portfolio into consideration, the company selected two methods – Sectoral Decarbonization Approach (SDA) and Temperature Rating (TR) – for its portfolio emission reduction target setting.

Stakeholders involved

Company functions

• Corporate Sustainability Department: acts as a facilitator for global collaboration and initiatives, and leads CTBC Holding’s participation in PCAF and SBTi

• Risk Management Department: applies the PCAF methodology for portfolio emission calculation and SBTi methodology for carbon emissions reduction target setting

• Business Units from Subsidiaries: collects GHG inventory and carbon reduction target from clients/investees and conducts client engagement

Main providers

• PCAF: for financial institutions, the PCAF methodology is a standardized and robust method in line with TCFD to measure financed emissions, which helps in further setting SBTi targets

• SBTi: established upon three main elements – a GHG budget, a set of emission scenarios, and an allocation approach – the SBTi methodology is an instructive framework for corporates setting emissions reduction targets consistent with the latest climate science

Key parameters to consider

Solution maturity

To align with the latest climate science, SBTi is supposed to revise its methodology when there is substantial progress regarding carbon emission issues. Meanwhile, PCAF and its methodology evolve to expand the list of asset classes and improve its database. Methodologies from both PACF and SBTi are not fully established, but should be viewed as the most robust and standardized tools available

Lifetime

• Financial Institutions are encouraged to assess their portfolio emissions on a periodical basis. CTBC Holding conducts the portfolio emissions assessment in accordance with PCAF twice annually

• For SBTi targets, financial institutions may submit their commitment to 2050 Net Zero when they accomplish their portfolio accounting, and should submit their near- and long-term targets for approval within 24 months after that commitment. CTBC submitted its concrete SBTi target in late 2022 and is expected to obtain approval from SBT soon. For business loans, listed/OTC-traded equity, and bond investments, CTBC set 2027 as the near-term emission reduction target. For other asset types, including commercial real estate, power generation project finance, and business loans specially for power generation, the target year is 2035.

Technical constraints or pre-requisites

• Emission data acquisition: client/investee GHG inventory data is essential for CTBC Holding to precisely measure portfolio emissions. Though CTBC uses databases from PCAF and other vendors, data quality is expected to improve substantially as more jurisdictions mandate GHG inventory

• Other data collection: the collection and collation of client/investee carbon reduction targets are central for CTBC Holding to set SBTi targets using the Temperature Rating method. With no unified format addressing their emission reduction target, nor an available database to gather all information, it is truly a labor-intensive process. Moreover, the task needs to be performed periodically, and some corporates may modify targets from time to time. CTBC has managed to overcome the burden of data collection by making use of indirect public sources and engaging with clients directly. CTBC gathered indirect data from open data sources, including Taiwan’s Market Observation post system, corporate sustainability reports, CDP questionnaires, etc. To gather more precise data, CTBC also engages directly with its portfolio clients to obtain first-hand data on their emissions.

Implementation and operations tips

To achieve global net-zero carbon emissions by 2050, CTBC Holding highly recommends financial institutions to apply the PCAF methodology to assess portfolio emissions and SBTi guidance to set carbon emission reduction targets. On the net-zero transition journey, these solid and transparent methodologies allow financial institutions to understand their current situation and chart the following steps to their net-zero destinations.