What current and future regulations relate to Financed Emissions?

Financed emissions are becoming a focal point for regulatory frameworks as governments and international bodies push for greater transparency and action in addressing climate change. Current and future regulations relating to financed emissions focus on disclosure, risk management, and alignment with global climate goals, such as the Paris Agreement. These regulations are designed to ensure that financial institutions are managing and reporting their climate risks, including the emissions associated with their portfolios. Here’s an overview of key regulations and initiatives:
 

1. Current Regulations
 

1.1. Task Force on Climate-related Financial Disclosures (TCFD)

• Global: The TCFD is a widely adopted framework for climate-related financial disclosures, including financed emissions. It provides recommendations for how companies and financial institutions should disclose the climate risks they face, including their carbon exposure and the strategies they are using to mitigate these risks.
   

• Relevance to Financed Emissions: Under TCFD guidelines, financial institutions are encouraged to disclose their financed emissions as part of their climate risk assessments. This involves reporting Scope 3 emissions from investments and lending portfolios, making it easier for investors to understand how climate risks are embedded in the financial system.
   

• Mandatory in some jurisdictions: Countries like the UK, New Zealand, and Switzerland have made TCFD-aligned disclosures mandatory for large financial institutions, and other countries are following suit.
   

1.2. European Union (EU) regulations

• EU Taxonomy: A classification system that defines what qualifies as sustainable economic activities. It aims to direct capital toward activities aligned with the EU’s climate goals, including reductions in financed emissions. Financial institutions must report how much of their portfolio is aligned with the Taxonomy.
   

• Sustainable Finance Disclosure Regulation (SFDR): SFDR requires financial institutions in the EU to disclose the sustainability risks of their portfolios, including financed emissions. They must report on how they manage adverse impacts, such as GHG emissions, in their investment decisions.
   

• Corporate Sustainability Reporting Directive (CSRD): Expanding upon previous reporting standards, the CSRD will require companies (including financial institutions) to provide more detailed and standardised disclosures on sustainability matters, including climate risks and financed emissions.
   

1.3. United States (SEC Climate Disclosure Rule)

• The U.S. Securities and Exchange Commission (SEC) proposed a rule in 2022 that would require publicly traded companies to disclose their climate-related risks, including their Scope 1, 2, and, in some cases, Scope 3 emissions (which include financed emissions for financial institutions).
   

• Status: While not yet finalised, this rule could lead to mandatory reporting of financed emissions for large banks and financial institutions in the U.S., creating greater transparency for investors and regulators.
   

1.4. UK Climate-related Financial Disclosures

• The UK has mandated climate-related disclosures aligned with TCFD for large companies and financial institutions, including banks and insurers. This requires these entities to disclose their exposure to climate risks, which encompasses financed emissions.
   

• Net-Zero Banking Alliance (NZBA): The UK is home to several major institutions that have joined the NZBA, a commitment to achieving net-zero emissions in their lending and investment portfolios by 2050. This ties future regulatory reporting to these goals.
  
   

2. Future and Emerging Regulations
 

The regulatory landscape is changing around the domain of emissions data, reporting and measurement of Financed Emissions. On both a national and global level, the following entities are likely to influence and shape the regulatory direction in the next few years.
 

2.1. International Sustainability Standards Board (ISSB)

• The ISSB, under the IFRS Foundation, is working on developing global standards for sustainability-related financial disclosures, including climate risk disclosures. These standards will likely cover financed emissions as part of broader Scope 3 emissions reporting.
   

• Expected Impact: These standards aim to harmonise sustainability reporting across different jurisdictions, potentially making it easier for banks and financial institutions worldwide to disclose their financed emissions consistently.
   

2.2. Climate Alignment Metrics

• Basel III & IV Revisions: Future updates to Basel capital requirements may incorporate climate-related risks, including financed emissions, into the risk-weighting of assets held by banks. This could impact how much capital banks need to hold against carbon-intensive exposures and incentivize greener investments.
   

2.3. Global Regulatory Convergence (G20, G7, etc.)

• Global bodies like the G20 and G7 have increasingly emphasised the need for coherent climate-related financial regulations. They are likely to push for harmonised approaches to financed emissions reporting and risk management across regions. This could result in new frameworks that require cross-border coordination among regulators to ensure that climate risks, including financed emissions, are consistently addressed.
   

2.4. Net-Zero Transition Plans
 

• EU and UK Net-Zero Regulations: Future regulations are expected to require financial institutions to develop and disclose detailed transition plans that align with the goal of net-zero financed emissions by 2050. This will include interim targets for emissions reductions in the near term, and banks will need to show how their portfolios are progressing toward decarbonization.
   

• International Net-Zero Pledges: More countries and regions are likely to mandate disclosures around financed emissions as part of their broader commitments to net-zero, particularly as climate action intensifies.
   

2.5. Carbon Border Adjustment Mechanisms (CBAM)

• The EU’s CBAM is a carbon pricing tool that could indirectly affect financed emissions. While its direct focus is on imported goods from carbon-intensive sectors, financial institutions that fund high-carbon sectors globally could see their portfolios exposed to new risks if their clients face additional costs from carbon pricing regulations.
   

3. Financial Institution-Specific Commitments
 

3.1. Net-Zero Banking Alliance (NZBA)

• Many banks have voluntarily joined the NZBA, which commits them to aligning their portfolios with net-zero emissions by 2050. This requires measuring and reducing financed emissions, with interim targets set for 2030. While currently voluntary, future regulations may enforce mandatory compliance with such targets.
   

3.2. Central Bank and Regulator Initiatives

• Central banks and financial regulators, particularly those part of the Network for Greening the Financial System (NGFS), are increasingly focusing on climate risks, including financed emissions. Stress testing for climate risks is becoming more common, and future regulatory stress tests may incorporate financed emissions as a key factor in assessing financial stability.
   

Summary of Key Areas of Focus in Regulation:
 

• Disclosure: Regulations increasingly require banks to disclose financed emissions as part of broader climate risk reporting, especially in regions like the EU, UK, and potentially the U.S.

• Risk Management: Financial institutions will need to integrate financed emissions into their risk management processes, potentially facing capital requirements for carbon-intensive assets.

• Transition Plans: Future regulations will likely require banks to outline how they plan to transition their portfolios to net-zero emissions, including tracking and reducing financed emissions over time.

• Global Harmonisation: Efforts like ISSB and cross-border regulatory collaboration are working toward creating global standards for measuring and disclosing financed emissions.

Financial institutions must prepare for increasing regulatory demands related to financed emissions, both in terms of transparency and their role in driving the global shift to a low-carbon economy.

To learn more about how Equifax is supporting financial institutions with accurate emissions data and calculation tools, visit our website or contact us for a demonstration of our Financed Emissions Calculator