As climate change becomes an increasing risk to financial stability—whether from natural disasters such as hurricanes, rising sea levels and wildfires, or to corporations from increased costs associated with transition to a lower-carbon economy—financial institutions are exploring ways to integrate this segment of risk management into their operations. This initiative is being driven by a standardized climate disclosure rule anticipated for release by the Securities and Exchange Commission (SEC) in early 2024.
The anticipated SEC Rule, scheduled to be released this Spring will require all publicly traded corporations, including banks, to annual disclose their Scope 1,2 and 3 carbon emissions. For publicly traded banks, scope 1 emissions include those generated from corporate owned real estate and fleet vehicles and scope 2 emissions include those generated by utilities to supply energy purchased by banks for their operations. Scope 3 carbon emissions are generated from a corporation’s supply chain. A bank’s scope 3 emissions are termed “financed emissions” and are those carbon emissions generated by those businesses who receive business loans. The SEC Rule will require all publicly traded banks to report their annual GHG emissions annually, including those financed emission generated by corporations who are the recipients of bank business loans.
As a result of this anticipated rule by the SEC, companies targeted for commercial lending will be required by those publicly traded financial institutions which extend them business loans to provide detailed corporate climate impact data on their ESG practices and their respective carbon footprint to better evaluate a bank’s long-term business lending risks. These loan requirements will radically change the way businesses interact with financial institutions, requiring corporations to formalize their ESG programs and document carbon emissions, both from their direct activities and from those within their supply chain.
The anticipated SEC Rule, which requires disclosure of “Financed Emissions” to business lenders for publicly traded corporations who receive commercial business loans will have a major impact on the business lending process. both on the banks supplying these loans and for companies targeted for loans. As lenders embrace this standard (which positions them to play a significant role in building a greener economy), banks will need technical support from third parties adept in evaluating ESG policies and verifying carbon emissions of their corporate client borrowers. In addition, businesses who receive commercial business loans will be obligated to authenticate their program efforts aimed at sustainability and CO2 reduction, both from their primary operations and from the myriad of companies within their supply chain. One could say “this responsibility will definitely roll downhill!” Just like banks, borrowers will be faced with a tremendous challenge to formalize their ESG program efforts, document the progress of these initiatives, and provide concrete evidence of the ongoing success in reducing carbon emissions.
The EI Group, a multidisciplinary environmental engineering, occupational safety and health consulting firm whose primary focus is aimed at supporting Fortune 1000 corporations involved in manufacturing, energy production and transportation services, and Environmental Risk Innovations (ERI), a consulting firm which manages environmental risk for banks, have formed an alliance to address the needs of publicly traded commercial lenders and those corporate borrowers targeted for commercial loans to assist their customers, both banks and corporations, in meeting the pending SEC rule requirements.
As part of this initiative, The EI Group and ERI will launch a joint blog series which outlines the SEC Rule in detail. The series of articles will include information which corporate lenders will require from corporate borrowers to accurately document “financed emissions,” along with the technical challenges of evaluating/verifying information associated with direct/indirect CO2 emissions and ESG program success.
An overview of the initial series of blog articles to be released bi-weekly will include:
| Blog 1: How Disclosure of Financed Emissions Will Impact the Lending Process for Both Banks and Corporations Targeted for Business Loans Standard |
| Blog 2: Climate Action in Financial Institutions Initiative-Inspiration for the PCAF Global Accounting and Reporting Standard |
| Blog 3: Climate Change and Banking: An Overview of the PCAF Global Accounting and Reporting Standard |
| Blog 4: PCAF’s Part C Standard: A Milestone for Climate Action in the Re/Insurance Sector |
| Blog 5: Climate Action 100+: A Collaborative Engagement Platform for Investors and Companies |
| Blog 6: Climate Risk Assessment and Flood Hazard Determination |
| Blog 7: What are Physical and Transition Climate Risks? |
| Blog 8: What Are the Objectives and Goals of the SBTi and Could It Be Useful in Our Company or Financial Institution’s Sustainability Planning? |
How We Can Help
About Environmental Risk Innovations (ERI)
ERI is the nation’s premier consulting firm that specializes in the management of environmental risk for commercial lenders. ERI’s clients include a broad base of commercial lenders, from regional banks to banks with national footprints. Since 1999, ERI has been dedicated to providing commercial lenders with effective and efficient due diligence services and guidance. ERI is staffed with environmental professionals whose diverse experience and expertise enables ERI to offer a wide variety of traditional and progressive risk management services. ERI is not a traditional environmental consulting firm that performs Phase I or Phase II Environmental Site Assessments. As a result, ERI’s recommendations represent a truly independent, third-party opinion that conforms to the client bank’s specific risk tolerance. ERI’s Physical Climate Risk Assessment is an evaluation aimed at understanding the potential climate-related risks associated with a property. It includes six risk categories: heat, precipitation, drought, wind, fire, and flood. The level of risk related to each risk category will be identified for the property. The Climate Risk Assessment also includes the completion of a Standard Flood Hazard Determination Form in accordance with the Federal Emergency Management Agency (FEMA). This review will determine if the property is situated within a flood zone and assesses the necessity of flood insurance, which is required by most underwriting departments. An ERI Environmental Professional will analyze this data and summarize the findings and potential climate-related risks to the collateral property. If appropriate, ERI will also suggest mitigation measures to maintain or enhance the real estate’s resilience against these risks over time. Contact Karen Nelson, Senior Vice President or Greg Lathan, President for details.
About The EI Group, Inc.
The EI Group, Inc. (EI) provides a comprehensive array of services for the development and execution of new and existing sustainability programs tailored to your business. Our 35+ years of experience in delivering air/water quality permitting/compliance and solid/hazardous waste reduction services or preparing our clients for ISO system third party audits by identifying performance risk/shortfalls for Environmental Management (14001),Occupational Safety and Health (45001) and Energy Management Systems (50001) has provided us the ideal platform to support all of your ESG program needs. EI understands the ever-changing environment and obstacles our clients face to
assist in refocusing your company’s business culture to achieve ambitious sustainability goals. Whether you are at the beginning of your sustainability journey or looking for management support in existing ESG program initiatives,
EI’s team of experienced professionals are ready to partner with you! Contact Mike Walker, VP/Principal Engineer or Greg Lathan, President for details.