KEY TAKEAWAYS

• Banks and financial institutions are increasingly committed to reducing the emissions they finance - with the auto industry among the world's biggest contributors to greenhouse gas emissions.

• This presents a problem for banks' disclosure processes and target setting: Estimating financed emissions from vehicles is a broad and complex process, and automakers' own disclosures use a patchwork of varying methodologies.

• With data from S&P Global Mobility, banks are equipped to understand and trace the Scope 3 emissions from their vehicle portfolios, evaluate future emissions projections, and establish ambitious net-zero goals.

Banks and other financial institutions are increasingly evaluating and disclosing the greenhouse gas emissions emitted by the businesses or assets they finance and underwrite, under their Scope 3 emissions category. Investments and loans in the highly carbon-intensive automotive industry and supply chain are a key part of their net-zero analyses.

Decarbonization commitments begin with banks and financial institutions making transparent climate disclosures on their current emissions exposures, setting targets in line with the Paris Agreement and other international standards, and evaluating progress against those goals.

This presents a problem: How to account for automotive emissions, encompassing both full-lifecycle vehicle emissions and the emissions of the supply chain?

Many banks are homing in on their vehicle portfolios, aiming to evaluate and manage emissions from both the gasoline/electricity carbon footprint (Well to Tank) and combustion (Tank to Wheel) processes, as well as portfolio-level analysis with net-zero goal setting.

The goal is to identify the key drivers of emissions, forecast future emissions pathways, and set and work toward ambitious emissions targets for 2030 and 2050.

However, this journey toward transparency is not without challenges. Banks are finding that methodologies for estimating Scope 3 emissions vary widely across the industry, and the necessary data is often difficult to access and lacks consistency. In contrast with most non-financial corporates, banks typically have low Scope 1 (direct operations) and Scope 2 (purchased energy) emissions; accurate Scope 3 emission analysis is critical to banks' net-zero goals.

Properly calculating vehicle emissions requires three key steps: estimating Well-to-Wheel (vehicle lifetime) emissions, projecting manufacturer-level emissions projections, and conducting portfolio-level analysis.

Step 1: Estimating Well-to-Wheel (Vehicle Lifetime) Emissions: Well-to-Wheel emissions are typically broken out into Well-to-Tank (fuel extraction, processing, and transportation) emissions and Tank-to-Wheel (combustion) emissions. Calculating Well-to-Tank emissions includes the upstream CO2 production for gasoline (including extraction, refinement, and shipping) and electric (including mining extraction, charging needs and grid emissions) vehicles. Next, calculating Tank-to-Wheel emissions requires projecting vehicle lifetime mileage and vehicle CO2 production per mile for each vehicle type in the bank's portfolio, from ICE to hybrids to battery electric vehicles. This information should be calculated on vehicle Tank-to-wheel emissions by make, model, and powertrain combinations, accounting for geography and usage.

Step 2: Calculate Manufacturer-Level Emissions Projections. By using the vehicle-powertrain level well-to-wheel emissions, the bank should project create manufacturer-level average emissions by year of production for each major vehicle manufacturer. These projections should extend to 2050 to align with various international net-zero agreements.

Step 3: Calculate Financed Emissions and Set Net-Zero Goals. Armed with forecasted emissions for each major vehicle manufacturer, banks and financial institutions can estimate the vehicle emissions financed by their automotive portfolio, and set clear, informed 2030 and 2050 emissions targets and identify paths to net zero.

S&P Global Mobility's data and consulting solutions can assist banks with such sustainable financing analyses.

As a result, banks are now better equipped to understand and trace the Scope 3 emissions from their vehicle portfolios, evaluate future emissions projections, and establish ambitious net-zero goals. They are also prepared to develop plans to work with their portfolio companies to meet these goals - marking a significant step forward in the financial sector's journey towards greater sustainability.

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This article was published by S&P Global Mobility and not by S&P Global Ratings, which is a separately managed division of S&P Global.