California has passed the California Climate Corporate Data Accountability Act (CCDAA), a regulatory package that requires companies with operations in California to report on their carbon emissions. Fosfor’s Ankita Asthana has provided a good summary of the law and how Decision Intelligence can help with compliance in her blog here. What we’ll be exploring here is the law’s significance to banks and how the partnership between Fosfor and GoldenSource can give you the peace of mind that you are fully compliant.

Why is it important?

The California climate disclosure law is significant in part because it’s law of its kind passed by a U.S. state, signaling that the states are beginning to get on board with ESG regulation. More important, however, is the fact that the law includes Scope 3. In the case of a bank, Scope 3is likely much higher than their own direct and indirect emissions. Banks are required to include the emissions from the activities of their clients – hence when reporting their Scope 3emissions, they need to include the emissions of any company they are doing business with. The overarching intention is to leverage the loan business’ impact on the environment.

So where the California disclosure law goes further is in banks needing to consider the emissions of their borrowers –which down the road will have significant impact on climate-related behavior overall.

As part of Taskforce on Climate Related Financial Disclosures (TCFD) recommendations and Europe’s Sustainable Financial Disclosure Regulation (SFDR), emissions need to be published by the buy-side for their funds and products, allowing investors to compare those products with respect to their climate friendliness. If a pension fund for example has investments in products with companies whose emission KPIs rank poorly relative to their peers, they may advise them unless they focus on improvements, they may want to wind down their investment in them. They can also vote in investor meetings, all of which directly influences the climate consciousness of their investees. That impact adds up, as many large institutional investors need to consider this in their investment decisions.

For banks this concept is applied to lending. If a bank lends heavily to businesses who are massive greenhouse gas emitters, the bank’s own total emissions will increase substantially. For example, if banks lend to an infrastructure project with a poor carbon footprint, this affects the bank.

As a result, the bank may prompt borrowers to improve, otherwise their engagement may eventually come at a premium. At the end they may pass on costs which are resulting from having climate offenders on their books. Conversely, companies who are very GHG efficient may be able to receive a more favorable loan from that same bank than those who adversely affect the bank’s own disclosures.

The challenges and how to solve them

A core challenge in addressing CCDAA for banks is data completeness and data quality, especially regarding scope 3. GoldenSource is very familiar with bringing in these types of metrics from multiple sources and for multiple regulations (like SFDR and TCFD), and we already have solutions to harmonize and aggregate metrics in various configurable forms up through an entire portfolio. While it may be new for banks, one’s scope 3 emissions are their supplier/value chain’s scope 1/2/3 emissions. Mastering and rolling those up is already a foundational pillar of our ESG Impact solution.

The solution maps ESG metrics and attributes from disparate systems into one and validates and normalizes them, ensuring the data quality and completeness you need. It also undertakes data quality checks, validating metrics against data standards while also checking staleness and plausibility, making your firm less susceptible to greenwashing or everyday data errors.

Critically, historical data is held to ensure that any changes in ESG status over time are visible, so you can act on them. A full audit trail and an as-of view of your data ensures that all your decisions are transparent, allowing you to benchmark your findings against either your own historical data or that of your peers, across regions and over time.

Lumin, the Decision Intelligence module of Fosfor, takes this high-quality data and, with its advanced analytics tools, provides the functionality to dissect, analyze, and visualize your findings and action them for the regulator and other interested parties. With Lumin, firms can retrospectively analyze which of the companies in a bank’s portfolio have caused particularly strong movement in their scope 3 emissions and act on that, or make projections on what emissions will look like over time and in the future.

GoldenSource ensures that all of your ESG data is complete and accurate and presents it to Lumin to analyze, action, and report – which ensures that your firm is fully compliant with CCDAA.

To learn more about how the powerful combination of Goldensource and Lumin can help you comply with the CCDAA, drop a mail to info@thegoldensource.com.