Morgan Stanley’s Financed Emissions Update: What It Means for Climate Goals and the Path to Net Zero
Hey there fellow ESG champions!
Morgan Stanley recently announced updates to its financed emissions targets, switching from specific reduction targets to a range-based approach for high-emission sectors. You can find the full report here: Morgan Stanley 2030 Interim Financed Emissions Targets
Morgan Stanley's recalibration reflects the economic challenges and the slow pace of decarbonization we face in meeting the 1.5°C climate target 🎯 but raises concerns about the broader implications for climate action 🌡️.
Their new framework covers industries like Power, Energy, and Auto Manufacturing, and now includes other emissions-heavy sectors such as Aviation, Chemicals, and Mining —accounting for 65% of Morgan Stanley's financed emissions.
🌱 In our view, the big question remains: Does this new approach truly benefit the planet? Are big banks helping drive progress, or are they adapting to a less ambitious future?
Here's how we see things:
The shift also highlights the need for better coordination 🤝, greater accountability 📊, and stronger support 💼 for vulnerable sectors.
Achieving a sustainable future requires action from everyone—banks 🏦, corporations 🏢, governments 🌐, and individuals 👥.
With enhanced transparency 🌱, a smart mix of incentives 🎉, and targeted support for small and medium businesses along supply chains 🚛, the financial sector can become a powerful force for climate progress.
By addressing who pays 💰, who coordinates 🔗, how we can improve 🛠️, and who needs help 🙌, we can find stronger, more effective solutions to tackle climate challenges.
Join us as we dig deeper….
📊 What Are Financed Emissions, and Why Are They Important?
Financed emissions refer to the greenhouse gas (GHG) emissions that are generated by the companies and projects that a bank or financial institution finances through loans, investments, and other financial services.
Unlike operational emissions—those from a bank’s direct activities—financed emissions come from downstream clients 🌍. As financiers, banks have a massive impact on driving industries to reduce their emissions or, conversely, slowing down climate progress. Through strategic investment, banks have a choice: support climate action or maintain the status quo.
Morgan Stanley’s recalibration could signal a broader trend toward cautious climate goals across the banking sector 📉. When a major bank redefines its targets, it can influence other financial institutions and heavy-emission industries, such as airlines and shipping, to reconsider their climate commitments.
This conservative stance raises concerns. Bank-financed emissions—those linked to investments and loans made by financial institutions—constitute roughly 95% of banks' total greenhouse gas (GHG) emissions. Acknowledging that banks cannot achieve their net-zero goals alone highlights a significant structural barrier in the race to limit global warming.
According to Swiss Re, the financial impact of unchecked climate change could place as much as $23.5 trillion of global GDP at risk by 2050 💸 . Without significant adaptation and progress, this figure could represent catastrophic consequences for economies, industries, and communities worldwide.
Climate disruptions are already affecting people globally, seen in increasing floods 🌊, hurricanes 🌪️, and wildfires 🔥. These disruptions underline the immediacy of climate action, yet the response remains uneven, and in some cases, insufficient. For many companies, balancing climate goals with financial realities is challenging. However, if banks like Morgan Stanley downscale their climate targets, will it delay the urgent actions needed to curb emissions?
💰 Who Pays for Climate Action?
As climate risks rise, the costs will inevitably impact everyone—governments, businesses, and individuals 💸. The economic toll of climate change is already substantial and growing: insurance companies are raising premiums by up to 30% in in high-risk areas. Governments, too, are shouldering enormous costs related to climate adaptation, mitigation, and disaster response 🏛️.
Ultimately, the financial burden of climate inaction filters down to individuals – taxpayers and consumers. Higher premiums, increased taxes, and reduced public resources for other essential services are part of this growing cost.
Additionally, as financing for climate resilience and sustainable practices becomes more critical, we may see higher prices on goods and services as companies attempt to absorb or pass down costs associated with regulatory compliance, ESG initiatives, and green financing premiums 🌿.
🔗 Who Is Responsible for Coordinating Climate Action Efforts?
One of the largest barriers to meaningful climate action is the lack of coordinated, binding efforts worldwide 🌐. Although international agreements like the COP conferences play a crucial role in raising awareness and fostering dialogue, they remain non-binding, leading to “free riders”—those who benefit without shouldering their share of the responsibility.
In Europe, the Corporate Sustainability Due Diligence Directive (CSDDD) and the Corporate Sustainability Reporting Directive (CSRD) make transparency and accountability mandatory, while providing a common language for banks, investors, and corporations.
CSDDD requires banks and companies to oversee human rights and environmental practices across their value chains 🧩, making banks responsible for their clients’ sustainability practices. This regulation requires companies, including banks, to conduct due diligence on the sustainability practices of their partners and clients. For financial institutions, this means scrutinizing the environmental practices of the companies they finance, which directly impacts their financed emissions.
CSRD mandates large firms to disclose comprehensive sustainability data, including Scope 3 emissions (covering indirect value chain emissions). This includes Scope 3 emissions which are particularly relevant to banks’ financed emissions. For banks, this means tracking, assessing, and disclosing financed emissions in their portfolios to assess environmental impact, identify sustainability risks, and inform sustainable investment choices 🌎. This makes transparency a key aspect of both accountability and climate action.
To comply with these regulations, companies must collect extensive data on their emissions, implement ESG strategies, and show concrete progress toward net-zero.
🛠️ How Can We Drive Better Climate Outcomes and what is the role of Financial Institutions?
Financial institutions can play a central role by aligning financed emissions targets with global climate goals and holding clients accountable.
Transparency is essential. Despite recent resistance to ESG standards, clear reporting on emissions—including Scope 3 across supply chains—is the foundation for meaningful climate action 📊. With better data, stakeholders can track progress, identify gaps, and work towards solutions tailored to each company’s climate impact. Transparency on financed emissions helps pinpoint environmental impacts in portfolios, facilitating better accountability and targeted action.
For financial institutions, leveraging finance 💰 to influence corporate behavior is a powerful tool. A well-designed system of incentives and penalties (a ‘carrot and stick’ approach) could encourage clients to prioritize decarbonization, making climate progress financially viable. Banks can use financial levers to reward companies that make meaningful progress on climate goals and penalize those that fall short. Sustainable finance tools can make climate progress both profitable and strategic, while higher costs of capital can signal the financial risks of inaction 🛑.
The integration of sustainability into financial decisions doesn’t just benefit the environment; it also reduces risk exposure for banks and investors. As natural disasters and climate-related economic losses continue to rise, the financial sector’s proactive support for sustainable practices can mitigate future costs and create more resilient portfolios.
🌱 Who Needs Support in the Transition?
To meet climate targets, we need to address emissions across the entire value chain 🌍. Supply chains, responsible for approximately 90% of corporate emissions, are a critical yet often under-supported component of the decarbonization process.
For many suppliers, particularly small and medium enterprises (SMEs), the costs associated with climate adaptation and ESG investments are prohibitive. Supporting smaller companies is essential for comprehensive climate action.
Banks can significantly influence value chain decarbonization. Lower-cost capital for SMEs focused on ESG can help bridge this gap, allowing these firms to thrive while meeting regulatory and environmental standards. Improving transparency across supply chains also helps companies fulfill reporting requirements and make impactful changes 🌿.
At Koaloo.Fi, we support SMEs and other key supply chain participants by providing data transparency solutions and facilitating affordable access to ESG financing. By reducing the cost of capital for environmentally responsible companies, we can encourage sustainable practices throughout supply chains.
By empowering SMEs, Koaloo.Fi helps build stronger, greener supply chains and enables comprehensive climate action.
Our Conclusion: 🌍 Working Towards a Collaborative, Transparent, and Sustainable Future
Morgan Stanley’s new financed emissions targets reflect realism but underscore the need for enhanced coordination, clearer accountability, and broader support for vulnerable stakeholders for climate action 🌡️.
By addressing who pays, who coordinates, how we can improve, and who needs help, we can better navigate the complex challenges of climate action.
Achieving a sustainable future will require concerted action from banks, corporations, governments, and individuals. With greater transparency, a well-structured incentive system, and targeted support for supply chain participants, the financial sector can play a transformative role in advancing climate goals.
Let’s keep pushing for transparency, accountability, and ambitious goals as we strive together for a sustainable future 🌅!
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