Morgan Stanley Joins Leadership of Global Carbon Accounting Partnership

I have to admit that I have limited familiarity with the investment and financial markets (and how they work) but it is interesting to observe the growing trend of investment firms and banks tying their long-term business strategies with environment-friendly projects and financing that have measurable and beneficial social and environmental impacts while earning commercially-appealing returns.

I’ve heard about the growth of the Green Bond market where, according to the World Bank, issuance surged to more than $250 billion in 2019. In China, Green credits such as loans to projects offering energy savings or emission reductions now make up approximately 10% of the portfolios of China’s top 21 banks thanks to mandatory Green Credit Guidelines issued by the China Banking Regulatory Commission and the People’s Bank of China.

Another type of loan that is gaining traction is the Sustainability-Linked Loan, according to the World Bank. Also known as ESG-Linked Loan or Positive Incentive Loan, the proceeds of the loan are used for general corporate purposes, rather than “green” projects. But the pricing of the loan is based on the borrower’s environmental, social and governance (ESG) score or overall sustainability achievements such as emission reductions. If the borrower achieves its sustainability target, it benefits from favorable interest rates on the loan. If it fails, it pays a higher rate.

In 2018, Henkel was the first company in Germany to conclude a syndicated ‘Sustainability linked Loan’, a credit facility linked to Henkel’s performance in three independent sustainability ratings. HSBC acted as Green Structuring Advisor and Lead Manager on this transaction.

Global agricultural firm Louis Dreyfus (LDC), headquartered in the Netherlands, has two loans with sustainability-linked pricing mechanisms—a US$750 million revolving credit facility (RCF) in North America and a US$650 million RCF in Asia. LDC will benefit from a reduction in the interest rate on the RCFs each year it makes improvements in its sustainability performance. An independent auditor will provide validation. Other companies like Nokia (Eur1.5 billion) and US company CMS Energy (US$1.4 billion) have also signed Sustainability-Linked Loans.

Today, Morgan Stanley announced that it has become the first U.S.-based global bank to join the Partnership for Carbon Accounting Financials (PCAF) and its Steering Committee as part of the Firm’s commitment to measuring and disclosing its approach to climate change risk and opportunity

Launched globally in 2019, PCAF is a collaboration to standardize carbon accounting for the financial sector, enabling a harmonized approach to the assessment and disclosure of greenhouse gas emissions financed by loans and investments. PCAF is used by asset owners, asset managers and banks to support a broad range of climate initiatives.

Morgan Stanley will lend insights and expertise to help PCAF develop the global accounting standard that can be used by all financial institutions to measure and reduce their climate impact. PCAF currently has 66 formal members, which include financial institutions from around the world and represent more than $5.3 Trillion USD in assets.

PCAF‘s methodology is currently being used in several markets for measuring financed emission in the financial sector and will soon be published as a global methodology which has been the work of a core team of financial institutions, including Morgan Stanley. PCAF’s Steering Committee is focused on managing the progress and success of this industry-led initiative.

PCAF’s Steering Committee members include ABN AMRO, Amalgamated Bank, ASN Bank, Global Alliance for Banking on Values (GABV) and Triodos Bank. In addition to its role on the Committee and its efforts to enhance PCAF’s core measurement methodology, Morgan Stanley commits to start measuring and disclosing lending portfolio greenhouse gas emissions.