On the journey to net zero, many financial services organisations are focused on building sustainable portfolios to reduce financed emissions.
It’s understandable that this is a priority, considering their investment activity represents such a significant majority of their emissions and is often the highest profile and most publicly scrutinised part of the organisation. As a result, organisations may neglect to take action to reduce the emissions from their own business process and operations, which is an incomplete and unambitious approach to net zero.
When it comes to meeting regulatory requirements, firms don’t have a choice between tackling these ‘operational’ emissions separately from their ‘financed’ emissions. Instead, they must consider them as two parts of one cohesive net zero strategy.
As the road to 2050 gets shorter, every little helps. So, don’t leave your operational emissions by the wayside. Tackling these emissions doesn’t just accelerate your net zero journey, it can help you win proposals, save money, and even support your financed emission targets, as will be explored later.
In this article, we explain exactly why operational and financed emissions must be considered together.
Operational emissions vs financed emissions
First, let’s look at the difference between financed and operational emissions.
Operational emissions encompass greenhouse gases directly or indirectly related to a company’s core operations, supply and value chains. These typically include Scope 1 and Scope 2 emissions, such as fuel combustion in company-owned facilities or purchased electricity for office operations. They also extend to most Scope 3 emissions, which cover upstream supply chain and downstream value chain activities such as purchased goods and services, business travel, employee commuting, waste management, and transportation logistics.
Financed emissions are fundamentally different, representing the emissions associated with a company’s investments and other financial activities, defined under Scope 3, Category 15 in the GHG Protocol. For financial institutions, this includes emissions linked to loans, investments, and project financing. For non-financial companies, financed emissions might arise from investments in subsidiaries, pension funds, or joint ventures. Unlike operational emissions, financed emissions capture the influence a company exerts through its financial capital rather than through its direct or supply-chain-related activities.
Why you need operational and financed emissions in your net zero strategy
On average, up to 90% of organisations’ emissions can sit in Scope 3. For many sectors, this is driven by Category 1: Purchased goods and services. For finance, this large majority is more likely thanks to Category 15: Investments. Therefore, most financial firms’ net zero strategies focus on reducing and disclosing emissions produced within their portfolios in order to meet targets.
It’s often the case that firms are more advanced in their portfolio-related net zero journeys before they look to operational emissions or before they even create targets for them at all.
However, this is a short-sighted approach. While investing in more sustainable propositions and curating a ‘green’ portfolio may seem like a more direct route to net zero, this is not a complete strategy.
Accounting for both operational and financed emissions is essential for a complete view of an organisation’s carbon footprint. While operational emissions highlight internal sustainability efforts and supply-chain decarbonisation, financed emissions reflect the broader impact of capital allocation decisions.
For many organisations, reporting on and indeed, reducing operational emissions is not only a regulatory requirement, but can have many additional benefits for the business, particularly when integrated into a wider sustainability strategy. As expectations around climate disclosure and net zero alignment continue to evolve, addressing all emissions demonstrates a comprehensive and credible approach to carbon accounting.
As such, the benefits to businesses considering and integrating operational emissions measurement alongside financed emissions include:
Win more contracts
Operational impact isn’t just a regulatory tick box, it’s often a necessity for potential stakeholders. Remember, you (i.e. your operational emissions) sit in your customers’ Scope 3 Category 1 requirements as part of their supply chain. Operational emissions are often a key point included in RFPs, and many tender discussions now include questions about an organisation’s ESG approach.
As such, being able to demonstrate quantifiable operational reductions is not just a competitive advantage, but a sales necessity in many cases.
Authenticity & credibility
Looking after your operational emissions shows that you are walking the walk. Before asking your portfolio to progress on their reduction targets, taking action on your own will give you the credibility to do so.
Moreover, it benefits your portfolio. You’ll have tangible experience you can use to support your investments and potential new business in reducing their own emissions. This is a valuable point to add to your sales pitch. Plus, if you can help organisations improve their sustainability, you’ll have scope to invest in them even further.
This all feeds back into your other net zero goal: to reduce financed emissions.
Control over emissions
Financed emissions may feel like a more substantial target, but operational emissions are more in your control to manage. This makes them a more straightforward area to adjust. Whether it’s bigger actions like installing energy-saving solutions for your building, or small adjustments like a print limit or recycling scheme.
It’s not just about the building you’re in (which may not be your responsibility as a renter) but also includes things like business travel and employee commuting. For example, company cars or flights.
Value chain engagement
Operational emissions are an opportunity to engage your team and educate them on the business’s net zero responsibilities and strategy. This helps to disseminate sustainability mindsets into all areas of your business. By educating your procurement teams, management teams, and more about the firm’s net zero targets, they are empowered to take accountability and play their part in reducing emissions.
Cost savings
Reducing your operational emissions can potentially save you money in the short, medium and long term.
There is a misconception that an operational reduction strategy will require a large upfront investment in time and resource. However, the load can be distributed as smaller tasks amongst different teams, so no one individual is burdened with the responsibility.
Also, the cost benefits of these actions – like switching suppliers or introducing energy-saving technologies – can materialise almost immediately. Firms can reduce their operational costs and reallocate the funds elsewhere. For example, we helped Alcumus source a new energy supplier to reduce emissions by 164 tCO2e and save hundreds of thousands.
“We reinvested the saving’s Planet Mark’s clean energy procurement team provided us into a rooftop solar array, this will deliver a further financial benefit of over £500,000 and lower our carbon footprint in the process.” – Nicole Jackson Global Sustainability Manager, Alcumus
How to start reducing operational emissions
The first step in integrating operational emissions into your net zero strategy is data.
Before you plan any actions, collect as much data as you can and establish a baseline. Measuring Scope 1, 2 and 3 emissions are a relatively standardised process under the GHG Protocol, and is required by more and more regulators, so you can start by following these methodologies.
A partner like Planet Mark can also help you get started. Not every Scope 3 category will be relevant to your business, for example those that refer to physical products. Working with a partner can help you understand what areas are in and out of scope, what’s relevant for your business, and how best to measure your footprint.
Learn more about the data collection process with Planet Mark
If you want advice on how to create a complete net zero strategy, get in touch with our team.
There are many ways firms can lower the risks involved in transition financing and build viability into the market, but mostly, they need to be bold and have patience. There’s no doubt that transition technologies will not show overnight return.
Nevertheless, if financial services firms can find a way to reduce their investment risks today, then they will be on the ground floor of a societally and legislatively essential, and fast-growing, industry. One that is certain to be a positive and impactful long-term investment.
