Financial institutions are expected to undertake a five-fold increase in spending on software that calculates their carbon footprint in the next five years to meet tighter regulatory standards, according to a report by research and advisory firm Verdantix.
Banks, insurers, private equity and investment managers are expected to spend US$256m by 2027, up from US$51m in 2021, as the carbon reporting framework of the Task Force on Climate-related Financial Disclosures is adopted.
Carbon accounting is becoming increasingly critical as accurate Scope 1, 2 and 3 emissions data underpins companies’ attempts to decarbonise, sell ESG-labelled debt and meet regulatory and disclosure requirements.
“Firms should start implementing carbon management software now to streamline their data collection and reporting,” said Alessandra Leggieri, an ESG and sustainability analyst at Verdantix.
Several software companies are seeking to digitise carbon accounting, including Sinai Technologies, Watershed, Greenly, Persefoni, Sustain.Life and Arcadia, to give a clearer view of companies’ carbon footprints and some can calculate emissions on a real-time basis.
Financial institutions are using carbon management software to track data and estimate their own Scope 3 carbon emissions and their portfolio firms, a task that 43% of firms interviewed in the 2022 TCFD status report described as “very difficult”.
Scope 3 emissions cover covers indirect emissions from companies’ "value chains", including their supply chains, and make up the vast majority of the financial sector’s emissions that they finance directly or facilitate through services such as underwriting. Scope 1 and 2 emissions data cover direct and indirect emissions that firms make in their own operations.
The financial services sector is expected to account for around a fifth of the anticipated US$1.49bn global spend on carbon management systems by 2027. Other sectors, including telecoms, media and technology, are also investing to meet net-zero pledges, but slower growth is seen in polluting sectors, the report said.
Europe is expected to become the biggest global market by 2025 and be worth more than US$650m by 2027. Growth will continue in the US, although the SEC’s climate disclosure rules of March 2022 will not come into effect until 2025 for major listed firms and 2026 for smaller public companies.