Sustainability Manifesto for Financial Products: Carbon Equivalence Principle

TL;DR

This paper proposes the Carbon Equivalence Principle (CEP), a method to quantify and include the carbon impact of financial products in terms linked to existing banking systems, enhancing sustainability transparency.

Contribution

It introduces the CEP as a novel approach to accurately represent the carbon impact of financial products within current banking frameworks.

Findings

CEP allows detailed carbon impact tracking over time.

It enables alignment of financial products with sustainability goals.

Supports transparent and comparable carbon impact disclosures.

Abstract

Sustainability is a key point for financial markets and the label "Green" is an attempt to address this. Acquisition of the label "Green" for financial products carries potential benefits, hence the controversy and attractiveness of the label. However, such a binary label inadequately represents the carbon impact - we use carbon as a useful simplification of sustainability. Carbon impact has a range either size of zero. Both carbon emissions, and sequestration of carbon, are possible results of financial products. A binary label does not allow differentiation between a carbon neutral investment and a coal power plant. Carbon impact has timing and duration, a planted forest takes time to grow, a coal power plant takes time to emit. Hence we propose the Carbon Equivalence Principle (CEP) for financial products: that the carbon effect of a financial product shall be included as a linked term sheet compatible with existing bank systems. This can either be a single flow, i.e., a summary carbon flow, or a linked termsheet describing the carbon impacts in volume and time. The CEP means that the carbon impact of investment follows the money. Making carbon impacts consistent with existing bank systems enables direct alignment of financial product use and sustainability, improving on non-compatible disclosure proposals.