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The writer was a principal investigator at Project Drawdown and heads the climate finance portfolio of the William and Flora Hewlett Foundation

These last weeks, Morgan Stanley, NatWest, Bank of America and Citigroup announced that they will begin measuring and reporting climate emissions from their financial portfolios. They join more than 60 financial institutions that already do so through the Partnership for carbon accounting.

It’s remarkable: we care about what matters to us. Whether it’s baking bread or taking medicine, measurements are essential. The basic regulations we take for granted today – auditing financial statements for profit and loss, for example – were only made mandatory when the United States experienced serious trouble during the Depression. After the Wall Street crash in 1929, Congress passed laws to ensure greater financial transparency for companies. To date, these measurement and disclosure requirements help investors, including retail consumers, to make informed decisions.

As a climate crisis looms, the most important action regulators can take today is to require financial institutions to measure and disclose the carbon emissions of their financial portfolios. Banks and other financial institutions are happy to make broad, long-term commitments to reduce climate impact by 2050, but granular metrics are essential to track this progress.

This means funding fewer dirty things and more clean alternatives each year until all funding is aligned with a low carbon and resilient society.

The scope, size, likelihood and duration of climate change create unprecedented systemic risk to the financial system. Here’s what’s at stake: loan losses, devalued assets, and the inability to recover financially. When businesses are disrupted or fail due to forest fires, droughts, severe storms and floods, the bank bears the brunt of defaulted loans. We are facing enormous economic upheavals. But there is also an opportunity.

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The Covid-19 pandemic and economic recession have once again pushed regulators to rethink economic fundamentals. Do we have the data and systems necessary to prevent and manage major exogenous threats? The answer is no. We need carbon data measurements for financial transactions immediately.

Since 2015 Paris Agreement, private banks have funded over $ 2.7 billion in lending and underwriting to the fossil fuel industry, with the four largest US retail banks funding the most carbon-intensive businesses at more than $ 800 billion. Oil and gas bankruptcies have begun, of natural gas producer Chesapeake Energy to the shale oil producer Whiting Oil, not to mention the large-scale slowdown from PG&E of California.

Momentum is building globally for carbon accounting in the financial sector. Even before the series of announcements in July and August, banks and asset managers to several continents, holding trillions in assets, were already tracking issues, and financial regulators had started to put guidelines in place. Five central government agencies in China established the Climate finance and investment association and the European Commission has launched a public consultation consider a range of sustainable finance policies, including carbon accounting.

There are more than 5,000 banks and over 5,000 credit unions in the United States. While less than 1 percent are currently reporting carbon emissions from their loans and investments, this is changing. Real economy banks – those that fund small businesses, mortgages, auto loans, and whatever makes Main Street work – have paved the way for measuring and reporting their emissions funded through the PCAF.

This industry-led initiative includes rural Montana credit unions and publicly traded financial institutions in New York City. If they can do that, surely the whole industry can embrace the policy – and regulators should certainly be asking for it.

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