Banks are central to decarbonizing the economy. As a main source of financing for the world’s infrastructure, they’re uniquely empowered to pressure industries from energy to manufacturing to cut their emissions. And recently, big banks have started bragging about their climate credentials: Bank of America, Morgan Stanley, and others all committed last week to reach net zero emissions by 2050 in their operations and investment portfolios. On April 26, Citigroup showed what that looks like by disclosing it walked away from at least 11 major deals related to coal-fired power plants last year.

But the financial industry has not yet reckoned with its full carbon footprint, according to a new survey from the Carbon Disclosure Project (CDP), a nonprofit that manages a global repository of carbon disclosures from companies and governments. CDP asked nearly 700 global financial institutions about their approach to “Scope 3” emissions: greenhouse gas emissions from the companies and projects in their investment portfolio, rather than from their own offices or operations.

Of the 332 firms that responded, about half had not conducted any analysis of the climate impact of their investment portfolios. Only a quarter of respondents—84 financial institutions—had published public data about their portfolios’ emissions. These data reveal the magnitude of what most financial institutions are still ignoring: Banks’ portfolio companies are emitting 700 times more emissions on average than their own operations.

Emily Kreps, CDP’s global director of capital markets, says financial institutions are turning a blind eye to their biggest sources of emissions because they can. Financial regulators in the US, EU, and elsewhere do not yet require all public companies to disclose their climate-related risks. “Financial institutions are very regulation-driven,” she said.

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Portfolio emissions are a proxy for risk

That could soon change: The UK plans to require banks to pass a climate “stress test” starting in June, and the EU and US are both developing new climate disclosure requirements that could cover not just a company’s exposure to physical climate damages but also “transition risk”: how a company’s bottom line could be adversely affected by the move away from fossil fuels. For the financial sector, transition risk is a function of portfolio emissions: Investing in an oil company, for example, exposes a bank to the risk of losses if and when the oil company finds itself stuck with a product it can’t sell.

If financial institutions began to measure, disclose, and decrease their portfolio emissions, that could threaten billions of dollars in infrastructure and investment financing and apply enormous pressure the global economy to decarbonize, Kreps argues. But financial institutions shouldn’t wait for their portfolio emissions to decline on their own, because they literally have a vested interest in filling their portfolios with low-carbon investments that won’t be at risk in a carbon-constrained economy. “They should want to provide capital to the winners who are going to thrive in economy that operates within planetary boundaries,” she said.

Mandatory climate disclosure is on the horizon

Picking winners in the low-carbon economy will not easy, said Clifford Rossi, a professor of risk management at the University of Maryland and a former chief risk officer of Citigroup. Eliminating obvious culprits like coal-fired power plants is only a first step. Assessing transition risk for a specific investment requires assumptions about the trajectory of the economy and the climate itself, said Rossi. Conventional climate models are ill-suited to the task, because they don’t yield very accurate insights at the level of geographic granularity or time horizon most relevant to investment planners—what the climate will be like for a specific factory in 10 years, for example. Likewise, the economic models banks can use to translate those climate forecasts into market forecasts—and thus make decision about transition risk—are loaded with uncertainty about the economic toll of climate impacts and the pace of the clean energy transition.

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In other words, many financial institutions won’t know precisely what to do with the data on portfolio emissions even after they have it. “This is not something they’re well-equipped to handle,” said Rossi.

That argument is borne out by CDP data: Of financial institutions that do disclose portfolio emissions, only around 46% have taken any action to align their portfolios with a science-based decarbonization target. That excuse won’t last much longer, Kreps said. Mandatory disclosure rules are now the horizon.

Companies are now lining up behind governments calling for stricter standards. On April 13, Apple became the first major public company to call for SEC rules requiring the disclosure of audited emissions data for companies’ entire supply chain. Salesforce followed with a similar announcement one week later. “All indications at a global level are that this isn’t going away,” said Kreps.