(Bloomberg) --

Investment bankers are being singled out in a new report by nonprofit ShareAction that targets a planned framework for calculating the carbon footprint of capital markets.

If the industry is allowed to go ahead with what ShareAction characterizes as a watered-down version of the plan, the climate cost will be severe, according to authors of the report.

The analysis is timed to pre-empt an announcement by the Partnership for Carbon Accounting Financials (PCAF), a group made up of banks tasked with ensuring the finance industry is aligned with the goals of the Paris climate agreement. PCAF is already months behind a scheduled release date laying out how banks should account for the emissions of bond and equity underwriting, or their so-called financed emissions.

ShareAction says there’s now a real concern PCAF will settle on a model that will be significantly weaker than originally expected.

“Some PCAF members are pushing hard to water down a key aspect of the standard—the weighting applied to capital markets volumes—arguing there are challenges in accounting for their full share,” ShareAction said in an analysis shared with Bloomberg. “If this is adopted, a number of banks could be under-reporting their climate impact for years to come.”

A spokesperson for PCAF said the working group is still in discussions, declining to comment further. The group didn’t immediately respond to a separate request for comment on the findings of the ShareAction report.

Carbon accounting remains a relatively new concept. Until now, banks have mostly limited emissions reporting to the footprint of their direct lending. The industry argues that calculating the climate fallout of capital markets operations is prone to double-counting. Nonprofits counter that, if the finance industry is to play a meaningful role in reining in global warming, there’s no alternative.

Xavier Lerin, senior research manager at ShareAction, says the concern now is that “decisions are being made by the banking industry with limited input from other stakeholders. For the PCAF consultation to have any credibility, it has to be transparent.”

PCAF has been looking at two models for calculating facilitated emissions. One would require banks to report 100% of the carbon footprint of everything they underwrite. The other is 17%, which reflects capital markets’ share of all industry financing and derives from analysis by the Basel Committee on Banking Supervision.

There’s also talk of a potential compromise deal, which would target a figure somewhere in between the two numbers, according to a person familiar with the process.

Banks have said they’ll follow the standards set out by PCAF whenever they’re ready. That includes members of the Net Zero Banking Alliance, which is the world’s largest climate finance coalition for lenders.

Setting the standard at 100% has the advantage of being simpler to understand, according to PCAF. In fact, some banks, including Goldman Sachs Group Inc. and Wells Fargo & Co., already use some version of it.

ShareAction says anything short of 100% is greenwashing.

But PCAF says requiring banks to report all of their facilitated emissions comes with a number of issues, including the inherent volatility of capital markets. ShareAction counters that PCAF could address the issue by changing the time period used in the calculation, so it’s not limited to the year of issuance. For example, using a five-year horizon would help iron out the effects of volatility and ensure a fair estimate, ShareAction says.

Another concern surrounding the 100% approach relates to the sheer volume of market transactions, which risks shifting focus away from lending, the bigger source of emissions. ShareAction says its research shows that only in rare cases does capital-markets financing exceed credit. It also says downplaying underwriting accommodates banks that have a lot of oil and gas clients, as these tend to rely more on capital markets than other sectors.

It’s “clear to us at ShareAction that banks take limited risks” in their capital markets operations, Lerin says. “They arrange these transactions over a few days and then they aren’t on their balance sheet, but the climate impact is potentially very, very big.”

--With assistance from Alastair Marsh.