A Balance Sheet tells a Net Zero Story

Banks and financial institutions have almost zero emissions. So do most companies in the service industry. Their balance sheet can guide them in their journey towards net zero.

Let us take the case of an insurance company (hypothetical, of course). An insurance company collects money from its policyholders by way of a premium. The company then invests the money in various securities that earn them a return. Out of this, claims against fire, death, floods etc., are paid. The remainder is the profit for the insurance company.

In a simple version, the balance sheet of an insurance company has policyholders’ claims on the liabilities side and the investment in securities on the asset side.

So, what are the implications for net-zero?

Let’s start with the liability side. Policyholders are either individuals or corporate. The bulk of customers tends to be corporates. The composition of corporates and their emission profile indicates a risk to the insurance company. For example, suppose a  significant portion of policyholders are in the business of coal and oil. In that case, the dwindling future of coal and oil companies may impact the insurance company. Thus it needs to track the emission profile of its customers.

The asset side is equally important. To be genuinely net-zero, the insurance company will also need to minimise its investment in high carbon securities. If it holds equity shares of a company, then that company’s carbon emissions count. The same holds for debt securities. Investments in mutual funds would require tracking of emissions of constituent companies.

The shift to net-zero requires companies not asset not only the direct emissions but also indirect emissions. A look at their balance sheet will help.

Published by Utkarsh Majmudar

Utkarsh Majmudar is a Fellow, IIM Ahmedabad and a professional with experience encompassing academics and administration at top business schools in India (IIM Lucknow, IIM Udaipur, and IIM Bangalore) and working with large corporations. His interest areas include corporate finance and CSR.

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