The Carbon Report and Atom’s ESG Strategy

Ahead of the release of our carbon report, our Director of ESG, Edward Twiddy, discusses its impact on our strategy.

2024 will be the first year that we have produced and published both our operational emissions (heat, power, travel, supplies, kit, cloud computing resources etc - everything in what is called scopes 1, 2 and 3 except for scope 3.15 for those that are familiar with the terminology) and also our financed emissions (the fossil carbon used to heat and power the homes and run the businesses that we lend money to - aka the previously elusive scope 3.15).

Our operational emissions have been trending down for a few years now as we get more efficient in the way we operate our HQ, get more active in how we travel to work and work with Google to reduce emissions from our use of their cloud. Financed emissions, however, are scary numbers. Less than 700 tonnes of CO2 per year from our operational emissions compares to well over 200,000 tonnes of CO2 per year from the financing we provide to homes and businesses.

The details of how this breaks down across each of the different parts of the bank’s lending activities will be in our latest carbon report, which we will soon publish. We have spent a long time and worked with many partners to get to these numbers, and we are ready to accept them as a measure of what we are financing. But we are also ready to acknowledge - as others do, but perhaps not very loudly - that these numbers are wrong. They are not based on actual measurements of energy use, and in some cases (especially for the business lending that we do) there are some very big gaps between the assumptions that lie behind how these numbers are created and any measurement of actual emissions from small and medium sized firms in the UK. The system for accounting for carbon emissions is not that young but it has necessarily focused on the very big sources of emissions in the global economy and is therefore still in the very early stages of dealing with carbon from small businesses. And it still relies on Energy Performance Certificates (EPCs) for estimating emissions from UK housing - which are at best a well-intended guesstimate and at worst the misuse of data that was never supposed to be used for this purpose.

This is acknowledged in a data quality score that stretches from 5 (least good estimates) to 1 (sitting in the cellar watching the meter tick over, or the digital equivalent). Our data is a 3 for residential mortgages - which is about as good as it can be, based on EPCs for 95%+ of all the properties that we have financed. This drops to a 4 for that part of our business lending book where we have had to rely on estimates based on the sector that the company is working in before trying to create a measure of CO2 emissions from their financial activity. It’s an OK place to start, but there are improvements needed - a sort of Satisfactory on an old version of Ofsted reporting.

All of this will change once actual energy use, linked back through providers and tariffs to the source of generation (wind, oil, gas, nuclear, LPG, biogas etc) can be used to take away the models, estimates and approximations. This is coming - rightly protected so that our personal information has to be provided on a fully permissioned basis. In the meantime we are not shying away from what is becoming an even more inconvenient, clear and present truth - our climate is shifting, it is bringing new risks to all of us and with those risks come new responsibilities as well as opportunities. So Atom retains its commitment to being climate positive (i.e. responsible for taking more carbon out of the atmosphere than we are putting in) by 2035, and we include the (likely to be amended) financed emissions in that commitment.

There are many dependencies that will affect the pace at which the wider economy moves to decarbonise power and heat, such as government policy, the speed and uptake of new data and building technologies, as well as customer choice. But as a lender with our own balance sheet, our own risk and credit policies and a determination to meet our strategic goals, there are many actions that we can take which will enable us to continue to be profitable and to deploy capital proactively, whilst also reducing the carbon intensity of our lending.

For example, since 2019 we have maintained a restricted sector policy within our business banking portfolio that forbids lending to carbon intensive industries, and we will continue to be proactive with amending policy and making real changes to our lending behaviour in the future. We have just doubled the number of business sectors (as measured using Standard Industrial Classification - SIC - codes) that we regard as high risk to the climate for the purposes of credit policy; there are now over 50 SICs that we won’t lend against unless it is to finance the transition to a low or zero carbon future for these firms. We will also publish and maintain an online tool for anyone - Atom customer or not - to assess the cost and returns of investing in insulation or other changes to their homes to reduce energy bills and carbon emissions.

Success at Atom is measured against our strategic scorecard, which we publish in our annual report and is the basis for the Board’s management of the business. A target to reduce our operational emissions has been a regular feature of the scorecard for some years but, whilst this continues to be a dedicated focus for the business, from this year onwards we have adopted a target focused on financed emissions. To reflect our growth plans but also to involve all parts of the business in meeting this target, we have focused on reducing the economic emissions intensity of our lending, and in particular aiming for a reduction in carbon emissions by 5% per million pounds loaned across the balance sheet. As we become more certain of the data points that we are gathering and have a stronger feel for the levers we can use to reduce the economic emissions intensity of our lending, we will mature this target to align to wider initiatives, such as the Science Based Target Initiative.

However, we are aware that there is no feasible route to reducing the intensity of emissions from our lending to zero without also bringing assets onto the balance sheet that are actively sequestering carbon from the atmosphere. We can do this in two ways: by diverting some of our lending activity into natural capital projects, or by actively using our balance sheet capital to own such projects ourselves. These are the two key levers we have as part of the “invest” pillar in our strategy. With our 2035 deadline to be climate positive only a decade away and the period required for natural capital projects to begin to sequester carbon, we decided that we need to start these investments now. Consequently, we have set ourselves a second scorecard target of investing — either through lending or direct purchase — to at least 100 hectares worth of natural capital projects in the current financial year with a longer term target of 1000 hectares by the end of this decade.

We are now actively involved in making lending available to natural capital projects, both those that support the sequestration of carbon but also those that create biodiversity gain and which can contribute to net gain requirements for new housing and commercial property developments. In addition we purchased our first natural capital project — a 10 hectare woodland in Northumberland — to help us actively remove carbon from the atmosphere. This small woodland project is forecast to sequester just under 7,000 tonnes of CO2 over its lifetime — a figure close to the estimated emissions from the first 10 years of Atom’s operations (back to that definition based on scope 1, 2 and 3, excluding 3.15). This is a small step, but using our risk capital in this way is a clear first example of our commitment to this strategy and putting the whole team’s rewards on the line is a second measure of how we are collectively aligned to a climate positive future.