What are financed emissions?

24 January 2025

Authors

Alice Gomstyn

IBM Content Contributor

Alexandra Jonker

Editorial Content Lead

Tamara Robinson

WW Product Marketing Leader, IBM Envizi

What are financed emissions?

Financed emissions are greenhouse gas emissions attributed to financial institutions through their lending and investment activities.

 

Financed emissions fall within the category of Scope 3 emissions, or emissions originating from companies within an organization’s value chain but which the organization does not directly own or control. (Such emissions are distinct from Scope 1 company emissions and Scope 2 emissions.) In the financial sector, that value chain includes the businesses that a financial institution lends to or invests in.

Many financial institutions today calculate and report their financed emissions according to a standard established by the Partnership for Carbon Accounting Financials (PCAF). This global, nonprofit financial industry group provides guidance on business sustainability initiatives. Other initiatives and groups also support financial institutions in their efforts to track and reduce financed emissions, including the Net-Zero Banking Alliance and the Science-Based Targets initiative (SBTi).

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Why are financed emissions important?

Recently, global climate change mitigation efforts have increasingly focused on sustainable finance and the environmental impacts of financial institutions, such as banks, asset management firms, insurance companies and private equity firms. As with other industries, the financial sector has been urged to measure its greenhouse gas (GHG) emissions and commit to emissions reductions. However, financial institutions are also in the spotlight for a specific type of indirect emissions: financed emissions.

The quantity of financed emissions in comparison to other emissions is significant. One global study found that, in 2022, reported emissions related to institutions’ financing activities were, on average, 750 times greater than their direct emissions. This disparity varied by region, with North American financial institutions reporting financed emissions being, on average, 11,000 times greater than operational emissions.1

GHG reporting and environmental advocates have encouraged financial institutions to measure and work to reduce financed emissions. They argue that the financial industry has the power to shape the global energy transition from carbon emissions-heavy fossil fuels to clean, renewable energy.

The financial sector can “redirect capital to companies contributing to the low-carbon transition, and away from companies that contribute to climate change,” according to the corporate climate action group, the Science-Based Targets initiative (SBTi). Such efforts, an SBTi steering committee member said, can “build the bridge to a net-zero emissions economy and enable system-wide improvements based on climate science.”2

Measuring and reporting financed emissions gives financial institutions deeper insights into the climate impacts of their lending and investment decisions. It empowers them to set targets to reduce carbon footprints in their supply chains, inform their environmental, social and governance (ESG) initiatives and answer to environmentally minded stakeholders. It can also help institutions in their risk management efforts by enabling them to determine their exposure to climate-related risks and policy measures, such as carbon pricing.3

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Accounting standards and metrics

Financial institutions can calculate financed emissions by following the methodology established by the Partnership for Carbon Accounting Financials (PCAF). PCAF is a financial services sector coalition dedicated to helping banks and other financial institutions align their portfolios with the 2015 Paris Agreement, an international treaty intended to limit global warming.

PCAF first published its universal standard for measuring and disclosing financed emissions, “Financed Emissions: The Global GHG Accounting & Reporting Standard, Part A,” in 2020. It released an updated version in 2022.

The PCAF standard dictates that a financial institution’s financed emissions should be determined based “on the proportional share of lending or investment in the borrower or investee.”4 The GHG emissions attributed to a financial institution should reflect its level of investment or lending in the company creating the emissions. A smaller investment or loan to a company would result in a lower level of financed emissions attributed to the corresponding financial institution, and vice versa. 

Under the PCAF’s general formula for calculated financed emissions, the emissions of the borrower or investee are multiplied by what’s known as an attribution factor. The attribution factor is the ratio of the institution’s outstanding loans and investments to the total equity and debt of the financed company or project.

PCAF provides extra guidance on financed emissions calculations specific to the different asset classes that make up lending and investment portfolios. The seven asset classes included in the current standard are:

  • Listed equity and corporate bonds
  • Business loans and unlisted equity
  • Project finance
  • Mortgages
  • Commercial real estate
  • Motor vehicle loans
  • Sovereign debt

Initially, the PCAF-financed emissions standard was endorsed by the Greenhouse Gas Protocol (also known as the GHG Protocol), a joint initiative of the World Resources Institute and the World Business Council for Sustainable Development. The GHG Protocol affirmed that the 2020 standard, including methodologies for six asset classes, conformed with the Protocol’s accounting and reporting standard for Scope 3 emissions.

The methodology for the seventh asset class, sovereign debt, was included in the updated 2022 PCAF standard and is pending approval by the GHG Protocol.

In addition to setting a standard for financed emissions, the PCAF has also set standards for facilitated emissions and insurance-associated emissions. Facilitated emissions are GHG emissions associated with the work of facilitating capital markets transactions, while insurance-associated emissions are GHG emissions of companies in insurance firms’ underwriting portfolios.

Supporting initiatives

Several nonprofit organizations encourage and assist financial institutions in measuring, disclosing and reducing their financed emissions.

CDP

CDP, formerly known as the Climate Disclosure Project, is an international nonprofit organization that provides an environmental impact disclosure system for use by both the private and public sectors. The system includes a questionnaire for financial institutions that requests emissions disclosures related to the institutions’ portfolio companies.

The Glasgow Financial Alliance for Net Zero

The Glasgow Financial Alliance for Net Zero, or GFANZ, is a global coalition of financial institutions committed to accelerating the decarbonization of the world economy. The coalition encourages institutions to develop plans to reach their net-zero targets, including strategies to reduce financed emissions.

The Net-Zero Banking Alliance

The Net-Zero Banking Alliance is a group of global banks convened by the United Nations that have committed to the Paris Agreement goals by targeting reductions in total and financed emissions. The alliance recommends that members establish emissions baselines and set targets that are focused on absolute emissions or emissions intensity. (An intensity target is an emissions target relative to a specific metric, such as emissions per kilowatt-hour or per tonne of product.)5

The Task Force on Climate-related Financial Disclosures

The Task Force on Climate-related Financial Disclosures, or TCFD, was a global organization that established a set of recommendations to bring transparency to companies’ climate-related risks. As part of its work, the TCFD guides asset managers and asset owners on reporting their exposure to carbon-intensive companies. The organization disbanded in 2023.

The Science-Based Targets initiative

The Science-Based Targets initiative, or SBTi, helps companies establish science-based targets for reducing emissions. For financial institutions, SBTi developed detailed criteria for common target-setting approaches for investment and lending portfolios. The criteria cover approaches that include centering emissions intensity targets, engaging with borrowers and investees, and addressing the role of fossil fuel-related companies and projects in institutions’ portfolios.6

Responsibility for calculating financed emissions?

Responsibility for calculating and reporting on financed emissions metrics is shared by several divisions within a financial institution, including asset managers, portfolio managers, risk and corporate reporting, enterprise IT and sustainability departments. However, as this discipline matures, new roles specific to sustainable finance—which would include financed emissions tracking—are emerging.

Challenges of measuring and reporting financed emissions

Financial institutions seeking to meet various reporting requirements on financed emissions might face challenges regarding data collection and data quality. For example, a 2022 TCFD survey found that asset managers and asset owners cited insufficient information from investee companies as their greatest hurdle in conducting climate-related reporting.7

Improving the quality of financed emissions will be a continuous and iterative process. Institutions can use a data hierarchy and scorecard created by PCAF to understand the quality of company emissions data, track that data quality over time and develop strategies for improvement.

In addition, the PCAF standard allows for financial institutions to turn to verified third-party data providers, such as CDP, that collect emissions information from companies. Institutions can also estimate emissions of financed companies based on companies’ own economic data and general emissions data available through public data sources and third-party providers.8

The GHG Protocol, for instance, provides tools that use emissions factors. These are representative values that relate the amounts of greenhouse gases produced by a business to a set amount of activity performed by that business, enabling emissions calculations.9

Key technologies and capabilities

Software solutions can help financial institutions track their financed emissions and support their sustainability reporting. Leading solutions might include capabilities and benefits such as:

  • Improving data quality and enhancing data collection, including capturing emissions data from third-party providers.

  • Analyzing emissions and emissions intensity by sector, region and company.

  • Tracking the progress of efforts to reduce the carbon footprints of investee companies.

  • Consolidating emissions metrics into a single module to support disclosure to ESG reporting frameworks, such as the European Union’s Corporate Sustainability Reporting Directive (CSRD).
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Footnotes

Financial Institutions Failing To Integrate Nature And Climate: New Report Warns Inaction On Nature Impedes Net-Zero Ambitions,” CDP, 16 August 2023.

2 “First opportunity for banks to receive stamp of approval on science-based climate targets,” Science Based Targets initiative, 1 October 2020.

3, 4, 8 “Financed Emissions: The Global GHG Accounting & Reporting Standard/Part A, Second Edition,” PCAF, December 2022.

Guidelines for Target Setting for Banks, Version 2,” UN Environmental Programme Finance Initiative and The Net-Zero Banking Alliance, April 2024.

6 “SBTi Financial Sector Near-Term Science-Based Targets Explanatory Document, Version 2.0,” May 2024.

7 “Task Force on Climate-related Financial Disclosures 2023 Status Report,” Task Force on Climate-related Financial Disclosures, October 2023.

9 “Calculation Tools FAQ,” Greenhouse Gas Protocol, retrieved 29 November 2024.