Mastering Measuring and Reporting: A How-to Guide for Financed Emissions

This guide helps sustainability managers learn how to measure and report financed emissions. It provides useful tips for managing these emissions and aligning investment policies with sustainability goals.

Table of Contents

• Understanding Financed Emissions
• What are financed emissions?
• Why are financed emissions important for sustainability managers?
• Measuring Financed Emissions
• Methodologies for measuring financed emissions
• Additional PCAF requirements of GHG accounting and reporting
• Tools and software for measuring financed emissions
• Best practices for accurate measurement
• Considering different asset classes
• Financed Emissions Calculation
• Reporting Financed Emissions
• The importance of transparent reporting
• Using the PCAF Financed Emissions Standard
• Key components of a comprehensive emissions report
• PCAF and EU Taxonomy Regulation
• Communicating Financed Emissions Data to Stakeholders
• Aligning Investment Policies with Sustainability Goals
• Integrating financed emissions data into investment decisions
• Advocating for sustainable investment practices
• Conclusion

Understanding Financed Emissions

What are financed emissions?

Financed emissions are greenhouse gas emissions linked to the investments and loans of financial institutions. These emissions come from the activities of the companies and projects that receive financial support. Essentially, financed emissions represent the carbon footprint of a financial institution's portfolio.

Why are financed emissions important for sustainability managers?

Sustainability managers need to ensure their organizations are responsible for the environmental impact of their investments. Understanding and managing financed emissions helps assess the carbon footprint of financial activities and align investment policies with sustainability goals. By measuring and reporting these emissions, sustainability managers can promote sustainable investment practices within their organizations.

Measuring Financed Emissions

Methodologies for measuring financed emissions

The Partnership for Carbon Accounting Financials (PCAF) offers a standardized method for measuring financed carbon emissions. This method helps financial institutions calculate and report their greenhouse gas emissions from lending and investment activities. By following the PCAF method, sustainability managers can accurately measure their organization's financial portfolio's carbon footprint.

Unlike the GHG Protocol's top-down approach, PCAF uses a bottom-up approach, assessing financed emissions at the customer level. This provides a more precise evaluation of environmental impacts and climate-related risks.

Additional PCAF requirements of GHG accounting and reporting

• Recognition: Financial institutions must account for all financed emissions under Scope 3, category 15 (Investment) emissions, as defined by the GHG Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard. Any exclusions must be disclosed and justified.
• Measurement: Financial institutions must measure and report their financed emissions for each asset class by "following the money" and using the PCAF methods. At a minimum, absolute emissions must be measured. Avoided and removed emissions can also be measured if data is available.
• Attribution: The financial institution’s share of emissions must be proportional to its share of exposure relative to the total value (company, project, asset) of the borrower or investee.
• Data Quality: Financial institutions must use the highest quality data available for each asset class and work to improve the quality of the data over time.
• Disclosure: Public disclosure of the results of PCAF assessments is essential for external stakeholders and financial institutions using the methodology. This ensures a clear, comparable view of how the investments of financial institutions contribute to the Paris climate goals.

Tools and software for measuring financed emissions

Various tools and software are available to help measure financed emissions, including carbon accounting platforms and sustainability management software. These tools can streamline data collection and provide valuable insights for sustainability managers to make informed decisions about their organization's investments.

Best practices for accurate measurement

To ensure accurate measurement of financed emissions, sustainability managers should set up clear data collection processes and robust tracking systems. Gathering reliable data from investee companies and projects, considering indirect emissions, and regularly verifying data are critical steps. Using the same data provider for all equity and bonds can help account for scope 1 and 2 emissions variability.

Considering different asset classes

PCAF provides detailed guidance for measuring and disclosing GHG emissions linked to seven asset classes:

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

Financed Emissions Calculation

Example: Listed equity and corporate bonds

Financed emissions from a loan or investment in a company are calculated by multiplying the attribution factor by the emissions of the borrower or investee company. The total financed emissions of a listed equity and corporate bonds portfolio are calculated as follows:

Financed emissions = ∑c (Attribution factorc × Company emissionsc)

where c is the borrower or investee company.

The attribution factor is the ratio of the outstanding amount to EVIC for listed companies and the total equity and debt for bonds to private companies:

For listed companies:

Financed emissions = ∑c (Outstanding amountc / Enterprise Value Including Cashc × Company emissionsc)

For bonds to private companies:

Financed emissions = ∑c (Outstanding amountc / Total equity + debtc × Company emissionsc)

PCAF offers three approaches for calculating financed emissions:

• Option 1: Reported Emissions
  • Collect emissions data directly from the borrower or investee company (e.g., sustainability reports) or indirectly via third-party data providers (e.g., CDP).
  • Allocate these emissions to the reporting financial institutions using the attribution factor.
• Option 2: Physical Activity-Based Emissions
  • Estimate emissions based on primary physical activity data from the borrower or investee company (e.g., megawatt-hours of natural gas consumed or tons of steel produced).
  • Use an appropriate calculation method with verified emission factors per physical activity (e.g., tCO2e/MWh or tCO2e/t of steel).
  • Allocate these emissions to the reporting financial institutions using the attribution factor.
• Option 3: Economic Activity-Based Emissions
  • Estimate emissions based on economic activity data from the borrower or investee company (e.g., revenue or sectoral assets).
  • Use official statistical data or recognized environmentally extended input-output (EEIO) tables providing region- or sector-specific average emission factors per economic activity (e.g., tCO2e/€ or $ of revenue or tCO2e/€ or $ of sectoral assets).
  • Allocate these emissions to the reporting financial institutions using the attribution factor.

Reporting Financed Emissions

The importance of transparent reporting

Transparent reporting of financed emissions is essential for building trust with stakeholders. By openly disclosing the carbon footprint of their financial activities, organizations show their commitment to environmental responsibility and accountability. This transparency helps stakeholders assess the impact of investments on climate change and make informed decisions.

Using the PCAF Financed Emissions Standard

Using the PCAF Standard provides financial institutions with standardized methods to measure financed emissions. This enables them to:

• Assess climate-related risks in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and CSRD.
• Set science-based targets (SBTs) using methods from the Science Based Targets initiative and other scientific methodologies.
• Report to stakeholders like the CDP.
• Report in line with the EU's CSRD and SFDR.

Key components of a comprehensive emissions report

A comprehensive emissions report should include:

• Detailed information on the methodology used for measuring financed emissions.
• A breakdown of emissions by investment type and sector.
• Initiatives or strategies implemented to reduce emissions and promote sustainable investment.
• Context for the data and insights into future plans for managing financed emissions.

PCAF and EU Taxonomy Regulation

The EU Taxonomy Regulation aligns financial resources with the Paris Agreement by setting standards to assess the environmental sustainability of companies' economic activities. These standards help evaluate the sustainability of an investment, allowing investors to compare and make informed decisions. The main disclosure metric used by the EU Taxonomy is the green asset ratio (GAR), which shows the percentage of investments meeting Taxonomy-aligned criteria.

However, using GARs alone to track progress towards the Paris Agreement's net zero emissions target by 2050 is insufficient. Investors and supervisors must consider additional factors, as financing "green" assets does not offset the climate impact of financing "harmful" ones. A more comprehensive set of information is necessary for accurate assessment.

The EU Taxonomy focuses on increasing investment in qualifying green projects to achieve Paris-aligned cash flows, while the PCAF Standard works towards Paris alignment by reducing portfolio emissions. This highlights the key difference between the two approaches.

Communicating Financed Emissions Data to Stakeholders

Effective communication strategies

When communicating financed emissions data to stakeholders, sustainability managers should make the information easy to understand. Using visual aids like charts and graphs can help present complex data clearly. Engaging with stakeholders through annual reports, sustainability reports, and meetings ensures the message reaches a wide audience.

Aligning Investment Policies with Sustainability Goals

Integrating financed emissions data into investment decisions

To integrate financed emissions data into investment decisions, consider the environmental impact of potential investments and align them with the organization's sustainability goals. By including carbon footprint assessments and environmental risk evaluations in the investment process, sustainability managers can ensure their financial activities support broader sustainability objectives.

Advocating for sustainable investment practices

To advocate for sustainable investment practices, build a strong business case for including environmental considerations in investment decisions. Use financed emissions data to show the financial and reputational benefits of sustainable investments and highlight the risks of high-emission investments. Foster a culture of sustainability and engage with key decision-makers to promote sustainable practices across the organization.

Conclusion

Mastering the art of measuring and reporting financed emissions is essential for sustainability managers to manage the environmental impact of their organization's financial activities effectively. By following standardized methodologies, using the right tools, and implementing best practices, sustainability managers can drive positive change and promote sustainable investment practices. Case studies and lessons learned from companies that have effectively managed and reported financed emissions provide valuable insights. By aligning investment policies with sustainability goals, sustainability managers can ensure their organization's financial activities contribute to a sustainable future.

Final tips for sustainability managers mastering financed emissions reporting:

• Stay informed about industry best practices and emerging standards for measuring and reporting financed emissions.
• Engage with industry peers and stakeholders to share knowledge and experiences.
• Continuously evaluate and update measurement and reporting processes for accuracy and transparency.
• Advocate for integrating financed emissions data into investment decisions and promote sustainable investment practices within your organization.

Navigating the complexities of financed emissions reporting can be challenging. My consulting firm specializes in helping companies master this field. We provide expert guidance, tailored solutions, and hands-on support to ensure your organization meets its sustainability goals and regulatory requirements. Contact us today to learn how we can assist you in effectively managing your financed emissions and driving sustainable investment practices.