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The definitive guide to financed emissions

January 23, 2023
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Measuring financed emissions is becoming a priority for all financial institutions. By quantifying the emissions from their investing and lending activities, investors, banks and insurance companies can begin the process of integrating climate-related opportunities and risks into their strategic decision-making.

Establishing the systems and processes to measure financed emissions can be challenging, but with the emergence of global standards and universal frameworks, as well as powerful new technology platforms, it’s now easier than ever.

In this guide we’ll define financed emissions, we'll break down the opportunities behind measuring and reporting financed emissions, the key challenges, as well as the steps you can take to get started.


Key sections in this guide


What are financed emissions?

Financed emissions are the greenhouse gas (GHG) emissions linked to the investment and lending activities of financial institutions like investment managers, banks and insurers. 

It’s essentially the carbon footprint of a firm’s investments or loans. It includes the emissions of all the companies in its portfolio, or its lending book, approportioned based on how much of these companies’ activities are financed by the financing entity.

Financed emissions are part of Scope 3 emissions under the Greenhouse Gas Protocol. For some firms, financed emissions are 700x larger than their direct emissions.

Are financed emissions Scope 3 emissions?

The first stage in the measurement process is to recognise the difference between:

  • Organisational emissions – which a firm is responsible for directly or indirectly
  • Financed emissions – which flow from a firm’s investment portfolio and lending practices

Organisational emissions are Scope 1 and Scope 2 emissions, while financed emissions fit into Scope 3. 

What are the 3 types of emissions?

Scope 1

Direct emissions from owned or controlled sources eg: operating buildings and other facilities, or a vehicle fleet.

Scope 2

Indirect emissions from the generation of purchased energy. Scope 2 emissions from one company are part of the Scope 1 emissions from another company.

Scope 3

All indirect emissions (not included in scope 2) that occur in the value chain of the reporting company. This includes both upstream and downstream emissions eg: financed emissions, business travel or employee commuting.

GHG Protocol emissions scopes


Carbon accounting frameworks

Like any accounting exercise, measuring GHG emissions requires a consistent standard to ensure accuracy and comparability at the company, portfolio and industry levels.
The leading global standard for measuring and reporting financed emissions comes from the Partnership for Carbon Accounting Financials (PCAF), a partnership formed by major European banks. 
PCAF has received a tick of approval by the GHG Protocol, which supplies the world's most widely used GHG accounting standards.

Under the GHGP, financed emissions are defined within the Corporate Value Chain (Scope 3) standard, for Category 15 investment activities.


Why you need to measure financed emissions

For individual financial institutions, there are three key drivers behind the need to measure financed emissions: 

  1. Business opportunities – value creation & risk management
  2. Protect your reputation and meet stakeholder expectations
  3. Increasing regulatory requirements

Why you need to measure financed emissions


Business opportunities – value creation & risk management

Our economy is being transformed by the urgent need to slow the impacts of climate change. It’s been called ‘the greatest commercial opportunity of our age’ as trillions of dollars will need to be invested in solutions. 

Measuring financed emissions equips financial institutions to recognise opportunities for allocating capital towards solutions, and identifying those sectors that are decarbonising the most quickly. 

There’s potential for stronger GDP growth flowing from increases in private and public spending on clean energy and energy efficiency. A joint analysis with the International Energy Agency and the International Monetary Fund suggests global GDP will be 4% higher by 2030 if we follow the net zero pathway. 

Equally important is risk management. The World Economic Forum’s Global Risks Report 2022 ranked the climate crisis as the top global risk for the third year in a row. 

Firms will increasingly be judged by their ability to navigate both the physical and transitional risks inherent in managing climate change.

Investors at all levels (and this can include the general public) increasingly expect investment managers and banks to recognise climate change as a very real source of potential risk to a portfolio company’s viability and success, thus impacting returns.

Managing climate change is now recognised as being part of an agent’s fiduciary duty, with specific guidance notes being issued by Australian regulators APRA and ASIC, as well as the RBA.

Protect your reputation and meet stakeholder expectations

There are growing expectations on financial institutions to measure financed emissions. A firm’s reputation will be impacted by the transparency of its reporting, with leaders benefiting from setting emissions targets and communicating progress.

Equally, those failing to measure and manage their financed emissions face the risk of reputational damage. Organisations are increasingly being held to account for the environmental impacts of GHG emissions, and financial institutions should be wary of their exposure.
At the same time, some determined private investors and climate-action groups are eager to accelerate the pace of change. They’re exerting pressure on companies through the power and influence of their investments, and they’re expecting greater transparency from their investment managers and bankers.

A survey of institutional investors in 2021 showed that 40% had made portfolio-wide commitments to net zero by 2050.


Increasing regulatory requirements

While current efforts to measure and manage financed emissions are occurring without widespread regulatory mandates or reporting rules, that’s likely to change very soon, and that’s a key driver for measuring financed emissions.

In the US, the Securities and Exchange Commission (SEC) has proposed rules around the disclosure of emissions, climate-related risks and net-zero transition plans for listed companies – including Scope 3 emissions. 
The SEC indicated that these rules would operate in alignment with the emerging international climate accounting regime from the International Sustainability Standards Board (ISSB), part of International Financial Reporting Standards (IFRS). 

In Australia, the federal government has released plans for a climate risk disclosure framework, in an effort to align with emerging global best practice.

Which countries have mandatory disclosures for financed emissions?

So far, both the UK and New Zealand have passed laws requiring the disclosure of risks inherent to financed emissions.

The UK imposed rules in April 2022, requiring over 1,300 of the largest companies and financial institutions to report climate-related risks in line with TCFD recommendations.

New Zealand has passed a law that mandates climate-related disclosures for around 200 of the country’s largest financial institutions. Banks, insurers and large listed issuers in New Zealand will now be required to follow TCFD reporting requirements.

Plus, the European Banking Authority (EBA) has announced it will make climate disclosures mandatory from December 2023. It will cover reporting on transition and physical risks, as well as financed emissions.  


How to measure financed emissions

The process of measuring financed emissions will depend on the structure of a portfolio, as well as an investor’s access to data. 

Below is an overview of the general process that financial institutions will need to follow to calculate financed emissions, and get started on their path to net zero.

Take an emissions ‘snapshot’ of portfolio emissions

You can build an initial ‘snapshot’ of a portfolio’s carbon exposure by using proxy data, or industry averages. 

With few companies reporting GHG emissions in sufficient detail, these estimates can be used in lieu of more precise quantities from the companies themselves to establish where ‘hotspots’ of carbon intensive activities are likely to be.

This data is calculated by estimating the total emissions involved in each portfolio company’s activity, then applying an ‘attribution factor’, based on the investor’s holding (this varies depending on asset classes). 

The sum of these comprise (an estimate of) the investor’s financed emissions.

From here, you can identify which companies and industries are likely to be most carbon-intensive, and prioritise action, which may involve collecting more specific information about a company’s climate action journey. 

Indeed some companies may already have taken action to reduce their footprint and this will not be reflected in industry average estimates.

Collaborate with companies to access accurate data

To move beyond a reliance on emissions estimates, you’ll need access to more precise data, sourced directly from portfolio companies. For this, it pays to collaborate.

Financial institutions can work with portfolio companies on the core challenge of collating and extracting emissions data, as well as building a two-way communication system that makes access to data simple for all parties.

Set an emissions baseline, and plan decarbonisation targets

Defining a baseline for your financed emissions establishes a starting point from which to measure progress towards your decarbonisation targets. 

The distance between an emissions baseline and a target represents the glide-path for climate action. 

The Paris Aligned Investors Initiative offers a model for investors to align their portfolios with the Paris Agreement and commit to net zero targets. It also operates as a platform to share and promote best practice.

For companies, the Science-Based Targets Initiative (SBTi) can help to ensure a target is inline with the goals of the Paris Agreement, and can help to assure external stakeholders that both the goal, and the strategies to get there, are reliable.

Integrate climate-risk assessments into investment decision-making

The core value of a complete set of emissions data is to influence investment decision-making – that’s where the rubber hits the road in decarbonising your portfolio.

Tracking this emission data, and individual commitments by companies, is useful to identify industries decarbonising most quickly, and also the risks inherent in those that aren’t making progress. 

Leverage technology to integrate complex data from multiple sources

The depth and breadth of the work required to accurately measure financed emissions makes traditional desktop analysis cumbersome and unreliable.

The integration of multiple sophisticated databases and data communication platforms can help investors, banks and insurers to more efficiently tally their GHG emissions exposures.

Leveraging solutions provided by technology developers, like Pathzero, is a force multiplier on the journey to calculate, communicate and finally manage financed emissions.


The challenges of measuring financed emissions for financial institutions

The key challenges for financial institutions, when measuring their financed emissions, include:

  • Lack of the required internal resources
  • Complicated fund structures making it onerous to access data
  • Difficulty in assessing the data quality of disclosures received

Lack of the required internal resources 

Assessing the complete set of financed emissions of an investment portfolio can be difficult due to a lack of internal resources.
An investment firm could have hundreds of portfolio companies, and a bank may have millions of individual and business customers, all in different industries, and often with complex ownership structures.
This burden has been a major obstacle to the reporting of financed emissions in the past. As the pressure to make disclosures grows, financial institutions are realising that existing internal processes won’t be sufficient.

Complicated fund structures making it onerous to access data

Financial institutions analyse the companies they invest in and lend to, and in large part they rely on data from the companies directly. 

They rely on audited financial statements that adhere to global accounting standards.
But when it comes to GHG emissions data, most companies simply aren’t measuring it, which makes data hard to find, or if they are, they may not be disclosing that data publicly.
Compound this with multiple layers of fund structures, which extend the distance between a firm and the underlying company itself, and it becomes clear how difficult it can be to access reliable GHG emissions data to report on financed emissions.

Difficulty in assessing the data quality of disclosures received

Once lines of communication have been established, and once data has been received, there’s the very real challenge of assessing the veracity of the data, and arranging it to be comparable with other companies.

Solutions to measure financed emissions

The challenges of measuring financed emissions have historically slowed the progress of firms pursuing net zero emissions. 

However, such challenges can be overcome as technology, improved data feeds and frameworks enable deeper emissions insights, at scale.

The software solution  

By leveraging technology, finance teams are able to scale their capacity to access, sort and aggregate their financed emissions data. 

As mentioned above, baseline insights on emissions exposures can be gathered quickly and easily using a platform powered by proxy data and industry averages. This initial financed emissions methodology allows firms to understand the gravity of their decarbonisation task, and to identify priority areas.

Integrating data feeds

The next step is for financial institutions to engage with companies directly to source emissions data, and collaborate on ways to improve. 

This process will greatly improve data quality, but it requires a more structured approach to the way emissions data is managed. 

An emissions management platform will link a financial institution to its partner companies and allow trusted parties to share data, drive change and report on progress.

PCAF data quality score

The PCAF Standard is emerging as the universal financed emissions methodology for financial institutions. It’s also helping firms to rank the quality of emissions data they’re receiving. 

PCAF has developed a five-step data quality scale, per asset class, enabling firms to report a quality score from 1 to 5. 

A score of 1 reflects the best quality data, and is achieved by having completed a verified emissions measurement. While a score of 5 is the lowest and indicates a bank or investor has used proxy data to estimate a company’s emissions. This typically can be done without the collaboration of the target company.

Technology delivers actionable data insights

Pathzero Navigator offers an emissions snapshot, for any private market investment portfolio. The data allows investment managers to make an immediate assessment of key carbon hotspots, offering valuable insight on where to direct priority action. 

The permissioned platform empowers portfolio companies to directly upload and manage their data, while also giving upstream LP’s their own direct access to monitor decarbonisation progress.

Learn more.



In summary…

There are huge opportunities for financial institutions to lead in taking action on climate change, and the first step is to measure financed emissions. 

With clear oversight of the emissions intensity of investing and lending activities, financial institutions can help steer strategic and investment decision making towards more attractive risk-adjusted returns, while also surfacing potential climate-related risks.

Expectations are shifting, and firms that lead on transparency and reporting will engender trust in their ability to navigate the turbulence of the climate transition. They’ll also avoid potential reputational damage from being seen as laggards, or being linked to environmental damage.

Financial institutions need to get started on their journey to quantify their financed emissions, and today the process is easier than ever.

Technology platforms, like Pathzero Navigator, can help you manage the complex web of data flows and company structures. Frameworks like PCAF and GHG Protocol have harmonised the global standards used in GHG accounting, enabling major investors and banks to commit to net zero financed emissions.

Now’s the time to streamline the management of your financed emissions, to lead in the transition to a net zero world. 


Glossary of frameworks for carbon accounting and calculating financed emissions

A key set of global frameworks, standards and voluntary guidelines for calculating GHG emissions has been central to enabling financial institutions to quantify and disclose their financed emissions.
Let’s explore some of the key resources in more detail:

PCAF - Partnership for Carbon Accounting Financials

PCAF provides the leading standard for financial institutions to measure and report their financed emissions.
The organisation was formed in 2015 by leaders in the finance industry who recognised the challenge of making rigorous emissions disclosures related to a firm’s Scope 3 emissions.
It offers consistent accounting rules that enable reliable emissions calculations, and most importantly, it allows for comparison between portfolios, and between firms.

iCI - Initiative Climat International

While PCAF offers a framework for a broad set of financial institutions, the iCI has developed specific guidance for GHG emissions measurement and reporting for private equity investors.
Titled ‘Private Equity Action on Climate Change’, it has been developed by the PRI and consulting firm ERM.
It combines industry specific knowledge, with existing best practice, to help private market investors overcome the unique challenges of measuring and reporting emissions data. It enables legitimate comparison between portfolios, as well as oversight by limited partners.

GFANZ - Glasgow Financial Alliance for Net Zero

Unveiled with much fanfare at COP26 in Glasgow, GFANZ aims to get more financial institutions making a net-zero commitment. 

It operates as a network to help firms deal with the many challenges inherent in setting and meeting those targets.
The core criteria that drive the ambitions of GFANZ involves a pledge to achieve net zero emissions as soon as possible, and by mid-century at the latest, as well as making a ‘fair’ contribution to a 50% reduction in global GHG emissions by 2030.

TCFD and the ISSB

The Taskforce for Climate-related Financial Disclosures (TCFD) is a comprehensive analytical framework enabling companies to disclose their climate-related risks and opportunities, with the primary users of this information being investors 

By making reporting consistent it makes it comparable, which helps investors and lenders better assess their sustainability credentials.

The International Sustainability Standards Board (ISSB) has been a long-time in the making, and is set to become the global standard setter for sustainability reporting in financial markets. As part of the IFRS Foundation, it goes beyond being just another voluntary set of guidelines. It aims to become a global standard with the potential to be enforced by governments, as well as becoming the baseline expectation of investors for sustainability-related disclosures by companies.

Net Zero Investment Framework, by The Paris Aligned Investment Initiative

The Paris Aligned Investment Initiative (PAII) is a collaboration of four investor networks, aligning their net zero targets through the Net Zero Investment Framework.
The four networks are:

  • The Institutional Investors Group on Climate Change (IIGCC) - Europe
  • The Investor Group on Climate Change (IGCC) - Australia/New Zealand
  • Asia Investor Group on Climate Change (AIGCC) - Asia
  • Ceres - US 

The ‘Initiative’ represents the global expansion of the ‘Framework’, offering financial institutions guidance and methodologies for setting and achieving net zero emissions targets, including the management of financed emissions.

The Net Zero Asset Managers Initiative 

The Net Zero Asset Managers Initiative brings together asset managers that are committed to supporting the goal of achieving net zero emissions by 2050 or sooner.   

It includes 273 signatories that manage more than US$61.3 trillion of assets. All of which have set targets aligned with a net zero pathway; as well commitments to use stewardship and corporate engagement to drive progress with their stakeholders. 

It shares a core membership of four founding network partners with the PAII.


Learn how Pathzero can help your business measure and manage its financed emissions.

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