A four-phase approach to help you measure and account for financed emissions
Financial services companies are well represented in the journey to net-zero carbon emissions. According to the United Nations,1 more than 160 firms with $70 trillion in assets are now committed to achieving net zero by 2050. This group, the Glasgow Financial Alliance for Net Zero,2 includes 43 banks from 23 countries with assets of more than $28 trillion.
For these companies, however, making the commitment is just the beginning of a more demanding journey. At some point, they will have to tackle their biggest data collection challenge since the Dodd-Frank Act was enacted in 2010. Not only do firms need to track and measure the Scope 1 and Scope 2 emissions from their own business operations, they also need to account for Scope 3, which means measuring and reporting the emissions and climate impact of many of the activities they help to finance for their customers.
This emissions category, known as “financed emissions,” is extraordinarily large and complex, as it touches almost every asset class and financing activity, from simple small business loans to the financing for carbon-intensive factories and construction projects. Complicating things further, the data that companies need is extremely difficult to obtain, and the quality is questionable.
Currently, there are five primary limitations that the industry needs to overcome to accurately report on financed emissions:
Fortunately, leading firms are forging ahead despite the obstacles, teaming with industry groups and standard setters such as Partnership for Carbon Accounting Financials (PCAF) and Science Based Target Institute (SBTi). PCAF developed the Global GHG Accounting and Reporting Standard for the Financial Industry3 to provide detailed methodological guidance to measure and disclose greenhouse gas (GHG) emissions associated with six asset classes. SBTi provides science-based principles and metrics for financial institutions to set quantitative net-zero targets linked with emissions reductions in the real economy.
At a minimum, these organizations are beginning to conduct internal analyses of their financed emissions. Some are disclosing it externally for certain products and industry types, acknowledging any data limitations or quality shortfalls through proxy and other assumption-driven reporting. Clearly, conservative assumptions should be used for these early disclosures. However, the need for this will ease over time as counterparties increase and improve their carbon disclosures.
We believe every financial services company can at least begin to plan for and participate in the journey to net zero. It’s critical that firms take action now to uphold the objectives of the Paris Accord, reducing GHG emissions and addressing climate change responsibly.
We recommend a four-phase approach to measuring and disclosing your financed emissions.
Financed emmisions = Attribution Factor X Scope 1 & 2 Emission Per Loan or Investment
Attribution Factor = % Share of Loan or Investment (e.g., Total Loan / Total Debt + Equity)
To do the math, you must know your percentage share of the financing of the business or project and assume an equal-share responsibility for the resulting GHG emissions from the business or project. First, however, you must gather your data, enable your “calculation engine,” and engage with your counterparties to validate the results.
As you work through these phases, it’s important to openly explain your goals and objectives to your external stakeholders. Make your assumptions known and acknowledge they will change over time. However, the long-term business benefits far outweigh the short-term costs of launching your financed emission journey.
