When it comes to decarbonisation, the financial sector holds immense power, but also enormous responsibility. While banks, asset managers, and insurers may operate low-emission offices, their biggest climate impact comes not from their operations, but from their portfolios.
These indirect impacts are known as financed emissions, and they’re rapidly becoming the new benchmark for credible ESG reporting and net zero finance.
What Are Financed Emissions?
Financed emissions are greenhouse gas (GHG) emissions associated with the lending, investment, and underwriting activities of financial institutions. They represent a bank’s or investor’s indirect contribution to global emissions through the activities they fund.
These emissions fall under Scope 3, Category 15 of the GHG Protocol and are often hundreds of times larger than the organisation’s direct operational emissions.
The Role of PCAF: A Common Standard
To bring consistency and credibility to financed emissions reporting, the Partnership for Carbon Accounting Financials (PCAF) developed a standardised methodology in 2020.
PCAF enables financial institutions to:
- Quantify GHG emissions linked to their financed assets
- Apply an attribution method based on the share of financing
- Disclose results with transparency and comparability
- Improve data quality and traceability over time
PCAF currently provides calculation methods across six key asset classes:
- Listed equity and corporate bonds
- Business loans and unlisted equity
- Project finance
- Commercial real estate
- Mortgages
- Motor vehicle loans
Each class has tailored guidance depending on data availability and portfolio structure.
How to Calculate Financed Emissions
1. Identify Relevant Asset Classes
Segment your portfolio by type — equities, loans, real estate, or insurance underwriting. Prioritise high-impact sectors first (e.g. fossil fuels, heavy industry).
2. Collect GHG Emissions or Proxy Data
This can include:
- Actual reported emissions from investees or borrowers
- Modelled estimates based on industry, geography, or revenue
- National sector averages (if no direct data is available)
3. Apply the Attribution Factor
The PCAF formula is:
Financed Emissions = Total Emissions × Attribution Factor
The attribution factor reflects the financial institution’s share of total financing (e.g. loan value ÷ enterprise value including cash).
4. Score Data Quality
Each data point must be assigned a Data Quality Score (1–5), where:
- 1 = Highest quality (e.g. actual emissions reported by the investee)
- 5 = Low quality (e.g. broad assumptions or sector averages)
Institutions are encouraged to improve their data quality over time.
5. Disclose Results
Financed emissions should be published as part of ESG disclosures or regulatory filings, and clearly broken down by:
- Asset class
- Geography
- Sector
- Data quality
Use frameworks like CDP, TCFD, SFDR, or ISSB S2 to align your reporting with investor expectations.
Why Financed Emissions Matter
📊 They Dominate Carbon Footprints
For most large financial institutions, Scope 3 (Category 15) emissions account for 90–99% of their total emissions footprint.
📉 They Drive Decarbonisation
Targeting financed emissions means shifting capital away from high-emitting activities and toward sustainable solutions.
🛡️ They Mitigate Climate Risk
Understanding financed emissions helps investors model transition risks and identify stranded assets.
📢 They Enhance Transparency
Investors, regulators, and civil society increasingly expect emissions to be reported at the portfolio level, not just operationally.
Key Tools for Financed Emissions Accounting
- PCAF Emissions Calculation Guidance
- Sweep for Finance – Portfolio emissions and net zero planning
- IBM Environmental Intelligence – Data integration and emissions modelling
- Normative for Financial Institutions – Scope 3 emissions automation
- GHG Protocol Scope 3 Standard – Category 15 methodology
Challenges and Limitations
- Data availability: Many investees don’t report emissions, especially SMEs.
- Double-counting: Financed emissions may overlap with investee Scope 1/2/3 reports.
- Attribution complexity: In syndicated loans or multi-investor funds.
- Verification: Data quality scores vary, and regulatory scrutiny is increasing.
Best Practices
- Engage investees for higher-quality data
- Use standardised frameworks (e.g. PCAF, GHG Protocol, ISSB)
- Prioritise material sectors (oil & gas, steel, aviation)
- Track and disclose data quality improvements year-on-year
- Align with science-based targets for financial institutions (SBTi-FI)
Conclusion
For the financial sector, climate action isn’t just about internal operations, it’s about the impact of every pound, euro, or dollar financed.
With frameworks like PCAF, it’s now possible to account for financed emissions in a credible, standardised way, and use those insights to guide strategic decisions, reduce risk, and align with a 1.5°C future.
This isn’t just accounting. It’s climate leadership measured at the portfolio level.
Frequently Asked Questions (FAQ)
What are financed emissions?
Financed emissions are the greenhouse gas emissions linked to a financial institution’s lending or investment activities. They are reported under Scope 3, Category 15 of the GHG Protocol.
Why are financed emissions important?
Financed emissions often make up most of a financial institution’s carbon footprint. Measuring them helps organisations understand the climate impact of the businesses and projects they finance.
What is PCAF?
PCAF stands for the Partnership for Carbon Accounting Financials. It provides a standard method that banks and other financial institutions can use to calculate and report financed emissions.
How are financed emissions calculated?
The emissions of a borrower or investee are multiplied by an attribution factor. This factor represents the financial institution’s share of the financing.
What information is needed to calculate financed emissions?
Institutions can use emissions reported by borrowers or investees when this information is available. Where it is missing, modelled estimates or sector averages may be used instead.
What is a PCAF data quality score?
A PCAF data quality score shows how reliable the information used in a calculation is. A score of one represents the highest-quality data, while a score of five is based on broader estimates or assumptions.
What are the main challenges of financed emissions accounting?
A common challenge is the limited availability of emissions information, particularly from smaller businesses. Calculations can also become more complex where several lenders or investors finance the same organisation.
