Financed Emissions

Financed emissions refer to the greenhouse gas (GHG) emissions that are indirectly associated with a financial institution's lending, investing, or underwriting activities. Unlike direct emissions, which stem from a company's own operations and energy use, financed emissions are generated by companies or projects that receive financial support from banks, investment firms, insurance companies, and other financial entities.

The concept of financed emissions has gained prominence as financial institutions face increasing pressure to address their role in contributing to climate change. Here's why this concept is important:

• Scope 3 Emissions: In the context of the Greenhouse Gas Protocol, financed emissions fall under Scope 3, which includes indirect emissions that a company is indirectly responsible for through its value chain and investment activities. Measuring and disclosing financed emissions is a key part of assessing a financial institution's overall environmental impact.

• Climate Risk: As the effects of climate change become more severe, financial institutions are under increased scrutiny to ensure their lending and investment activities align with sustainability goals. Understanding financed emissions helps institutions evaluate and mitigate climate risks in their portfolios.

• Sustainable Finance: With the rise of sustainable finance, banks and investors are committing to align their portfolios with the Paris Agreement's goals. This means considering the emissions generated by the companies and projects they finance. Tracking financed emissions allows financial institutions to set meaningful targets for reducing carbon footprints and guiding investments towards greener, more sustainable industries.

• Stakeholder Expectations: Investors, regulators, customers, and activists are increasingly demanding transparency around environmental impacts. Financial institutions that disclose and address their financed emissions demonstrate accountability and may improve their reputation and attract more eco-conscious investors and clients.

Several frameworks and initiatives, such as the Partnership for Carbon Accounting Financials (PCAF), have been established to help financial institutions measure and report their financed emissions in a standardized manner. This allows for benchmarking and greater comparability between institutions, ultimately contributing to a more sustainable financial sector.

Challenges to overcome

Accounting for financed emissions involves many complexities and challenges. As financial institutions strive to understand and manage their environmental impact, they encounter a variety of obstacles.

Data Quality and Availability: Financial institutions often struggle with obtaining accurate, comprehensive, and timely emissions data from their clients and investees. This issue is exacerbated by variations in data collection methods, disclosure standards, and reporting practices across different industries and geographies.

Standardization and Methodology: There is a lack of consistency in the methodologies used to calculate financed emissions. While frameworks like the Partnership for Carbon Accounting Financials (PCAF) provide guidance, not all financial institutions follow the same standards, leading to discrepancies in how emissions are calculated and reported.

Portfolio Diversification: Financial institutions typically have diverse portfolios, encompassing various industries and asset types. This diversification complicates efforts to standardize emissions accounting, as different sectors have unique emissions profiles and reporting practices.

At ClimateDelta, we are committed to partnering with stakeholders in the financial services industry to develop customized tools that support organizations throughout this journey.