Cority recently hosted an insightful webinar, covering financed emissions and the role financial institutions play in the global transition to a low-carbon economy. Our experts, Karina Alventosa and Laura Knecht from Cority’s Sustainability Cloud, shared their insights on the complexities of calculating financed emissions, aligning with climate targets, and leveraging ESG software to streamline emissions tracking and goal setting. Here are some of the key takeaways from the discussion.
What are Financed Emissions?
Financed emissions refer to the greenhouse gas (GHG) emissions associated with a financial institution’s lending, investment, and underwriting activities. Unlike operational emissions, which stem from a company’s direct activities, financed emissions account for the indirect emissions that arise from the projects, businesses, and assets that financial institutions support. Banks, asset managers, and insurers face increasing pressure to align their activities with global climate goals. As a result, accurately measuring and managing financed emissions has become essential for mitigating climate-related risks and ensuring regulatory compliance.
Approaches to Measuring Financed Emissions
There are two main methodologies for measuring financed emissions. The GHG Protocol was the first widely recognized standard that financial institutions used to estimate their emissions footprint. However, the framework lacked the granularity and specificity needed to account for the complexity of financial portfolios. To address these gaps, the Partnership for Carbon Accounting Financials (PCAF) was developed, providing a more comprehensive and standardized approach tailored specifically for the financial sector.
The Role of PCAF in Measuring Financed Emissions
PCAF offers a global standard for measuring and disclosing financed emissions, helping financial institutions improve transparency and consistency in their carbon accounting. Some key aspects of the PCAF methodology include:
- Asset Classes Covered: PCAF outlines methodologies for seven asset classes. This includes listed equity, corporate bonds, business loans, and commercial real estate.
- Attribution Factor: Financed emissions are calculated by multiplying the emissions of investee companies by an attribution factor. This represents the share of investment relative to the company’s total equity and debt.
- Data Quality Scoring: PCAF also includes a methodology for assessing the quality of emissions data. This encourages institutions to improve data accuracy over time.
By following PCAF’s methodology, financial institutions can align their climate strategies with international targets such as the Paris Agreement and drive meaningful decarbonization efforts.
Setting Climate Targets for Financial Institutions
Once financed emissions are measured, the next step is setting climate targets that align with international frameworks.
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Near-Term Targets
Near-term targets focus on achieving significant emissions reductions within 5 to 10 years. This is aligned with the 1.5°C trajectory of the Paris Agreement. These targets help financial institutions address immediate climate-related risks, such as carbon taxes and evolving regulatory requirements.
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Net-Zero Targets
Net-zero targets focus on long-term decarbonization. While the Science-Based Targets initiative (SBTi) is still finalizing net-zero standards, financial institutions can start preparing for future alignment by exploring current methodologies.
Navigating the Challenges of Target Setting
As financial institutions work to set ambitious climate goals, they face several key challenges. Managing diverse data sources and ensuring integration across systems can be complex. Accurate data collection and reporting are critical to effective emissions tracking. At the same time, aligning internal metrics with formal regulatory requirements for emissions reductions and climate targets is crucial for maintaining accountability.
Leveraging ESG Software for Success
As institutions tackle these challenges, the right ESG software solution can streamline the process of measuring and managing financed emissions. Key benefits that you should look for are:
- Centralized Data Collection: The right software should be able to allow companies to efficiently manage data from multiple sources.
- Simplified Reporting: Companies should be able to generate actionable insights to track emissions and set climate targets through the right solution.
- Tools for Progress Monitoring: Technology should be leveraged so companies can align investments with their climate goals.
Moving Forward with Decarbonization
Financial institutions must act now to improve their emissions tracking and align investments with climate goals. With the right methodologies, such as PCAF, and robust software tools, institutions can successfully navigate the complexities of decarbonization and contribute to a sustainable future. Contact Cority today to discover how our solutions can help streamline your emissions tracking and target-setting process.
