The Partnership for Carbon Accounting Financials (PCAF) is a worldwide collaboration of financial institutions that work together to develop and implement a harmonized approach to assess and disclose financed emissions. ‘Financed emissions’ are the GHG emissions relating to loans, underwriting, investments, and other financial services and products.
In this article, we aim to answer the following questions:
- What is the Partnership for Carbon Accounting Financials (PCAF)?
- How does it impact financed emissions reporting?
- How can financial institutions participate?
What is the PCAF?
The PCAF was created in 2015 by Dutch financial institutions (FIs) to unify the initiatives that global FIs utilize to disclose the greenhouse gas (GHG) emissions of their financial activities. This industry-led initiative spread to North America in 2018 and went global in 2019.
In 2020, PCAF developed and published the ‘Global GHG Accounting and Reporting Standard for the Financial Industry’ comprising three ‘Parts’; one of which being the ‘Financed Emissions Standard’.
As of the writing of this article, there are 404 FIs that are members of PCAF, with expected continued expansion as more institutions act to mitigate their contributions to climate change. There are PCAF regional implementation teams in North America, Latin America, Europe, Africa, and Asia-Pacific.
What is PCAF’s Financed Emissions Standard?
The Financed Emissions Standard outlines a specific methodology to assist FIs in calculating and disclosing emissions generated by their investments and loans. The methodology provides an expansion of guidance on Scope 3 category 15 emissions outlined by the GHG Protocol Corporate Value Chain Standard. In addition, guidance is now included in questions within the Carbon Disclosure Project (CDP) reporting as of 2020, after an alignment of CDP with the Task Force on Climate-Related Financial Disclosures (TCFD).
PCAF’s Financed Emissions Standard defines seven asset classes, with detailed information about how to calculate emissions for each, to assist any FIs at the start of, or throughout, their GHG accounting journey. The asset classes construct the backbone of the methodology and provide a level of inherent flexibility, which is of the utmost importance in this industry due to recognized limitations in data availability and quality. The asset classes currently covered were determined by PCAF to be the most relevant and largest shares of portfolios globally. FIs can choose to begin with measurement or disclosure at a specific asset class level or for a sector within a certain asset class.
Which companies should use PCAF?
PCAF is open to any FI and therefore it has developed GHG accounting methodologies that apply to any FI. PCAF outlines four specific business goals of the Financed Emissions Standard:
- Creating transparency for stakeholders
- Managing climate-related transition risks
- Development of climate-friendly financial products
- Alignment of financial flows with the Paris Agreement
Any FI who wants to achieve related climate goals should follow the guidelines published by PCAF. The methodology provides expansion of guidance on Scope 3 category 15 emissions outlined by the GHG Protocol and is part of the CDP disclosure process. Therefore, any FI wanting to improve their CDP scores or enhance their data reporting for CDP should follow the standards created by PCAF.
The PCAF and CDP Collaboration
In late 2021, CDP and PCAF announced a partnership with the aim to combine their resources and networks to promote the PCAF Standard and to increase TCFD-aligned financed emissions reporting amongst FIs globally. Through this collaboration, CDP and PCAF aim to increase the number of FIs reporting financed emissions in line with PCAF Standard, and through CDP’s Financial Services Climate Change Questionnaire, to fill a critical data gap in climate reporting.
What needs to be reported?
Companies that join PCAF must commit to disclosing the GHG emissions associated with their portfolio of loans and investments within a period of three years, using the jointly developed accounting methodologies. The emission scopes required for reporting differs for each asset class, with Scope 1 emissions as mandatory for all asset classes, but the inclusion of Scope 2 and 3 varying for each. The multistep process standardized by PCAF is applied to each asset class.
The asset classes covered are:
- Listed equity and corporate bonds, including all on-balance sheet and those traded on a market.
- Business loans and unlisted equity, including all on-balance sheet and those not traded on a market and that are privately held.
- Project finance, including all on-balance sheet loans or equities to projects for specific purposes, for instance, wind or solar projects.
- Commercial real estate, including all on-balance sheet loans for the purchase and refinance of real estate for commercial uses.
- Mortgages, on-balance sheet loans for the purchase and refinance of residential property.
- Motor vehicle loans, on-balance sheet loans and lines of credit to businesses and consumers to finance one or several motor vehicles.
- Sovereign debt, including all bonds and loans (of all maturities) issued in domestic or foreign currencies.
How to join PCAF and the process
Once a FI has decided to work with PCAF, they submit a commitment letter and participate in activities with the local regional implementation team. Within the first three years, it is expected that the committed FI calculates, assesses, and discloses their financed emissions.
This assessment process begins with an evaluation of the composition of the company portfolio and which asset class(es) the institution decides to begin with. Conducting a hot spot analysis to screen and prioritize the parts of the portfolio that would be the focus for target setting such as asset classes and sectors. The data collection proceeds from that decision point and the overall guidance for each asset class provides the types of data required for calculation. For each asset class, there are three options for dataset types provided by the PCAF guidelines. The options are organized in an inherent data quality scale, with Option 1 as the highest data quality score and Option 3 with the lowest data quality.
Unsure of where to start with PCAF? Want to learn more about how Cority can help? Talk to our team of ESG data experts with over 15 years of experience across financial and corporate GHG emissions reporting to learn more about how our software and support can enable your journey.