Financial institutions are increasingly required to assess and report the carbon footprint of their investment and loan portfolios. Financed emissions, which represent the greenhouse gas (GHG) emissions associated with lending and investment activities, are critical to this process. These emissions, classified under Scope 3, category 15 of the GHG Protocol, are pivotal in achieving sustainability goals and ensuring compliance with evolving regulations.
Our step-by-step guide provides banks and financial institutions with a structured approach to effectively measure, manage, and report financed emissions as part of their carbon accounting strategies.
1. Understand the importance of financed emissions
Financed emissions provide a clear picture of the indirect environmental impact of financial institutions' lending and investment activities. Measuring these emissions is essential for:
- Meeting regulatory requirements such as ISSB, CSRD, and Pillar 3 climate risk disclosures
- Benchmarking performance against emissions regulatory reduction pathways like the IEA NZE 2050
- Identifying climate-related risks and ensuring better preparation for financial impacts
Understanding the state of your institution’s current financed emissions is the foundation for effective carbon accounting.
2. Make sure the data is right
Accurate carbon accounting begins with reliable data. Financial institutions must gather emissions data from counterparties, often facing challenges such as inconsistent reporting practices and data quality issues. Your solution should recognize that data quality can improve over time and allow for multiple calculation methodologies, depending on the data quality level.
Employing a centralized platform to consolidate data from multiple sources, validate inputs, and maintain version control and an audit trail can significantly improve data accuracy and transparency.
3. Leverage PCAF industry standards for consistency
The Partnership for Carbon Accounting Financials (PCAF) provides a global standard for measuring and reporting financed emissions. Templates and methodologies aligned with PCAF and the greenhouse gas protocol ensure consistency and credibility. Financial institutions should also align their practices with other frameworks like ISSB, CSRD, and GRI to meet disclosure requirements.
4. Use carbon limits, budgets and pricing to assess new investments
Financed emissions data is more than being compliant with the current requirements. By analyzing emissions at the contract or asset level, institutions can gain actionable insights to inform lending and investment decisions. Such an approach enables financial institutions to support sustainable practices and align with net-zero commitments while balancing business objectives, resulting in a reduced carbon footprint.
5. Constantly benchmark your institution against targets, sector averages and pathways
Benchmarking financed emissions against internal or external pathways, such as the IEA NZE 2050, helps institutions measure progress toward sustainability goals. Setting carbon limits across portfolios and monitoring performance over time allows continuous improvement. Advanced tools can also compare portfolios against multiple pathways to accommodate varying targets.
6. Address key challenges proactively
Banks and financial institutions face several challenges to meet financed emissions requirements, including improving data quality, sector and regional variability and regulatory changes. A financial institution will need to balance investment choices versus carbon limits and budgets to meet regulation targets. Investing in technology solutions that provide end-to-end data collection, calculation, and reporting workflows can help overcome these obstacles. Leveraging APIs and advanced analytics ensures scalability and adaptability in a rapidly changing landscape.
7. Choose the right tools for carbon accounting
Selecting a comprehensive solution, such as OneSumX for ESG, can simplify and streamline the carbon accounting process. Features such as contract-level analysis, robust audit trails, and flexible benchmarking tools empower institutions to maintain transparency and compliance. They also enhance data accuracy, support performance monitoring, and enable seamless integration with reporting applications.
Mastering financed emissions requires a strategic approach that combines data accuracy, standardized methodologies, and advanced technology. By following these seven steps, financial institutions can take control of their carbon accounting, align with global sustainability goals, and lead the way in climate accountability.
