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Standard for measuring debt’s emissions emerges

01 December 2020 Keiron Greenhalgh

A global alliance of financial institutions in mid-November launched a standard for measuring emissions related to the funds they and their peers lend, hoping that it will increase transparency and allow apples to be measured against other apples.

The standard gives banks, asset owners and asset managers a tool for measuring and reporting greenhouse gas (GHG) emissions associated with loans and investments, according to the Partnership for Carbon Accounting Financials (PCAF), using either the operational or financial control approach, rather than an equity alternative.

Previously, financial institutions used different approaches and accounting methodologies to measure financed emissions and opted for various reporting metrics, and the PCAF aims to standardize the way financial institutions measure and disclose financed emissions and increase the number of financial institutions that commit to measuring and disclosing financed emissions, it said.

Its backers are collaborating with some of the key stakeholders in the sectors such as the Task Force on Climate-related Financial Disclosures, Carbon Disclosure Project (CDP), and European Commission Technical Expert Group on Sustainable Finance. PCAF says its standard offers a methodology that aids transparency when it comes to CDP disclosures.

The emissions measured are the seven gases included in national inventories under the United Nations Framework Convention on Climate Change (UNFCCC): carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, sulfur hexafluoride and nitrogen trifluoride. All are usually converted to and expressed as tons of carbon dioxide equivalents.

"For a financial institution, scope 3 category 15 emissions (i.e., financed emissions) are often the most significant part of its GHG emissions inventory and special consideration must be made regarding how these are measured," according to PCAF.

The approach being used makes a big difference, according to IHS Markit Senior Research Analyst Sara Giordana. "I think this is crucial because the choice of the approach (equity-based, operational or financial control) affects which activities' emissions in the company's chain are categorized as direct (scope 1 emissions) and indirect (scope 2 and scope 3 emissions), leading to significant implications in terms of standardization and data comparability," she said.

Specifically it builds on its predecessors by offering additional guidance for different asset classes, according to PCAF, which says the standard provides methods to measure financed emissions of six asset classes: listed equity and corporate bonds, business loans and unlisted equity, project finance, commercial real estate, mortgages and motor vehicle loans.

"Follow the money" is a key tenet for GHG accounting of financial assets, meaning that the money should be followed as far as possible to understand and account for the climate impact in the real economy, according to PCAF.

The standard has found support from both regulators and investors.

The Dutch central bank's chief banking supervisor and a member of the European Central Bank supervisory board, Frank Elderson, said: "As a supervisory authority, we want institutions to effectively identify and manage their climate risks. Measurement and disclosure on their carbon emissions is a key aspect of this," he said, adding: "The PCAF global accounting and reporting standard enables financial institutions worldwide to do this, and this is key, to do this, in the same manner. And this will ensure comparability of these reports, and therefore their usability by other markets, will increase."

From the investor side, Boston Common Asset Management Director of Shareowner Engagement Lauren Compere said: "While we looked at different carbon methodologies, we thought this standard and the PCAF approach was really the one that could be applied most comprehensively for investors and banks across lending and investing portfolios."

Meantime, Elderson's fellow Dutchman, Peter Blom, Triodos Bank CEO, noted: "Financial institutions recognize that measuring financed emissions is a catalyst for action, regardless of their size, business model or where they are in the world. GHG accounting provides crucial information to assess the resilience of portfolios to climate-related risks and identifies opportunities to finance the decarbonization that's so urgently needed for the transformation to a net-zero emissions society."

The standard has received the "Built on GHG Protocol Mark" from the GHG Protocol, the supplier of the world's most widely used greenhouse gas accounting standards, PCAF said.

PCAF will continue to work with financial institutions providing technical support to implement the standard globally, it said, adding that in 2021, the organization will develop additional asset class methods and publish case studies.

The standard can be found at https://carbonaccountingfinancials.com/standard.

Posted 01 December 2020 by Keiron Greenhalgh, Editor, Energy and Natural Resources Group, IHS Markit

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