Financial leaders join fights against climate change

PCAF Standard: Towards Green Financing

In this 3-part series, we show how the finance sector moves from ambition to action on greenhouse gas emissions. Get immersed, get inspired.

Set up in 2015, the Partnership for Carbon Accounting Financials (PCAF) counts over 300 banks, insurance companies, investors and other financial institutions worldwide. They all commit to PCAF  to assess and disclose the greenhouse gas emissions they finance through loans and investments – aka financed emissions. And you can too.

Aligning with Paris Climate Agreement

In 2015, a group of 14 Dutch financial institutions created PCAF, under the leadership of ASN Bank. Concerned by the scale of climate change, they decided the time had come to step up. After all, investors and banks, which represent most of the available capital globally, were carelessly financing our fossil fuel-dependent economy. Turning a blind eye to this overwhelming responsibility was no longer justifiable. We all gambled on fossil fuels for decades and we lost. No more. The industry-driven initiative expanded to North America in 2018 and went global in 2019.

Only by rethinking our financial ecosystem can we transition towards a low-carbon society.

PCAF’s main objective is enabling financial institutions to align their portfolio with the Paris Climate Agreement, which wants to limit global warming to 1.5°C above pre-industrial levels. A first step in this direction is measuring and disclosing greenhouse gas (GHG) emissions associated with lending and investment activities.

A standard for transparent GHG accounting and reporting

Responding to the industry’s demand for a global, standardized approach, PCAF developed the Global GHG Accounting and Reporting Standard for the Financial Industry. It provides detailed methodological guidance to measure and disclose GHG emissions associated with six asset classes:

#1 Listed equity and corporate bonds (e.g. common stock)

#2 Business loans and unlisted equity (e.g. credit used for capital expenditures)

#3 Project finance (e.g. loans to build a bridge)

#4 Commercial real estate (e.g. loans to purchase retail space)

#5 Mortgages (e.g. loans for a new house)

#6 Motor vehicle loans (e.g. loans to buy a new company car)

In the future, PCAF may add more asset classes. But this foundation already allows financial institutions to thoroughly assess their portfolio as well as perform scenario analysis, set targets, inform actions and disclose progress. This then translates into 6 benefits of disclosing your financed emissions, which we share in this blog post.

Good to know: the standard not only enables carbon accounting for generated emissions, but also for avoided emissions (e.g. through investments in energy-efficient projects) and removed emissions (e.g. through investments in reforestation projects).

No data, no excuse

Although the concept of financed emissions is straightforward, calculating them is much less so. It requires data from a wide range of other businesses and organizations, many of which may not be actively measuring their carbon footprint.

Data blind spots, however, are no longer a dealbreaker. While PCAF recognizes that collecting quality data is a huge challenge, it should not be used as an excuse for inertia. The partnership claims that, in many cases, using estimated or proxy data to fill in the blanks works just as well to identify carbon-intensive hotspots in lending and investment portfolios. Moreover, PCAF’s guidance includes a data-quality scoring matrix. This encourages improvements to data quality in the medium and long term.

Financing a just transition

For financial institutions, emissions from loans and investments are often the most significant part of their GHG emissions. Only by measuring these scope 3 emissions can they materialise their carbon footprint and redirect funds. With the capacity to tap into vast volumes of mainstream private finance, financial institutions play a significant role on the world’s path to climate neutrality. And we’re glad to see that things are taking a turn for the better.

Wondering how disclosing your financed emissions benefits you?

Based on some real-life examples from renowned financial institutions, we’ve distinguished 6 clear benefits. Read more.

Already convinced and ready to start tracking your own financed emissions?

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