Financial institutions are pledging to lower carbon footprints. Here’s what you need to know about financed emissions.

Financial institutions are facing pressure from regulators, civil society and clients for increased transparency about their role in climate change and other sustainability-related issues. An increasing number of financial institutions believe that they have to play an active role in the sustainability transition of the real economy, particularly when it comes to climate change1. Many have pledged to reduce the carbon emissions of their operations, and more importantly, to reduce the emissions associated with their financing and investment activities, known as their “financed emissions”. 

Quantifying financed emissions is a tangible first step toward building trust that financial institutions are integrating climate change into their core business of providing and allocating capital. Additionally, financed emissions could be used as a proxy for transition risk from climate change.

Disclosure of financed emissions is currently voluntary in the US, though already mandatory in the European Union; though US regulators are signaling expectations for enhanced climate risk disclosures.

1 Source: Glasgow Financial Alliance for Net Zero “more than 550 firms in the global financial sector have independently committed to the goal of net zero by 2050, in addition to setting interim targets for 2030 or earlier and reporting transparently on progress along the way.”

Why should you measure financed emissions?

  • Foster compliance with mandatory disclosure rules in some jurisdictions
  • Enhance transparency to investors through voluntary disclosures
  • Assist in target setting
  • As a key pillar of your risk management profile

What challenges should you be prepared to tackle?

  • Understanding the application of accounting standards - many of which are still evolving
  • Preparing for enhanced climate risk disclosures, which for some financial institutions will likely include an analysis of carbon exposures in their portfolios
  • Gathering emissions data - which is often incomplete or inconsistent in some asset classes; entirely missing in others
  • Addressing technological challenges in processing and computing financed emissions data
  • Properly folding in projections around rates of future global decarbonization to help develop portfolio selection and management strategies that align to company climate targets while balancing overall growth and risk objectives

Key updates to PCAF Financed Emissions Standard

In late 2022, PCAF released version 2.0 of its financed emissions standard, an update from the standard originally published in 2020. Significant updates in the new standard include:

  • Methodology for attribution of sovereign emissions to holders of sovereign debt instruments
  • Methodology and disclosure requirements for carbon emissions removals associated with investment activities
  • Methodology to improve comparability of attributed emissions between reporting dates by adjusting for the impact of market value fluctuations on emissions attribution.

The addition of a methodology for sovereign debt instruments represents a significant addition for carbon accounting: as of year-end 2021, global outstanding central government debt totaled more than $30 trillion, making this asset class one of the largest sources of institutional investment worldwide.

The GHG Protocol – the main accounting standard for GHG emissions reporting – considers financed emissions its own specific category of indirect, downstream emissions. However, it doesn’t provide robust guidance for how to measure these emissions. In addition, some financial asset types have no carbon accounting standard and others have a limited conceptual relationship to emissions (for example, student loans).

The Partnership for Carbon Accounting Financials (PCAF) stepped in with the goal of harmonizing the application of GHG standards by financial institutions. The GHG Protocol sets the foundation for measuring Scopes 1, 2 and 3 emissions, while PCAF offers a methodology to attribute GHG emissions of portfolio companies to financial institutions.

As of the time of this publication, PCAF’s attribution methodology covers the following asset classes:

  • Listed equity and corporate bonds
  • Business loans and unlisted equity
  • Project finance
  • Commercial real estate
  • Mortgages
  • Motor vehicle loans
  • Sovereign debt

In general, this methodology is based on the ratio of the investment in a company made by the financial institution divided by the enterprise value; including debt, equity, and cash of the company. It can be difficult to implement in practice as company ownership structure, market price fluctuations and data limitations may complicate the calculation.

Emissions data is often incomplete or inconsistent in some asset classes and may be entirely missing in others. Many firms are digging into their entire portfolios, asset by asset, in order to address this and build a full picture of their emissions.

Many companies have not disclosed the emissions data required to complete this picture. Because of these data challenges, you may want to start with developing baseline financed emissions estimates at the sector level using industry/sector-wide emissions factors. These factors can be provided by sources such as the International Energy Agency (IEA). In practice, such industry estimates may diverge materially from emissions actually reported by a company.

You should expect to encounter gaps in emissions data and  will want to consider how to handle data quality concerns. PCAF developed a data hierarchy and scorecard that can be used to understand the overall quality of company emissions data, track the data quality over time, and develop strategies for improvement. Improving the quality of financed emissions will be a continuous and iterative process for financial institutions.

Processing and computing financed emissions data can be formidable. Many firms are exploring how to progress from a largely manual spreadsheet-based exercise to tech-enabled automated financed emissions accounting that is integrated into existing IT infrastructure.

Several technology providers are developing solutions to calculate financed emissions, ranging from specialized players in sustainability-related data to large enterprise solutions providers. Accounting and data challenges may complicate the implementation of an IT solution, as flexibility in the design is required to deal with the changes. Systems also must be fit to consume and process different types of data. Emissions data is not a characteristic of the financial asset, but rather of the company underlying the investment. Traditional financial institution reporting systems are equipped to process characteristics of the actual asset (such as the value of a security or loan), but are not designed to also incorporate data from the underlying company to which security or loan relates.

Firms need to be forward-thinking when it comes to technology, as it is critical in moving toward investor-grade reporting of financed emissions that can be used for decision making by internal and external stakeholders.

Regulatory-mandated financed emission reporting is on the horizon. While not currently required, many financial institutions have voluntarily chosen to manage and/or set targets to reduce financed emissions.

The Science Based Targets Initiative for Financial Services (SBTi for FS) provides more technical guidance by applying sector-based decarbonization projections to the emissions baseline data. There are many options for sector decarbonization; extended research focuses on what levels of decarbonization need to happen in an industry to be consistent with climate science.It will be important to periodically update the baseline emissions inventory as more portfolio companies report emissions data and as industry estimates are refined.

Portfolio managers will need to manage and monitor metrics and progress against targets. It is imperative to get buy-in from investment teams at the start of a net zero project to help develop an execution framework  to meet long-term goals. The investment and credit professionals that are ultimately responsible for managing financed emissions should have the training and tools necessary to apply these concepts in their day-to-day activities. With a decarbonization target set, a trained and engaged investment team, and an achievement plan in place, financial institutions can readily embark on the road to net zero.

Addressing financed emissions challenges: Getting started

Calculating financed emissions is not a once-and-done exercise. As you progress towards your own organizational goals, you should expect to update baseline emissions estimates on a regular basis. Work closely with the companies your firm conducts business with—both lending to and investing in—to encourage transparency of its GHG emissions and activities promoting lower emissions in the real economy.


  • Understand existing and evolving accounting standards around measuring financed emissions.
  • Consider how you will address Scope 3, Category 15 emissions. These Insurance Associated Emissions are defined as GHG emissions in the real economy associated with specific (re)insurance policies.
  • Understand reporting architecture required, leveraging existing financial reporting architectures to the greatest degree possible.


  • Find ways to source the data, dependent upon investment type and relationship with the investee entity.
  • Assess reliability and availability of the data and consider how to handle data quality concerns.
  • Look to established data scorecards (e.g., PCAF) to understand emissions data quality, track data over time, and develop strategies for improvement.
  • Establish a sustainable, repeatable process and internal controls to collect and aggregate data and remediate data quality issues.
  • Maintain and store ESG data in accordance with regulatory requirements and company policies.


  • Assess reporting capabilities of your current technology stack.
  • Determine if you can leverage existing IT systems or need to phase in new technology.
  • Understand how to make technology systems ready to consume and process different types of financed emissions data.
  • Consider other key technology features including compatibility with company IT strategic vision; integration and automation; reporting and dashboards; and user experience.

Target Setting

  • Take steps to update your baseline emissions inventory on a periodic basis.
  • Manage and monitor metrics and progress against decarbonization targets.
  • Get buy-in from investment teams at the outset to help develop execution frameworks.
  • Look to implement necessary training and tools.

Contact us

Steve Bochanski

Principal, Climate Risk Modeling Leader, PwC US

Donald Reed

Managing Director, Finance Transformation, PwC US

Graham Hall

Director, Risk Modeling Services, PwC US

Guido Moret

Director, Consulting Solutions, PwC US

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