The Imperative of Tackling Financed Emissions

Abstract: The financial sector has a critical role in addressing climate change by integrating climate risks into financing decisions, particularly by tackling “financed emissions”—the greenhouse gases tied to loans and investments. These emissions far exceed operational emissions, making their reduction essential for meaningful climate action. Measuring financed emissions is complex, requiring financial institutions to adopt standardized frameworks like the Partnership for Carbon Accounting Financials (PCAF) and improve data collection over time. However, the true impact lies in acting on these insights, shifting business models towards sustainability, and leveraging financial products like green bonds and sustainability-linked loans. With increasing regulatory and stakeholder pressure, financial institutions must go beyond compliance to drive long-term economic and environmental value. By embracing this shift with urgency and vision, they can help shape a future that balances financial growth with planetary well-being.

The financial industry plays a vital role in directing capital for the transition to a low-carbon future and to address increasingly severe economic disruptions caused by climate change. Banks, investment firms and other providers of capital must, as a strategic imperative, look to integrate climate risks into their financing decisions. 

The concept of “financed emissions” (i.e., the greenhouse gases from loans and investments made by financial institutions) is key in this transformation. Finance emissions dwarf operational emissions by staggering margins, sometimes as high as 700 times greater. While efforts like reducing energy usage in office buildings or switching to renewable power are necessary, their impact on financial institutions’ total emissions is a drop in the ocean compared to reducing emissions from financing activities. This disproportion highlights both the challenges and opportunities in measuring financed emissions. 

Take initials steps and continue improving

Measuring financed emissions requires financial institutions to attribute a share of their borrowers’ emissions. The Partnership for Carbon Accounting Financials (PCAF) Global GHG Accounting and Reporting Standard is a globally recognized method for measuring and disclosing financed emissions. Key steps in the calculation process are:

• Define suitable scope and boundaries – determine methodologies, asset classes, exposures and value chain activities to include in the calculation.
• Identify and collect relevant data – primary or secondary sources of emissions data and emissions factors. 
• Determine appropriate attribution factors based on asset classes being measured.
• Perform calculations in line with the PCAF standard.

The path to decision-useful financed emissions is very complex, with data quality and availability posing significant challenges. Finance emissions rely on extensive high-quality emissions data from borrowers, which is often difficult to obtain. While proxies and estimates are inevitable for addressing data gaps, financial institutions must strive to get better over time. The key is to start now. Focus on the most material parts of the portfolio and refine methodologies as data quality improves. Engaging with clients, leveraging third-party data, implementing IT solutions and enhancing data management practices are essential in this journey. 

Integrate results to create value and drive action

Calculation is just the beginning; the true value comes from acting on insights. With growing pressure from regulators, investors and other stakeholders, financial institutions are expected to provide greater transparency on their total emissions, calculation methodologies and strategies for transitioning portfolios towards net-zero pathways. Regulations such as OSFI’s B-15 climate risk guidance in Canada, California’s climate disclosure laws and the EU’s Corporate Sustainability Reporting Directive (CSRD) underscore the need to disclose this information. 

To effectively reduce financed emissions, a paradigm shift is required – moving beyond short-term profit maximization to embracing sustainable long-term value creation. Financial institutions need to embed climate considerations into business models, adopt green lending practices, and actively support clients implement decarbonization strategies. There also lies an opportunity to reorientate the vast capital they control. Innovative financial products, such as green bonds, sustainability-linked loans and transition finance instruments, are gaining traction as they provide a dual benefit of financial returns and positive environmental impacts. 

Financed emissions should not be seen as another reporting burden, but a key enabler for transformative action. Measuring and managing these emissions help build trust, unlock new business opportunities and enhance the management of climate transition risks. Financial institutions should go beyond compliance and seize this pivotal moment to be a catalyst for a future that prioritizes both planetary well-being and economic prosperity. This role must be embraced with urgency and vision, understanding that actions today lay the groundwork for the economies of tomorrow.

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