Five-Minute Brief: Rethinking Financed Emissions – Insights from PCAF’s 2024 Consultation

To navigate the transition to a low-carbon economy, financial institutions must have a clear, credible understanding of the climate-related risks and opportunities tied to their investment portfolio.

Tackling climate change requires addressing not only direct corporate emissions but also the vast emissions enabled through capital flows. As stewards of capital, financial institutions are uniquely positioned to influence the pace and scale of the global transition to net-zero. Measuring financed emissions helps monitor climate-related financial risks in lending and investment portfolios and drive financing toward low-carbon businesses, decarbonization of carbon-intensive industries and climate solutions.

In December 2024, the Partnership for Carbon Accounting Financials (PCAF) launched a public consultation on new methodologies, metrics and analysis for measuring and reporting greenhouse gas (GHG) emissions associated with financial activities. Quinn+Partners took part in the consultation, which will inform Version 3 of PCAF’s Global GHG Accounting and Reporting Standard, expected to be released in the Summer or Fall of 2025.

Here are the key insights we took from the consultation and why they matter for financial institutions.

Understanding Financed Emissions

Financed emissions refer to the GHG emissions associated with a financial institution’s lending and investment activities. These emissions are a company’s scope 1 and 2 emissions (and sometimes scope 3 emissions) attributed to a financial institution based on the proportion of their lending or investment in a client company. For example, if an investor invests and/or lends the equivalent of 20% of a company’s total debt and equity, they would attribute 20% of that company’s emissions as their financed emissions.

Measuring financed emissions is essential to:​

• Protect financial institutions by measuring and monitoring the transition risks associated with lending and investment portfolios
• Establish a foundation for climate scenario analysis, target-setting and transition planning
• Understand clients’ emissions profiles to support their decarbonization efforts with products, services and advice
• Monitor progress on decarbonization and progress toward net-zero
• Prepare for compliance with emerging mandatory disclosure rules

PCAF’s Role in Standardizing Financed Emissions Accounting

In 2020, PCAF launched the first global standard to measure and report financed emissions. This initiative provided financial institutions with a standardized framework to assess GHG emissions associated with their lending and investment activities. Grounded in the GHG Protocol‘s principles of completeness, consistency, relevance, accuracy and transparency, PCAF’s Global GHG Accounting and Reporting Standard provides specific guidance for the following asset classes: listed equity and corporate bonds, business loans and unlisted equity, project finance, commercial real estate, mortgages, motor vehicle loans and sovereign debt.

Developed by financial institutions for financial institutions, this standard has become a reference methodology for financed emissions reporting under emerging global and regional regulatory frameworks, including the Corporate Sustainability Reporting Directive (CSRD), the European Banking Authority’s Pillar 3 framework and IFRS S2 Climate-related Disclosures standard is currently undergoing consultation for amendments to revise the requirements and guidance for financed emissions.

PCAF’s Public Consultation

In December 2024, PCAF launched a consultation in response to the growing demand for:

• Improvements in the comparability and consistency of financed emissions reporting
• Aligned methodologies with climate initiatives such as the Science Based Targets Initiative for Financial Institutions (SBTi FI) and Net-Zero Banking Alliance (NZBA)
• Feedback from financial institutions who found the current methodology lacked specificity, resulting in inconsistent emissions data
• Better distinction between actual financed emissions reductions versus portfolio shifts due to market forces or data quality improvements

Here are our reflections on the evolving standards and what they mean for financial institutions:

• New Methods: PCAF is proposing updated methodologies for the use of proceeds, securitization, sub-sovereign debt, and financed scope 3 emissions to ensure broader alignment with investor strategies and capture emissions more accurately. As a result, expect a launch of the updated financed emissions standard including these new methods in Summer or Fall 2025.
• Attribution Analysis: Many factors drive year-over-year emissions changes, including market valuation, investment amounts, and company emission performance. PCAF’s Inventory Working Group analyzed changes in emissions performance of an investment portfolio of business loans and unlisted equity. This attribution analysis demonstrated a way to analyze year-over-year changes, but the working group decided not to formalize methods in the new standard. We think attribution analysis will continue to be an important tool for investors to use financed emissions data for performance tracking and decision support
• Financed Avoided Emissions: As financial institutions channel more capital into climate projects, interest is growing in quantifying emissions potentially avoided through these investments. PCAF explored how to account for avoided emissions linked to investments in climate solutions but stresses the importance of separating them from core inventory emissions to avoid misrepresenting and/or overstating performance
• Forward-Looking Metrics: Financial institutions aiming to align with climate targets like those set by the NZBA or SBTi should begin integrating forward-looking metrics into their transition plans. Forward-looking metrics, such as expected emissions reductions, can be used to supplement financed emission inventories. The consultation outlined principles to guide the use of these metrics, such as clarity in scope, data quality and scenario alignment

Taken together, these methodological changes, new metrics and additional analysis for financed emissions are reshaping how financial institutions measure, report and act on their climate plans. We will continue to review PCAF’s upcoming guidance and actively participate in consultations, when valuable.

How to Get Started

At Quinn+Partners, we have helped asset owners, banks and asset managers quantify financed emissions, assess climate-related risks and opportunities and develop practical methodologies to derive meaningful insight from complex data. If you are looking to understand your exposure to climate-related risk or strengthen your climate-related measurement and disclosure, please get in touch.