From Assets to Emissions: Decoding the Financial Services Emissions Profile

The transition towards sustainability is vital for companies across all sectors, including financial services. While these firms may not directly generate substantial emissions, their environmental impact is intricately linked with their investment portfolios and associated activities. As we move from a voluntary reporting framework to a regulated one, the importance of treating climate data as financial data becomes increasingly evident. It all starts with understanding what makes up your carbon footprint. This blog post explores the concept of emissions profiles, why they matter, and their relevance to financial services, and provides key takeaways for organizations in this sector.

What is an Emissions Profile? Why Does it Matter?

An emissions profile serves as an initial roadmap for understanding the various business activities contributing to your carbon footprint, offering insights into the financial and operational data required for calculating overall emissions.

Understanding your emissions profile is critical for both asset owners (LPs) and asset managers (GPs). It often plays a pivotal role in risk assessment and is frequently one of the first steps organizations take when measuring their carbon footprint. These insights inform decision-making, enabling organizations to prioritize actions that lead to net zero emissions and portfolio decarbonization.

However, the significance of emission profiles goes beyond mere regulatory compliance. They serve as essential benchmarking tools, allowing for peer comparisons, advancing climate objectives, and facilitating the identification of tailored best practices for specific business operations. Additionally, understanding emissions profiles aids in strategic planning, alignment with industry standards, and meeting customer-specific climate needs through dedicated solutions.

Understanding the Emissions Profile in Financial Services

A financial services organization's emissions profile typically encompasses several categories, reflecting both its direct and indirect environmental impacts. The Greenhouse Gas Protocol (GHGP), established in 1998, is regarded as the gold standard for corporations, including financial services firms, to measure carbon emissions and categorize them into three groups. 

• Scope 1 emissions: These are direct emissions from sources that are owned or controlled by the organization. This category includes emissions from activities such as combustion of fossil fuels in company-owned vehicles, boilers, or other equipment.
• Scope 2 emissions: These are indirect emissions from the generation of purchased electricity, heating, and cooling consumed by the organization. Scope 2 emissions arise from activities that are not directly owned or controlled by the organization but are related to its energy consumption.

The most intricate and potentially impactful category of emissions within financial services pertains to scope 3, which are indirect emissions from activities that occur outside the organization's own operations but are related to the organization's activities. Scope 3 emissions include emissions from the entire value chain, such as those from the supply chain, transportation of goods, employee commuting, business travel, and waste disposal. For instance, if the organization invests in or lends to companies in fossil fuel-intensive sectors, the associated emissions will contribute to their financed emissions profile.

The image below illustrates these emissions with the following color codes:

• Yellow: Material Emissions Source
• Gray: Possibly Material Emissions Source
• White: Likely Not Material Emissions Source

Where financial services often go wrong, however, is by disproportionately focusing on measuring and addressing their scope 1 and 2 emissions. In reality, the bulk of emissions typically fall under scope 3 Category 15 investments, or financed emissions. According to CDP, emissions from investments accounted for over 700 times the direct emissions for financial firms in 2020.

Measuring Financed Emissions (Category 15) 

Financed emissions refer to the greenhouse gas (GHG) emissions associated with the financial activities of an organization, such as lending and investing. These emissions are tied to the capital that financial institutions allocate to different sectors, such as energy, transportation, or services. By understanding and managing financed emissions, financial institutions can align their portfolios with global climate goals and lessen their environmental impact.

There are various ways to categorize financed emissions, including:

• Portfolio Level: This refers to the emissions associated with the entire investment portfolio of a financial institution. It includes all the emissions from various investments, loans, or other financial products offered by the institution. Calculating emissions at the portfolio level provides an overview of the institution's overall climate impact.
• Sector Level: This focuses on emissions related to specific sectors or industries where significant investments are made. Analyzing emissions at the sector level allows financial institutions to identify high-impact areas and work toward emissions reduction in those sectors.

When it comes to measuring financed emissions, the Partnership for Carbon Accounting Financials (PCAF) stands as a guiding standard, offering standardized guidance to calculate financed emissions. Their methodology aligns with the GHG Protocol's Corporate Value Chain (Scope 3) Accounting and Reporting Standard, particularly Category 15: Investments. It is also endorsed by the Task Force on Climate-related Financial Disclosures (TCFD). Most importantly, PCAF provides detailed calculation methodologies for various asset classes of financed emissions, including:

• Listed Equity and Corporate Bonds: Emissions linked to publicly traded shares and debt securities.
• Business Loans and Unlisted Equity: Emissions tied to private loans and ownership stakes in businesses.
• Project Finance: Emissions associated with the financing of long-term infrastructure and industrial projects.
• Commercial Real Estate: Emissions tied to properties used exclusively for business purposes.
• Mortgages: Emissions related to residential property loans.
• Motor Vehicle Loans: Emissions associated with financing for personal or commercial vehicles.

As a contributor to the International Sustainability Standards Board (ISSB), PCAF's strategy is positioned to influence the development of international and domestic climate and sustainability accounting standards.

In broad terms, calculating financed emissions involves determining the portion of an entity's enterprise, project, or asset value sustained by the services of a financial institution. This proportion is then applied to the GHG emissions of that specific entity, project, or asset. Whenever possible, it is best to rely on actual data. However, when this is not an option (as discussed under data quality considerations), one may resort to activity or sector-level data and emissions proxy factors for accurate estimations.

Calculating Operational Footprint for Financial Services

For financial services, calculating the operational footprint is often straightforward. It typically involves:

• Scope 1: Calculating emissions from owned vehicles (if applicable) and natural gas combustion for heating.
• Scope 2: Determining emissions from purchased electricity, often accessible through utility bills indicating MWh consumption.
• Scope 3 (excluding Category 15): Typically, relevant calculations involve emissions from flights related to company business travel. Upstream Purchased Goods and Services might also be relevant, but the footprint outside of investments is likely relatively small.
• Scope 3, Category 15: Finally, a critical aspect is assessing financed emissions, or emissions related to Category 15.

The most reliable approach to calculate these emissions is by using carbon accounting software, eliminating manual errors, enabling tracking of work, and facilitating auditable and verifiable calculations. Software like Persefoni’s is particularly helpful for financial services, as they offer modules for both operational and financed emissions, tailored to this specific use case. Additionally, at Persefoni, GHGP and PCAF standards are integrated into the calculations to facilitate adherence to these standards.

Key Takeaways for Businesses

As evidenced by the emissions profile, climate risk is a material concern for financial institutions. These institutions need to comprehend their exposure to climate risk and take the proper measures to mitigate it. 

These three steps are recommended:

• Embrace Transparency: Asset managers are increasingly receiving requests to disclose the emissions associated with investments in various companies. Investors are also demanding that financial institutions reveal their emissions and take steps to reduce them. Financial institutions that fail to meet these demands risk losing investors. Embracing transparency fosters trust and alignment with stakeholders' values.
• Adopt Best Practices for Measuring Emissions: Begin by measuring scope 1, 2, and relevant scope 3 emissions. Various tools and methodologies can be used to measure emissions from investments, but PCAF is widely regarded as the gold standard for financial services organizations.
• Prioritize Financed Emissions: The majority of emissions from the financial services industry stem from investments, specifically Category 15 of scope 3 emissions. This presents a significant opportunity for financial institutions to reduce emissions by decarbonizing their portfolios.

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The emissions profile serves as a crucial tool for organizations looking to better understand what emissions sources they need to track to accurately measure their carbon footprint in line with industry best practices. As we shift towards more regulated disclosures, the need to have robust systems in place to demonstrate your work and data integrity is key. Persefoni, with its climate solutions experts, collaborates closely with each organization to measure and report carbon footprints tailored to specific business operations, reporting requirements, and climate objectives. Through our platform, we help companies maintain control over GHG emissions data, ensuring its integrity and comprehensive record-keeping.