The Importance of Measuring Financed Emissions in Climate Battle

In an era where the planet faces unprecedented environmental challenges, it is imperative that we take bold and decisive actions to mitigate the impacts of climate change. Its consequences should no longer be seen as distant scenarios, as they are part of our daily reality. Rising global temperatures, extreme weather events, and the loss of biodiversity serve as stark reminders of the urgency to reduce carbon emissions.  

Carbon emissions are at the forefront of this global challenge, with industries, governments, and individuals seeking innovative solutions to mitigate their impact. The financial sector plays a critical role in this effort, as it provides the capital that businesses and governments need to invest in low-carbon technologies and infrastructure.

One way to measure the impact of the financial sector on climate change is to track financed emissions. Financed emissions are the greenhouse gas (GHG) emissions that are directly or indirectly caused by the activities of financial institutions. This includes emissions from the projects and assets that financial institutions finance, as well as emissions from the operations of the financial institutions themselves.

Measuring financed emissions is important for a number of reasons. First, it helps financial institutions to understand their climate impact. This information can then be used to identify and manage climate risks, set emissions reduction targets, and develop climate-friendly investment products.

Second, measuring financed emissions can help to improve transparency and accountability in the financial sector. By disclosing their financed emissions, financial institutions can demonstrate their commitment to climate action and allow their stakeholders to hold them accountable.

Third, measuring financed emissions can help to drive investment in low-carbon technologies and infrastructure. By understanding the climate impact of their investments, financial institutions can make more informed decisions about where to allocate their capital.

The Partnership for Carbon Accounting Financials (PCAF), founded in the Netherlands in 2015, is an industry-led initiative that is developing a global standard for measuring financed emissions, spearheaded by some of the world's leading banks and providing a platform for international collaboration. 

The PCAF Global GHG Accounting and Reporting Standard for the Financial Industry is the first global standard for financed emissions, and it is already being used by over 425 financial institutions around the world. Its primary goal is to provide a clear view of how financial institutions are contributing to carbon emissions and how they can proactively reduce their impact. Moreover, the standard is designed to be comprehensive, transparent, and consistent. It is also open source, which means that it is freely available for use by any financial institution. 

The PCAF standard is a valuable tool for financial institutions that are committed to climate action as it helps them to: 

Set science-based targets. PCAF's standard is aligned with the Paris Agreement's goal of limiting global warming to well below 2C, and it can be used by financial institutions to set science-based targets for their financed emissions.

Report their climate impact transparently. PCAF's standard requires financial institutions to disclose their financed emissions in a consistent and transparent way. This information can be used by investors, regulators, and other stakeholders to assess the climate performance of financial institutions.

Share best practice. As more financial institutions join the initiative, a ripple effect is created throughout the financial sector. The sharing of best practices and the adoption of emission-reducing strategies sets the example for others to apply. Smaller institutions, motivated by the actions of their larger peers, are also inspired to follow suit. This domino effect amplifies PCAF's reach.

In addition to these benefits, PCAF also:

• Drives the development of low-carbon finance. By providing a clear framework for measuring and reporting financed emissions, PCAF helps to create a market for low-carbon investments. This is important because it will help to accelerate the transition to a Net Zero economy.

• Promotes climate risk awareness. By helping financial institutions to understand their climate impact, PCAF helps to raise awareness of climate risk among investors and other stakeholders. This is relevant because climate risk is a major threat to the financial system.

• Constantly evolves to reflect the latest scientific knowledge and best practices. This ensures that financial institutions are always using the most up-to-date information to measure and report their emissions.

One of PCAF's most transformative aspects is its role in aligning finance with sustainability objectives. When financial institutions recognize the carbon-intensive nature of certain investments, they are incentivized to divest from high-emission industries and seek greener alternatives. This shift in capital allocation has the potential to reshape industries and encourage a rapid transition to a more sustainable global economy.

Through transparency, alignment with sustainability goals, and the power to influence investment decisions, PCAF seeks to trigger a profound shift in the financial sector. By fostering innovation, empowering stakeholders, and promoting global cooperation, PCAF paves the way for a more sustainable, resilient, and emissions-reduced future.

The work the Carbon Trust is doing, through the support to financial institutions that want to adopt PCAF, is helping to raise awareness of the importance of financed emissions and to drive the development of standardized measurement methods. This is essential if we are to achieve the ambitious emissions reduction targets that are needed to address climate change during this decade.