PCAF Explained

PCAF (Partnership for Carbon Accounting Financials) is a global initiative helping financial institutions measure and report greenhouse gas (GHG) emissions from their loans and investments. It provides a standardised framework aligned with the Greenhouse Gas Protocol, making it easier for organisations to track emissions, set reduction targets, and align with the Paris Agreement.

Key Highlights:

• Purpose: Helps financial institutions measure financed emissions, which are often 700+ times larger than operational emissions.
• Framework: Covers 6 asset types (e.g., mortgages, vehicle loans) and emerging categories like sovereign debt and insurance.
• Adoption: Over 550 institutions (as of Feb 2025) use PCAF to improve transparency and accountability.
• Benefits: Supports target setting, risk management, and compliance with climate regulations.
• Challenges: Data quality issues, resource demands, and reputational risks.

Quick Overview of PCAF Standards:

PCAF's GHG Reporting Standard

Standard Basics

The PCAF Global GHG Accounting and Reporting Standard offers financial institutions a clear way to measure and report greenhouse gas (GHG) emissions tied to their portfolios [5]. It builds on the GHG Protocol and aligns with the Corporate Value Chain (Scope 3) Accounting and Reporting Standard for Category 15 investment activities [4]. Financed emissions often dwarf operational emissions - by more than 700 times in some cases [1]. This highlights the massive influence financial institutions have on climate change through their investment choices. The standard is divided into three main parts, each addressing a specific area.

Main Elements

The standard is structured into three key sections:

Why Standards Matter

• Assessing climate-related risks in financial portfolios * Setting science-based targets to cut emissions * Offering a consistent framework for transparent reporting to stakeholders * Supporting climate strategies with accurate data

"In order for banks to reduce their impact on global warming, we need to be able to measure what that impact actually is. We recognise the Dutch founders for initiating the open-sourced methodology that PCAF provides as a major step forward." – Keith Mestrich, CEO Amalgamated Bank [4] PCAF also provides regional implementation teams to assist institutions with technical support and feedback, ensuring the standard is applied effectively [1].

Introduction to Partnership for Carbon Accounting Financials (PCAF)

PCAF Asset Types and Methods

PCAF builds on its framework by categorising assets and offering specific methods for measuring emissions tied to financing activities.

6 Core Asset Types

Each asset type requires a tailored approach to measure financed emissions effectively.

Emerging Asset Categories

PCAF is actively expanding its methodology to include additional financial activities. Current work is centered on three main areas:

• Sovereign Debt: Calculating emissions from government bonds and loans. * Capital Market Facilitation: Measuring emissions linked to underwriting and advisory roles. * Insurance-Related Activities: Assessing emissions from insurance underwriting. By March 2023, 373 organisations were using PCAF's methods [3]. These new categories highlight the demand for accurate and actionable measurement tools.

How to Apply PCAF Methods

Financial institutions can adopt PCAF methods by focusing on three main principles:

• Data Quality Assessment: Use reliable data sources, improve data quality over time, and aim for accuracy and completeness. * Attribution Calculation: Apply attribution factors specific to each asset class, ensure consistent measurement practices, and document the methods used. * Practical Application: For example, a $10M loan to a company with $100M in capital and annual emissions of 50,000 metric tons, using a 10% attribution factor, would result in 5,000 metric tons of financed emissions [7].

PCAF and Related Standards

Collaborating with GRI, CDP, and PRI

PCAF works closely with leading climate reporting frameworks to streamline the measurement and reporting of financed emissions. This unified approach reduces duplicate efforts and ensures consistency across various standards. Here's how PCAF integrates with key frameworks:

Aligning with the Paris Agreement

PCAF helps financial institutions align with the Paris Agreement by offering standardised methods for calculating emissions, enabling science-based target setting, and tracking progress toward net-zero goals by 2050. So far, over 280 financial institutions - representing financed assets exceeding $75 trillion - have adopted PCAF standards. This demonstrates its growing influence in driving climate action [8]. With these achievements as a foundation, PCAF is preparing for further advancements.

Future Plans for PCAF

PCAF is set to expand its framework and deepen its integration with international standards. Upcoming initiatives include:

• Aligning with International Sustainability Standards Board (ISSB) guidelines * Coordinating with the EU Taxonomy and Sustainable Finance Disclosure Regulation (SFDR) * Launching an improved data quality scoring system in collaboration with CDP

"PCAF continues to work towards establishing greater accountability in the GHG accounting space. As the Principal Founding Data Partner, S&P Global looks forward to supporting the initiative in these efforts." [9] Looking ahead, PCAF aims to enhance data quality, cover more asset classes, and strengthen regulatory alignment. These efforts will help financial institutions better understand and manage their climate impact.

PCAF Pros and Cons

Looking closely at PCAF shows both its benefits and the challenges that come with its adoption, shaping how institutions can use it effectively.

Benefits for Users

PCAF helps financial institutions measure, report, and manage financed emissions, keeping them aligned with climate goals.

Common Problems

Adopting PCAF isn't without its hurdles:

• Data Quality Issues: In many areas, emissions reporting is voluntary, leading to gaps or inconsistencies in data [11]. * Resource Demands: Setting up a financed emissions program requires significant investment in staff, training, and technology [11]. * Reputational Risks: Sharing emissions data and targets can invite public scrutiny [11].

"Measuring financed emissions cannot be done in a silo. Engaging cross-functional stakeholders from each of the three lines of defence, including early and meaningful engagement of the business teams, can help improve measurement accuracy and organisational cohesion toward target management and net zero." > > Forvis Mazars [11] Despite these challenges, some institutions have successfully leveraged PCAF.

Success Stories

Here are examples of institutions effectively using PCAF:

1. ABN AMRO Bank Their Sustainable Investment Tool for commercial real estate includes:
   • Energy label ratings for properties.
   • Tailored energy-saving recommendations.
   • Investment cost and payback period calculations.
   • Carbon reduction estimates [10].
2. BNG Bank By incorporating PCAF into its reporting cycle, BNG Bank provides detailed carbon footprint data for its credit portfolio, ensuring greater transparency [10].

Next Steps

Using the PCAF framework and standards outlined earlier, financial institutions can take practical steps to measure and disclose their financed emissions.

Main Points

PCAF offers a consistent method for tracking and reporting financed emissions, which often far exceed operational emissions. Accurate measurement is crucial [1]. Here are the main elements of PCAF implementation:

Getting Started

Implementing PCAF involves three straightforward steps:

1. Initial Assessment Reach out to PCAF at info@carbonaccountingfinancials.com to get detailed guidance on implementation [12].
2. Formal Commitment Submit a letter committing to measure and disclose GHG emissions within three years [12].
3. Implementation Process Join a regional team to receive technical support and tailor the framework to your local context [12].

"It's time for carbon accounting to become business as usual in financial institutions. PCAF provides an easy way to get started, regardless of the size or location of your organisation. We urge others to take the opportunity that PCAF presents, to share your learning from doing so and together we can play our part in the urgent effort to transition to a sustainable, low carbon future." > > – Jellie Banga, COO, Triodos Bank [12]

Tools and Software

To simplify the process, consider using specialised software. For example, Emerald Power's Portfolio Management software offers: