How to streamline your financed emissions reporting.

Financial institutions face a massive challenge: reporting the greenhouse gas (GHG) emissions tied to their loans and investments - known as financed emissions. These emissions are, on average, 700 times larger than a financial institution's direct emissions. Yet, only 25% of organisations actively measure them, and nearly half avoid analyzing their portfolio's climate impact. Here's what you need to know:

• Key Challenges: Poor data quality, reliance on proxies (used by 80% of banks), and inconsistent reporting standards.

• Frameworks to Follow: GHG Protocol, PCAF Standard, and ISSB IFRS S2 guide measurement and reporting.

• Solutions: Use carbon accounting software for automated data collection, real-time tracking, and compliance with standards like PCAF.

• Action Steps:

  1. Improve data collection with direct sources (e.g., company reports, utility data).

  2. Adopt tools like Persefoni or Emerald Power to automate calculations and reporting.

  3. Follow PCAF’s asset-class-specific methodologies for precise emissions tracking.

Accurate financed emissions reporting is critical for meeting net-zero goals, complying with regulations, and supporting climate strategies. This guide breaks down how to overcome obstacles and implement effective systems.

Financed Emissions Basics and Requirements

Defining Financed Emissions

Financed emissions refer to the greenhouse gas (GHG) emissions tied to the investment and lending activities of financial institutions. These fall under Scope 3, Category 15 of the GHG Protocol and are far larger than the institution's direct emissions. On average, financed emissions are 700 times greater than emissions from direct operations ^[3]. They are linked to a range of financial products, such as loans, project financing, and mortgages.

The scale of these emissions is staggering. In 2020, the 18 largest U.S. banks and asset managers financed activities that resulted in 1.97 billion tons of CO₂ equivalent emissions ^[1].

Current Rules and Standards

A variety of regulatory frameworks guide how financed emissions are measured and reported:

The Partnership for Carbon Accounting Financials (PCAF) is a widely used standard, with over 100 banks and investors implementing its methodology ^[5]. The GHG Protocol describes PCAF as "the first global, harmonised, and transparent methodology for measuring the GHG emissions of loans and investments" ^[5]. However, despite these frameworks, financial institutions still face notable hurdles in reporting.

Main Reporting Obstacles

Even with established standards like the GHG Protocol and PCAF, financial institutions encounter several challenges:

• Data Quality Issues: Over 80% of banks depend on proxy data due to incomplete or unreliable emissions information from portfolio companies ^[3].

• Limited Visibility: Only 23% of bank executives report having a full understanding of their financed emissions ^[3].

• Sector and Market Variations: Differences across industries, market volatility, geographic factors, and changing counterparty strategies add complexity.

"Regulation will [be] needed to require companies to evaluate their scope 3 emissions to effect real change and approach carbon neutrality." – Deutsche Bank sustainability research team ^[3]

To overcome these challenges, financial institutions must build better data collection systems and adopt standardized calculation methods. The PCAF Standard provides detailed guidance for assessing emissions across asset classes. This helps institutions evaluate climate risks, set science-based targets, communicate with stakeholders, and shape climate strategies ^[5].

Accounting for financed emissions

Carbon Accounting Software Tools

Financial institutions often struggle with the complexities of financed emissions reporting. Carbon accounting software helps simplify this process by addressing common data quality challenges and ensuring compliance with established reporting standards.

Key Features to Look For

Choosing the right carbon accounting software is critical. Here are some essential features to consider:

Comparing Top Software Options

There are several platforms available for financed emissions reporting. Here's a quick comparison of leading tools:

What Makes Emerald Power Stand Out?

Emerald Power offers a comprehensive suite of tools designed to meet the needs of financial institutions. Here’s what sets it apart:

• Automated, Multi-Location Integration: Ensures real-time data accuracy across various locations.

• Real-Time Monitoring: Tracks emissions data as it arrives, helping identify gaps quickly.

• AI-Driven Automation: Reduces manual effort while improving data precision.

• Dedicated Support: Provides access to sustainability consultants for expert guidance.

The platform’s Pro plan includes advanced features like AI-driven automation and smart alerts. For institutions managing complex portfolios, the Enterprise solution offers custom API integrations and real-time data collection capabilities.

A study highlights that executives estimate up to 40% error rates in emissions calculations when using inadequate tools ^[6]. By leveraging the right software, institutions can build a strong foundation for accurate data collection and reporting - key factors we'll delve into further in the next section.

Data Collection Methods

To tackle the data quality issues mentioned earlier, accurate financed emissions reporting requires strong, automated systems for gathering and validating data from portfolio companies. Effective data collection is the foundation for reliable and compliant emissions tracking.

Setting Up Data Collection

A great example of efficient data collection comes from TD Ameritrade. In 2021, the company developed a heat map to evaluate physical and transition risks related to energy and power sector emissions ^[1].

Here are some key data sources and methods:

Focus on gathering data directly whenever possible. Using proxies, like industry averages, should only be a temporary solution. If direct data isn't available, set a clear timeline to transition to direct collection methods.

Data Quality Control

A study found that 38.9% of emissions reports from oil and gas companies between 2010 and 2019 lacked consistency ^[9]. This underscores the importance of thorough verification processes.

To improve data accuracy, consider the following:

• Use AI-powered tools to validate data against industry standards.

• Cross-check data with utility feeds and independent third-party reports.

• Apply PCAF quality scores to rate data reliability (1 being the highest) ^[10].

"Climate change is a giant risk and opportunity facing most businesses globally, and private markets are really well positioned to address this challenge, but the key is getting the data we need to be able to assemble a carbon footprint."
– Suzanne Tavill, Partner and Head of Responsible Investment, StepStone Group ^[7][8]

Optical Character Recognition (OCR) can be a helpful tool for extracting data from unstructured sources, such as utility bills. Additionally, maintaining open communication with portfolio companies is crucial for ongoing improvements in data quality and reporting processes.

Meeting GHG Protocol Standards

Financial institutions need to follow frameworks like the PCAF Standard, which aligns with the GHG Protocol's Corporate Value Chain guidelines ^[5].

GHG Protocol Rules

Financed emissions are classified under Scope 3, Category 15 of the GHG Protocol ^[4]. The PCAF Standard outlines methods for calculating and reporting greenhouse gas (GHG) emissions across seven asset categories ^[11].

Scope 3 Calculation Steps

To calculate financed emissions accurately, follow these steps:

• Identify the relevant asset categories based on PCAF's seven classifications.

• Collect verified emissions data from companies in your portfolio.

• Apply ownership percentages to allocate investee emissions appropriately.

"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 organizational cohesion toward target management and net zero." - Forvis Mazars ^[2]

Using digital tools can simplify these processes, ensuring accurate and compliant results.

Using Software for Compliance

Carbon accounting platforms like Emerald Power can automate data collection, apply GHG-compliant calculations, track emissions in real time, and create reports that meet required standards.

By 2022, PCAF aimed to have over 250 institutions worldwide adopting their Standard ^[5], highlighting the push for consistent reporting. To stay compliant, organisations should develop a long-term implementation plan. This plan should include regular updates to calculation methods and ongoing collaboration with portfolio companies ^[2].

For cases where direct emissions data isn't available, industry averages can serve as a temporary workaround while improving data collection systems ^[4].

Improving Report Quality and Speed

Tackling issues with data quality and compliance can be challenging, but refining your reporting process doesn't have to be. By improving team workflows and incorporating automation, you can make report generation faster and more reliable.

Team Workflow Setup

Use a centralized platform to bring all your data together while maintaining audit trails for accountability ^[12].

• Build cross-functional teams that include members from risk, finance, and other relevant departments to improve measurement accuracy.

• Use tools like Dataiku dashboards to validate data systematically ^[13].

• Create clear communication channels for updates on regulations, data progress, and deadlines.

A strong team workflow creates a solid base for integrating automation into your reporting process.

Automated Report Creation

Automation tools for carbon accounting can minimise manual tasks and reduce errors. Look for platforms that offer features like real-time tracking, image recognition for extracting invoice data, system integration, and customisable templates ^[14].

For example, Emerald Power's Pro plan leverages AI-powered automation and smart alerts to simplify report generation.

Regular Process Updates

Make it a habit to review and update your processes. This includes improving your data infrastructure, refining estimation methods, updating conversion factors, and ensuring compliance with regulations. Regularly evaluate emissions reduction targets, risks, and materiality to stay on track ^[15][16][1].

Conclusion

Financed emissions are a massive concern - 700 times larger than direct emissions ^[18]. Yet, only 25% of institutions measure them, while 49% skip portfolio climate analysis entirely ^[1]. In 2020 alone, the 18 largest U.S. banks were responsible for financing 1.97 billion tons of CO₂-eq ^[1]. This highlights the urgent need for better reporting practices.

Accurate reporting requires reliable tools and consistent methods. Platforms like Emerald Power simplify the process by automating Scope 1, 2, and 3 data collection while ensuring compliance with the GHG Protocol ^[17]. This not only reduces manual effort but also improves data accuracy. Aligning with the GHG Protocol is critical since it supports frameworks such as PCAF and TCFD ^[18].

By addressing data silos and quality issues with automation, financial institutions can:

• Work more effectively with high-emission portfolio companies

• Develop focused strategies for emissions reduction

• Make smarter decisions about capital allocation

• Track progress using real-time data

With mandatory reporting requirements increasing ^[16], having efficient systems in place isn’t just about saving time - it’s about preparing organisations for the future and supporting global climate efforts.