A Look at the Inner Workings of Financed Emissions

Financed emissions (sometimes called portfolio emissions) are the emissions that can be attributed to an investor (generally an asset manager or bank) as a result of their investments. In other words, if you invest in a steel company (either by purchasing equity, a bond, or through a corporate loan), some of the steel company’s underlying emissions are attributed to you, in an amount directly proportional to how much capital you invested in that company. The same concept can be applied to other asset classes, for example investments in real estate, where a portion of the underlying building’s emissions are attributed to the investor based on the amount of capital provided to purchase or build the building. Similarly, with sovereign debt a portion of the country’s emissions can be attributed to investors relative to the amount of capital lent to the government.

Financed emissions builds on the GHG Protocol Corporate Standard , the most widely-used standard for corporate greenhouse gas emissions. Under this standard, GHG emission are divided into three ‘scopes,’ as follows:

• Scope 1 are the emissions produced directly by the assets the company owns or controls. For example, the emissions from heating the corporate office.
• Scope 2 are the emissions produced indirectly by energy use. Generally, this is the emissions from the use of electricity. For example, you don’t own the power plant down the street, so those emissions are not in your scope 1, but you do use electricity, so a portion of those emissions are yours, according to the amount of electricity you use.
• Scope 3 emissions are everything else, up and down your supply chain and in the lifecycle of the products or services provided, and in the activities of your stakeholders. For example, the emissions that result from the energy consumed in the use of your product, or your employees commuting to work are scope 3.

A company’s emissions (also called its carbon footprint or GHG inventory) are the sum of its scope 1 and scope 2 emissions, although companies often also report their scope 3 emissions separately.

For financial organizations, financed emissions are a special category of Scope 3, equal to the sum of the scope 1 and 2 emissions that is attributable to that financing across all the companies financed (via debt or equity).

Guidance for the calculation of financed emissions is available through the Partnership for Carbon Accounting Financials , or PCAF.

Generally, financed emissions are calculated according to the following formula:

Figure 1 – General approach to calculation of financed emissions, according to the PCAF 2nd edition (pg. 40).

Outstanding amount in the above refers to the amount of debt/equity outstanding from the investment, total equity plus debt is a measure of company valuation, while the emissions are the scope 1 and 2 emissions of the investee company. The calculations are slightly different for different asset classes. For example, the attribution factor denominator for public companies is enterprise value plus cash (EVIC), for private companies it is the book value of equity plus debt. and for real estate it is the value of the building at loan origination.

The total emissions calculated in the above formula is in tons of CO2e for the portfolio of holdings, and represents the scope 1 and 2 emissions that the organization is effectively financing.

There are other related measures that can be used to compare emissions over time and across portfolios. One of those is financed emissions intensity, which is the financed emissions divided by total portfolio value, and is expressed in tCO2e per million $ (or Euro) of investment/financing. Another widely used metric is the weighted average carbon intensity (WACI). WACI is the sum of the weight times the scope 1 and 2 emissions of each company divided by the revenue of that company, with the weight being the value of the investment divided by total portfolio value. Here the denominator for the emissions intensity is company revenue instead of company value, and WACI is expressed in tCO2e per million $ of revenue.