by Lily Branstrom
Environmental Risk Analyst

Welcome back to our blog series on Banks, Borrowers, and Climate Change. Today we will be returning to the PCAF Global Accounting and Reporting Standard by taking a closer look at Part B: Facilitated Emissions and what it means for financial institutions and reporting requirements.

Part B of the PCAF standard focuses on “facilitated emissions,” which are emissions associated with services provided by financial institutions in capital market transactions. These emissions are distinct from financed emissions, which are based on on-balance sheet exposure (e.g., loans and investments). The temporary nature of facilitated emissions means that financial institutions do not usually take on financial (credit) risk in facilitated transactions.

The development of the Facilitated Emissions Standard has been based on the GHG Protocol standards for corporate reporting, providing additional detailed guidance on how financial institutions can report on facilitated emissions under Scope 3 category 15. It is important to note that while the standard provides guidance on accounting for facilitated emissions, it does not cover how targets should be set for reducing these emissions. This is where a third party could provide expertise on target-setting and troubleshooting.

The calculation and reporting of facilitated emissions are crucial for understanding the impact of financial institutions on directing capital towards activities that support the transition to a net-zero economy by 2050. The PCAF Facilitated Emissions Standard provides a transparent and standardized methodology for measuring and reporting these emissions.

To calculate facilitated emissions, financial institutions can use the PCAF standard’s emission factors, which are based on industry-specific data and best practices. These factors allow institutions to estimate the emissions associated with their loans and investments, providing a comprehensive view of their carbon footprint. Financial institutions are expected to report facilitated emissions as part of their overall greenhouse gas emissions inventory. PCAF provides a framework for calculating and reporting facilitated emissions, which includes the following steps:

  1. Identifying facilitated emissions: Financial institutions need to identify the emissions associated with the projects and activities they finance. This includes both direct emissions from the operation of funded projects and indirect emissions along the value chain.
  2. Calculating emissions: Once the emissions are identified, financial institutions can use emission factors provided by PCAF or other sources to calculate the total greenhouse gas emissions associated with their financing activities.
  3. Reporting: Financial institutions are expected to report their facilitated emissions, along with their methodology for calculating them, in their annual reports or other disclosure mechanisms. This allows stakeholders to understand the institution’s impact on the environment and track progress over time.
  4. Setting targets: PCAF encourages financial institutions to set targets for reducing their facilitated emissions and to report on their progress annually. This helps to ensure transparency and accountability in the transition to a low-carbon economy.

The standard also outlines additional requirements for accounting and reporting greenhouse gas emissions from capital market activities and their facilitators. Financial institutions are required to account for all emissions associated with capital market instruments and justify any exclusions. These emissions should be reported separately under Scope 3 Category 15 as defined by the GHG Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard.

One key aspect of reporting these emissions is that facilitated emissions should be reported separately from financed emissions. This separation is crucial because facilitated emissions and financed emissions are not directly comparable. Therefore, they must be reported separately under the GHG Protocol scope 3 category 15 (Investments). Financial institutions are required to adhere to specific principles when reporting their emissions, including relevance, completeness, consistency, transparency, and accuracy. Reporting should align with the institution’s business goals, such as identifying and assessing climate-related transition risks and opportunities. Reports should be disclosed at least annually and at a fixed point in time to provide a representative view of emissions for that reporting year.

In addition to reporting facilitated and financed emissions, financial institutions should account for seven greenhouse gases under the Kyoto Protocol, converted to carbon dioxide equivalents (CO2e). These emissions should be reported in metric tons of CO2e or another appropriate metric conversion. Financial institutions should also separately account for and report facilitated biogenic and non-biogenic CO2 emissions, as well as biogenic and non-biogenic CO2 removals. Biogenic CO2 emissions are those that result from the combustion or decomposition of biologically based materials, such as plants or animals. Non-biogenic CO2 emissions are those that result from the combustion of fossil fuels or other non-biological sources.

Financial institutions may also report avoided emissions and emission removals, but they should apply the same accounting principles as for generated facilitated emissions. Reporting should be without considering carbon credits generated for these same emissions, and any credits generated by clients should be reported separately.

Overall, Part B of the PCAF standard provides a valuable framework for financial institutions to assess and reduce their carbon emissions. By tracking facilitated emissions, these institutions can play a key role in driving the transition to a more accountable future.

For the latest and most accurate information, it is recommended you refer to the most recently published PCAF documentation and guidelines. Be on the lookout for more information from EI and ERI regarding GHG accounting, climate change, and how financial institutions are being affected.

Environmental Risk Innovations (ERI), a consulting firm which manages environmental risk for banks, and The EI Group, a multidisciplinary environmental engineering, occupational safety and health consulting firm whose primary focus is aimed at supporting Fortune 1000 corporations involved in manufacturing, energy production and transportation services, have formed an alliance to address the needs of publicly traded commercial lenders and those corporate borrowers targeted for commercial loans to assist their customers, both banks and corporations, in meeting the pending SEC rule requirements. As part of this initiative, ERI and The EI Group have launched a joint blog series which outlines the SEC rule in detail. You can read the entire blog series here.