Is there a solution? Commercial lending's Financed Emissions challenge
The issue of calculating financed emissions in commercial lending is
indeed complex, but several frameworks and methodologies have emerged
to help banks and financial institutions tackle it. In this blog we
reveal the key challenges around data availability, standardisation,
and appropriate attribution of emissions and we provide and an
overview of current progress and solutions:
1. PCAF (Partnership for Carbon Accounting Financials)
Standard
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Approach: PCAF provides the most widely used methodology specifically for financial institutions to assess financed emissions across asset classes, including commercial lending. It offers a framework to calculate emissions based on available data or estimation methods when full data is lacking.
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Data Challenges: PCAF acknowledges that commercial clients often don’t have direct emissions data, especially SMEs. As a solution, PCAF has developed emission factors (like revenue-based proxies) and encourages financial institutions to work toward collecting better data.
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Progress: Major banks are increasingly adopting PCAF guidelines, and it’s seen as the standard for financed emissions calculation in commercial lending.
2. Emissions and Climate Data for Industry Sectors
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Approach: Equifax gathers emissions data using AI to extract increasingly accurate emissions data from the SME and larger enterprise sectors, providing a more granular look at emissions, improving on the sector levels estimates relied on today. Banks can use this data that has a lower PCAF score to replace the estimates approximating the emissions associated with commercial lending to different sectors.
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Progress: This data is transparent, and its lineage can be presented for audit purposes or retrospective analysis.
3. Engagement with Clients on Data Collection
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Approach: Many banks are starting to encourage or even require clients to report more robust emissions data as a condition of financing. This approach, however, requires significant relationship-building and often data-sharing support to incentivise accurate emissions reporting.
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Progress: This is slower due to data collection challenges, but the larger trend toward mandatory climate disclosures may help standardise client data over time.
4. Sector-Specific Approaches and Scopes of Emissions
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Approach: Some financial institutions are developing bespoke methods that involve assigning different weightings to client emissions depending on sector and activity level. Banks might consider primary emissions (Scope 1), indirect energy use (Scope 2), and supply chain impacts (Scope 3) to tailor financed emissions more accurately.
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Progress: This varies widely by institution, but large banks are increasingly adopting sector-focused estimations to improve accuracy.
5. Data Vendors and Integrations
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Several third-party vendors (such as S&P Global, MSCI, and Moody's) now offer climate-related data that financial institutions can use to estimate emissions for commercial clients, especially where direct data is lacking.
While there’s no universal solution yet, these frameworks and data partnerships are leading to more refined approaches, and progress has been promising in recent years. At Equifax we’ve launched our Financed Emissions Calculator to address this challenge.
To learn more about how Equifax is supporting financial institutions with accurate emissions data and calculation tools, visit our website or contact us for a demonstration of our Financed Emissions Calculator.