Understanding Financed Emissions: The 95% Carbon Footprint
Did you know that a staggering 95%¹ or more of a bank's carbon
footprint comes from its financed emissions? This means the vast
majority of the climate impact from the financial sector isn't from
their own offices or operations, but from the projects and companies
they choose to fund. Understanding financed emissions is crucial, not
just for banks striving for NetZero, but for anyone interested in the
intersection of finance and climate change. This blog post dives into
the essentials: what financed emissions are, why they matter, and how
financial institutions are grappling with this significant challenge
and is the first in a series of articles we are publishing to shine a
light on financed emissions
What are Financed
Emissions?
Financed emissions refer to the
greenhouse gas (GHG) emissions that are indirectly attributed to
financial institutions as a result of their lending, investments,
and other financial services. These emissions are considered
"financed" because they are generated by the activities of
companies or projects that banks, asset managers, insurers, or other
financial institutions support, but not by the financial
institutions themselves.
Let’s cover a few key
concepts:
Indirect Responsibility: Financial institutions typically do not directly emit GHGs through their operations (certainly not to the extent that manufacturing or transportation does). However, by providing loans, equity investments, or other forms of financing to companies that emit GHGs, they are considered indirectly responsible for those emissions.
Scope 3 Emissions: Financed emissions are part of what’s known as Scope 3 emissions, which are a category of indirect emissions that occur in the value chain of an organisation. For financial institutions, financed emissions represent one of the largest portions of their Scope 3 emissions, given the impact of the companies they support.
Calculation of Financed Emissions: Financial institutions calculate these emissions based on their exposure to the entities they finance, using methods like the Partnership for Carbon Accounting Financials (PCAF) methodology. The calculation factors in the size of the financial institution's exposure to a particular company or sector and the carbon intensity of that company’s activities.
Importance for Sustainability: Financial institutions are increasingly being called upon to manage their financed emissions as part of broader efforts to align with climate goals, such as the Paris Agreement. Investors, regulators, and other stakeholders are putting pressure on these institutions to reduce the carbon intensity of their portfolios by investing in lower-carbon industries or supporting companies in their transition to more sustainable practices.
Disclosure and Reporting: Many financial
institutions are now disclosing their financed emissions as part of
their environmental, social, and governance (ESG) reporting. This
transparency helps the business and its investors understand the
climate risks associated with the financial institution’s
portfolio.
Navigating the complexities of
financed emissions measurement can be challenging. 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.
Sources:
Link 1: https://www.accenture.com/us-en/insights/banking/sustainability-rising-challenge-net-zero-banking
Link 2: CDP, Climate Change Questionnaire; Technical
Note: Scope 3 relevance by Sector, 2023.