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Mastering Scope 3 Emissions: A Brief Guide for Financial Institutions to Measure, Manage, and Mitigate Financed Emissions

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Key Takeaways

  • Financed emissions account for over 90%  of a financial institution’s total emissions, making them the most critical factor in emissions reporting.
  • Despite their complexity, understanding and mitigating Scope 3 emissions is vital for aligning with net-zero targets, responding to LP expectations, and identifying opportunities for decarbonization.
  • Transparency in Scope 3 reporting is becoming a proxy for sustainability performance, with LPs demanding reliable data from GPs and their portfolio companies (UN PRI’s 2023 Report)
  • Centralized platforms, audit trails, and automated anomaly detection can streamline emissions management and improve accuracy.
  • This guide explores what Scope 3 emissions are, how to calculate them, and why they are challenging to measure. It also highlights best practices adopted by leading private market players to overcome these challenges and how technology can streamline reporting and compliance.

Understanding Scope 1, 2, and 3 Emissions

  • Scope 1: Direct emissions from owned or controlled sources (e.g., fuel combustion in company-owned vehicles).
  • Scope 2: Indirect emissions from purchased energy (e.g., electricity for offices or data centers).
  • Scope 3: All other indirect emissions across the value chain, including financed emissions (investments, loans, and other financial activities).

For financial institutions, Scope 3/Financed Emissions is the most significant, often 700x greater than their direct emissions and representing over 90% of their total emissions.

Key Factors Driving GPs to Disclose their Financed Emissions

  • Global sustainability initiatives like the Net Zero Asset Managers Initiative (NZAM) and the Science Based Targets initiative (SBTi), along with climate targets from COP 28 and COP 29, are intensifying the focus on financed emissions disclosures.
  • Public financial institutions, such as pension funds, are the first to receive these targets and cascade them across their portfolios, increasing pressure on General Partners (GPs) to disclose emissions, particularly Scope 3. 
  • At the same time, regulatory frameworks the Sustainable Finance Disclosure Regulation (SFDR) and the International Sustainability Standards Board (ISSB) are driving stricter, standardized reporting in private equity, pushing GPs to future-proof their portfolios for compliance.

Financed Emissions: The Key Scope 3 Category for Financial Institutions

Financed emissions encompass emissions linked to an institution’s investments, lending, and financing activities. These emissions include the Scope 1, 2, and 3 emissions of portfolio companies and financed projects.

Key Measurement Approaches:

  • Portfolio-Level Analysis: Assessing emissions across an entire investment portfolio.
  • Sector-Specific Analysis: Identifying high-emission sectors for targeted decarbonization strategies.

To measure financed emissions, financial entities take attribution of the emissions from a proportion of their loans, debts, and investments. 

To ensure the correct data is collected and calculated, the Greenhouse Gas Protocol created the “Scope 3: category 15 investments” category, which is a calculation methodology for measuring financed emissions. However, this calculation method had an underdeveloped level of detail for financed emissions calculations, which is why in 2019 the Partnership for Carbon Accounting Financials (PCAF) was adopted as a global standard calculation methodology for financed emissions.

PCAF: The Standard for Measuring Financed Emissions

PCAF provides detailed calculation methodologies for various asset classes of financed emissions, including:

    • Listed Equity & Corporate Bonds: Emissions linked to publicly traded stocks and debt instruments.
    • Business Loans & Unlisted Equity: Emissions associated with loans to private companies and equity stakes in unlisted businesses.
    • Project Finance: Emissions from financing large-scale infrastructure and industrial projects.
    • Commercial Real Estate: Emissions attributed to business properties.
    • Mortgages: Emissions tied to residential property financing.
    • Motor Vehicle Loans: Emissions from financing personal and commercial vehicles.
    • Sovereign Debt

How Investment Firms can Calculate their Financed Emissions:

  • First determine their share of an entity’s value—whether a company, project, or asset—supported by their financial services. This proportion is then applied to the entity’s total GHG emissions. 

  • Use actual reported emissions data from investees. However, if direct data is unavailable, estimates can be derived using sector-level data or emissions proxy factors, ensuring reasonable accuracy in reporting.

Despite these industry efforts to standardize financed emission methodologies,  large financial institutions often have millions of loans, investments, or debt holdings, which make the collection and calculation of data a complex process.

Challenges that GPs Face in Calculating Scope 3/Financed Emissions

Amid the growing emphasis on these disclosures GPs and their underlying portfolio companies face several key challenges when reporting their Scope 3/financed emissions: 

Complexity of Carbon Calculations, which stems from:

  • Carbon emissions data (i.e. Scope 1, 2, and 3 emissions) is spread across multiple reporting entities, from layers of GPs to their underlying portfolio entities and then further down to their respective suppliers.
  • Since GPs and portfolio entities each have a different way of storing this data, either manually or on centralized servers or both, data aggregation becomes complex.
  • Different asset classes are at varying stages of maturity in capturing emissions data, further complicating the data collection process.

Limited Internal Resources

  • Quantifying financed emissions across an investment portfolio is resource-intensive, especially for firms managing hundreds of portfolio companies or banks overseeing millions of individual and business accounts. These entities operate across various industries, often with intricate ownership structures, making comprehensive emissions assessment a significant challenge
  • Historically, the lack of internal capacity has been a key barrier to financed emissions reporting. However, as regulatory and investor pressure for disclosure increases, financial institutions are recognizing that existing processes are insufficient, driving the need for enhanced data management capabilities.

Data Availability and Completeness:

  • Although over 90% of all emissions are Scope 3 (World Resources Institute), only 12% of organizations measure them (Carbon Emissions Survey, BCG).
  • Even when companies do measure Scope 3 emissions, the quality and completeness of this data is often inconsistent.  Variability in reporting methodologies and data collection practices across industries can make comparisons difficult. To fill these data gaps, LPs and GPs face the burden of relying on emissions estimation methodologies and harmonizing disclosures with other data sources, a process that requires time, resources, and expertise. 

Intricate Fund Structures & Attribution Complexity:

  • Financial institutions depend on investee and borrower disclosures to assess emissions. While financial data is standardized through audited statements, GHG emissions reporting remains inconsistent. Many PortCos either do not track their emissions or, if they do, may not publicly disclose the data, creating significant gaps in financed emissions assessments.
  • This challenge is exacerbated by complex fund structures, which add layers of separation between GPs and underlying PortCos, making data access more difficult. Without clear accountability mechanisms, collecting accurate emissions data across multiple ownership layers becomes cumbersome and resource-intensive. Additionally, investors must navigate the complexities of attributing emissions based on investment type—whether equity, debt, or other financial instruments—further complicating the reporting process.

Best Practices for GPs to Accurately Calculate their Financed Emissions

Leading GPs are adopting technology-driven strategies to enhance the accuracy, efficiency, and reliability of financed emissions calculations and their emissions profile. By leveraging ESG data management platforms that have advanced carbon accounting capabilities, private market players are:

1. Centralizing Data through technology that can:

  • Ingest data from various sources, including databases and document templates.
  • Apply estimation methodologies to fill gaps and generate a comprehensive emissions footprint.

2. Ensuring Data Integrity with Audit Trails: Accurate emissions reporting requires transparent and auditable records. GPs are implementing audit logs within their systems to track:

  • Who entered or modified data.
  • When changes were made.
  • The source of emissions data, ensuring traceability and compliance.

3. Automating Anomaly Detection: To improve data quality, leading financial institutions are integrating automated anomaly detection within their emissions management systems. By setting thresholds, these systems can:

  • Flag outliers and inconsistencies.
  • Reduce manual verification efforts.
  • Improve confidence in reported emissions figures.

Specialized platforms like ESGTree provide tailored modules for both operational and financed emissions, ensuring that investment firms can efficiently track, calculate, and verify their carbon footprint. As AI-driven data validation and automation tools evolve, financial institutions can further enhance accuracy while reducing administrative burdens.

By integrating these best practices, GPs can move beyond compliance and position themselves as leaders in sustainable finance, aligning their portfolios with global decarbonization goals.

 

For those seeking a streamlined approach, ESGTree’s advanced carbon calculator can handle all calculations for both your institution and your portfolio. Reach out to us to learn more!

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