Monday, July 15, 2024

Scope 3 Emissions: Spotlight on Financial Institutions

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Scope 3 disclosures are complex, and Category 15 (Investments) is an obscure segment intended to cover emissions that arise from one company having a stake in another (i.e., financial transactions)1. For most companies, this represents a proverbial footnote in their overall emissions profile. Indeed, given Category 15’s unique set of conceptual and data challenges, it is not a coincidence that it sits at the tail end of the Scope 3 catalogue.

For financial institutions, however, financial transactions are the business, making Category 15 emissions a critical component of their overall emissions disclosures.

Financed and Facilitated Emissions

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Three Key Challenges

Financial institutions need to overcome three key challenges in disclosing their financed and facilitated emissions to improve corporate reporting rates.

First, in contrast to other Scope 3 categories, the rulebook for reporting on financed emissions and facilitated emissions is in many ways still nascent and incomplete. Accounting rules for financed emissions were only finalized by PCAF and endorsed by the Greenhouse Gas (GHG) Protocol — the global standard setter for GHG accounting — in 2020.5 These codify the accounting rules for banks, asset managers, asset owners and insurance firms. Rules for facilitated emissions followed in 20236, covering large investment banks and brokerage services. Those for reinsurance portfolios are currently pending the approval of the GHG Protocol7, while rules for many other types of financial institution (not least exchanges and data providers like us) currently don’t exist.

Exhibit 1.

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Source: LSEG, CDP. Companies reporting material and other Scope 3 vs non-reporting companies, in 2022 FTSE All-World Index, by Industry

Exhibit 2.  Features of PCAF’s Financed and Facilitated emissions standards5,6

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Third, there are complexities around attribution factors. For financed emissions, this is the ratio of investments and/or outstanding loan balance to the client’s company value. However, market fluctuations of share prices complicate this picture and can result in swings in financed emissions that are not linked to the actual emissions profile of client companies.8

Next Steps?

Given these complexities and the significant reporting burden, financed and facilitated emissions are likely to remain a headache for reporting companies, investors, and regulators alike for some time to come.


FTSE Russell’s Scope for Improvement report addresses 10 key questions about Scope 3 emissions and proposes solutions to enhance data quality.

In its Climate Data in the Investment Process report, CFA Institute Research and Policy Center discusses how regulations to enhance transparency are evolving and suggests how investors can make effective use of the data available to them.


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