Financed emissions

For businesses looking to reduce their carbon footprint, it’s important that financed emissions are also taken into account. Minimum’s financed emissions audit can give financial institutions a full spectrum view of their carbon output, and help them to understand how to reduce it. 

What are financed emissions?

Put simply, financed emissions are the emissions attributed to a financial institution when investing in another company or asset. Emissions from invested companies or assets are attributed to the investor based on the value of the investment (as a share of the total value of the company or asset). 

Financed emissions fall under scope as Scope 3 emissions for the investor,  which are the indirect greenhouse gasses (GHGs) generated by a business as a result of their activities in the wider supply chain. These GHGs under scope 3 include those generated from sources beyond those that the financial business is directly responsible for, such as:

• Transportation
• Waste management
• Supply and distribution
• Travel

Financed emissions are often overlooked when it comes to sustainability - with many financial institutions not measuring or disclosing them  - but they can have a significant impact on your carbon footprint. 

By conducting a financed emission audit, finance businesses can gain greater visibility into the environmental impacts of their investments and take action to reduce them - which is where Minimum can help.

How are financed emissions calculated?

Financed emissions are calculated by attributing the Scope 1, 2 and 3 emissions of invested companies or assets to the investor. Whilst the attribution of the emissions differs based on the type of investment (e.g. equity vs debt), the general methodology is to look at the share of total value that an investment accounts for. This share is then attributed to the investee emissions and attributed to the investor. 

For example: Investor A has a $10 million equity investment into Company B. This equity investment represents 10% of the total enterprise value of Company B.  Company B’s total emissions equal 50 tonnes of CO2e. Investor A’s financed emissions from its investment into Company B equal 5 tCO2e (as this equals 10% of Company Bs total emissions)

The sum of all attributed emissions across an investors portfolio are referred to as the investors financed emissions. 

Why is calculating financed emissions important?

Calculating financed emissions is an important step in measuring and reducing the environmental impact of a financial institution or  business. Accurately assessing the GHG emissions associated with financed emissions  can help to identify areas where reductions could be made, as well as inform strategies for improving efficiency, and justifying sustainable investments.

For financial institutions and businesses looking to reduce carbon emissions and meet net zero goals by 2050,  the level of financed emissions today will be a key factor for measuring progress and investing in climate goals. 

How to reduce financed emissions

Financial institutions have the potential to reduce their financed emissions through various initiatives that target the main sources of emissions of their investee companies. To reduce financed emissions financial institutions have to engage with their investee companies. Examples include:: 

• Engaging companies to set decarbonisation targets
• Engaging companies to decarbonise their supply chains
• Engaging companies to replace carbon intensive practices with low-emissions alternatives
• Engaging companies to implement energy efficiency measures

If engagement fails, investors can divest from the investments that contribute significantly to their financed emissions and thereby reduce this.

With these steps in place, financial institutions and businesses can significantly reduce their financed emissions over time and become more environmentally responsible organizations.

Minimum can help organizations to understand their existing carbon output, and create plans to mitigate climate related risks in the future.  Our Emissions Data Platform seamlessly collects and processes emissions data from every corner of your organization and supply chain - no matter the format. 

Learn more about how Minimum's Emission Data Platform can help to power you all the way to Net Zero today.  

FAQs about financed emissions

What is the difference between financed and facilitated emissions?

Financed emissions refer to the greenhouse gas emissions that result from the investments, loans, and financial support provided by financial institutions to businesses and projects. These emissions are indirect because they are associated with the activities and operations of the entities that receive financing from the institution. 

Facilitated emissions, on the other hand, refer to the greenhouse gas emissions that result from the facilitation of financial transactions by financial institutions. It includes emissions associated with the services provided by financial institutions, such as advisory services, underwriting, or brokering activities. These emissions can be indirect and result from the activities of the clients or counterparties involved in the financial transactions.

What category are financed emissions? Are they scope 3?

Financed emissions are classified as a type of Scope 3 emissions, which refers to indirect emissions from activities that occur outside of an organization’s boundaries. 

What is PCAF?

The Partnership for Carbon Accounting Financials (PCAF) is a global collaboration of financial institutions that aims to standardize and harmonize the measurement and disclosure of greenhouse gas emissions associated with their lending and investment portfolios. It provides a framework and tools for financial institutions to calculate and report their financed emissions, promoting transparency and accountability in the financial sector's climate impact.

PCAF was launched in 2015 as an initiative by a group of Dutch financial institutions and has since grown into an international partnership. Its members include banks, asset managers, pension funds, and insurance companies from around the world. The partnership collaborates on developing methodologies, metrics, and reporting guidelines to enable consistent and comparable measurement of financed emissions.

What regulation is in place for financed emissions?

As society becomes increasingly concerned about the effects of climate change, finance emissions are under stringent regulatory scrutiny. In response, a trio of measures have emerged to ensure businesses are transparent about their environmental impact. They are: 

• Task Force on Climate-related Financial Disclosures (TCFD)
• Sustainable Finance Disclosure Regulation (SFDR)
• ISSB sustainability disclosure framework

These regulations are shifting the landscape of finance, prioritizing sustainability and underscoring the importance of making environmentally sound choices.