PCAF - Partnership for Carbon Accounting Financials

The Partnership for Carbon Accounting Financials (PCAF) is a global partnership of financial institutions working to develop and implement a harmonized approach to assess and disclose the greenhouse gas (GHG) emissions associated with their loans and investments—known as financed emissions.

Key Objectives:

• Standardize measurement of financed emissions
• Enable financial institutions to set science-based targets
• Support climate risk management and disclosure (TCFD, IFRS S2)
• Drive capital allocation toward low-carbon economy

Why Financed Emissions Matter

Financial institutions' financed emissions (Scope 3 Category 15) are typically 700x larger than their operational emissions (Scope 1+2). For example:

• Bank operational emissions: 10,000 tCO₂e (offices, branches, data centers)
• Bank financed emissions: 7,000,000 tCO₂e (loans to fossil fuel companies, mortgages, corporate loans)

Measuring and reducing financed emissions is essential for financial institutions to align with Paris Agreement goals and manage climate-related financial risks.

PCAF Asset Classes

PCAF provides methodologies for 7 asset classes:

1. Listed Equity and Corporate Bonds
Emissions attributed based on ownership share (enterprise value including cash).

2. Business Loans and Unlisted Equity
Emissions attributed based on outstanding amount relative to company's total equity plus debt.

3. Project Finance
Emissions attributed based on project-level data and financing share.

4. Commercial Real Estate
Emissions from buildings (operational and embodied carbon), attributed based on loan-to-value ratio.

5. Mortgages (Residential Real Estate)
Emissions from residential buildings, attributed based on mortgage amount relative to property value.

6. Motor Vehicle Loans
Emissions from vehicle use (fuel combustion), attributed based on loan amount relative to vehicle value.

7. Sovereign Debt
Emissions attributed based on country's total emissions and financial institution's share of sovereign debt.

PCAF Calculation Formula

Financed Emissions = Attribution Factor × Borrower Emissions

Attribution Factor = Outstanding Amount / (Total Equity + Debt)

Example: Corporate Loan

• Bank loan to Company X: $50 million
• Company X total equity + debt: $500 million
• Company X annual emissions: 100,000 tCO₂e
• Bank's financed emissions: ($50M / $500M) × 100,000 = 10,000 tCO₂e

PCAF Data Quality Score

PCAF uses a 5-level data quality score to assess the reliability of financed emissions calculations:

Goal: Improve data quality over time by engaging borrowers to disclose emissions data.

PCAF Implementation Steps

Step 1: Join PCAF
Become a PCAF member (free for financial institutions committed to measuring and disclosing financed emissions).

Step 2: Select Asset Classes
Prioritize asset classes based on portfolio composition and materiality.

Step 3: Collect Data
Gather loan/investment data (outstanding amounts, borrower information) and emissions data (borrower-reported or estimated).

Step 4: Calculate Financed Emissions
Apply PCAF methodology to calculate financed emissions by asset class, assign data quality scores.

Step 5: Disclose
Report financed emissions through CDP, TCFD, IFRS S2, or dedicated climate reports.

Step 6: Set Targets
Set science-based targets for financed emissions using SBTi Financial Sector Guidance.

Step 7: Engage Portfolio Companies
Engage borrowers/investees to improve emissions data quality and support their decarbonization efforts.

PCAF and SBTi for Financial Institutions

SBTi Financial Sector Guidance builds on PCAF methodology:

Sectoral Decarbonization Approach (SDA)
Set intensity targets (emissions per unit of physical output or economic activity) for high-emitting sectors (power, steel, cement, aviation, etc.).

Portfolio Coverage
Targets must cover at least 67% of financed emissions within 5 years of target validation.

Temperature Alignment
Targets must align with 1.5°C or well-below 2°C pathways.

Engagement
Financial institutions must engage portfolio companies to set their own science-based targets.

PCAF Adoption

Global Membership: Over 400 financial institutions across 6 continents have joined PCAF as of 2024, representing $100+ trillion in assets.

Regional Networks:

• North America: 100+ members
• Europe: 150+ members
• Asia-Pacific: 80+ members
• Latin America: 50+ members
• Africa: 20+ members

Regulatory Drivers:

• EU Taxonomy: Requires disclosure of financed emissions for certain activities
• IFRS S2: Requires disclosure of Scope 3 financed emissions for financial institutions
• SEC Climate Rule (proposed): Would require financed emissions disclosure

Challenges in Financed Emissions Accounting

Data Availability
Many borrowers (especially SMEs) do not measure or disclose emissions, requiring use of estimates and sector averages (lower data quality).

Attribution Methodology
Different approaches (outstanding amount, equity share, project share) can yield different results, requiring judgment.

Double Counting
Multiple financial institutions financing the same company each attribute a share of emissions, leading to apparent double counting at system level (acceptable under PCAF).

Scope 3 of Scope 3
Should banks account for Scope 3 emissions of their borrowers? PCAF recommends including borrower Scope 3 where material and data available.

Financed Emissions by Asset Class (Typical Bank)

Corporate Loans: 40-50% of financed emissions (high-emitting sectors: oil & gas, utilities, industrials)
Commercial Real Estate: 20-30% (building operational emissions)
Mortgages: 15-25% (residential building emissions)
Project Finance: 5-15% (infrastructure, energy projects)
Listed Equity & Bonds: 5-10% (investment portfolio)
Motor Vehicle Loans: 1-5% (consumer auto loans)
Sovereign Debt: <1% (government bonds)

PCAF and Climate Risk Management

Physical Risk Assessment
Use financed emissions data to identify portfolio exposure to climate-vulnerable sectors and geographies.

Transition Risk Assessment
Assess portfolio alignment with net-zero pathways, identify stranded asset risks in high-carbon sectors.

Scenario Analysis
Model portfolio emissions under different climate scenarios (1.5°C, 2°C, 4°C) to assess financial impacts.

Engagement Priorities
Prioritize engagement with high-emitting portfolio companies to support decarbonization.

Capital Allocation
Shift capital from high-carbon to low-carbon sectors, set green financing targets.

Primary Source Documents

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