In the continuing effort to meet greenhouse gas (GHG) reduction goals, the familiar adage about “following the money” has proven to be profoundly true. With more than $3.8 trillion USD invested in the fossil fuel sector in total, the financial industry has a major role to play in bringing about the changes needed to meet the Paris Climate Agreement’s 2050 / net-zero carbon goals.
This is the simple (and stark) reason that drove the formation of the Partnership for Carbon Accounting Financials (PCAF) and the development of the Global GHG Accounting and Reporting Standard for the Financial Industry.
What Is PCAF?
PCAF is a global, industry-led initiative to measure and disclose GHG emissions financed by loans and investments. Members of the partnership are working together to standardize the approach to measuring and disclosing GHG emissions in the effort, which was started in 2015 by Dutch financial institutions. It was extended to North America in 2018 and was launched globally in 2019. As of this writing, the effort has 291 participating financial institutions, including banks, investors, pension funds, asset owners and managers.
PCAF’s mission is to leverage the financial sector’s purchasing power in order to move society to a more sustainable future. The PCAF standard provides “detailed methodological guidance” for the measurement and disclosure of GHG emissions relative to six major asset classes:
- Listed Equity and Corporate Bonds
- Business Loans and Unlisted Equity
- Project Finance
- Commercial Real Estate
- Mortgages
- Motor Vehicle Loans
Operationalizing ESG Data
With the pressure mounting for companies to report their climate risk data, the need for quality data has never been greater. If companies don’t have quality data to back up sustainability claims, the company may be accused of greenwashing. In a recent SpheraNOW ESG podcast episode, Sphera Chief Product Officer Mike Zamis discussed how quality data can help prevent greenwashing:
“Companies can always control their data. Now, whether they can get good data, that’s another question. One of the fundamental challenges we’re seeing in the marketplace is companies being able to operationalize this ESG data. How do we not make it a once-a-year data-collection exercise and actually embed it in our business operations that we execute every single day? Think of financial reporting. We don’t wait until the year end to see what the company financials are. Every day, every week, every month, every quarter, every year—we have financial professionals working against defined frameworks.”
ESG reporting has the power to provide greater insight into sustainability performance and allows companies to more accurately monitor progress. It’s a smart way to cut through rhetoric that can lead to greenwashing and gives stakeholders greater visibility into companies’ ESG programs. This kind of reporting is becoming an area of greater focus in the global ESG community.
PCAF’s aim to provide more standardized metrics for carbon accounting also has the potential to clear up the confusion around how to approach GHG disclosures. This will go a long way in preventing greenwashing in the financial industry.
“We need regulations where everyone’s measured the same way against the same frameworks, where we have professionals who know how to report against ESG metrics, and then we need that audited. I think those three steps would go a long way toward preventing greenwashing,” Mr. Zamis added.
What Are the PCAF Standards and Initiatives?
PCAF is an extension of Scope 3 Category 15 (Investments) of the Greenhouse Gas (GHG) Protocol. An open-source solution, it’s aligned with several other strategic initiatives, including the Task Force on Climate-Related Financial Disclosures (TCFD), the CDP (formerly the Carbon Disclosure Project) and the Center for Climate-Aligned Finance. Notably, CDP’s disclosure framework now fully integrates PCAF’s Global GHG Accounting and Reporting Standard for the Financial Industry through its Climate Change Questionnaire for Financial Services, which asks for disclosure of Scope 3 portfolio emissions.
PCAF is also collaborating with the Science Based Targets initiative (SBTi) to help financial institutions align their portfolios with the Paris Agreement’s climate goals. Using the sector decarbonization approach (SDA), participating organizations can use PCAF to measure their financed emissions to develop baselines and track against agreement targets.
The practical impact of PCAF being open source is that participation and use of PCAF’s methodologies is easy to access, free of charge and open to financial institutions large and small. However, you should know that access to PCAF’s emission factor database and methodologies is exclusively available to PCAF signatories.
How Can Financial Institutions Participate in PCAF?
Companies that join PCAF must commit to disclosing the GHG emissions associated with their portfolio of loans and investments within a period of three years, using the jointly developed accounting methodologies. If you’re interested in the details of the process, and you want to take action, you can review the commitment letter here.
Companies that are interested in joining can obtain free technical assistance to start measuring emissions financed by loans and investments. More details on what is included in this free technical assistance are available in this brief guide.
Finally, PCAF encourages financial institutions to consider participation in a regional team. PCAF now operates in five regions: Africa, Asia-Pacific, Europe, Latin America and North America. By joining a regional implementation team, companies will be able to apply the Global GHG Accounting and Reporting Standards to their particular regional context. The regional team construct also offers your institution the opportunity to work with other banks and investors to share ideas and insights, helping companies collaboratively improve GHG accounting across their regions and throughout the world.
PCAF’s focus is powerful and crucial to GHG emissions reduction. PCAF will continue to build momentum and interest within the financial and investment community and across the broad spectrum of industries this sector serves.
