The climate risks associated with the transition to a low-carbon economy are becoming more imminent, especially for greenhouse gas (GHG)-intensive sectors. In this context, aligning with the Paris Agreement has taken on new urgency for businesses, while many countries are embedding net-zero targets into regulatory and policy instruments.
Financial institutions are not exempt from the tensions and changes taking place in the real economy. On the one hand, they play a key role in accelerating the transition to a low-carbon economy through their lending and investment decisions. On the other, they must reduce their exposure to high-emission assets to decarbonize their portfolios and reduce vulnerability to transition risks. In this way, climate action in the financial sector carries a clear double materiality.
Against this backdrop, the concept of financed emissions has gained prominence. Measuring them has become a priority for financial institutions that understand the need for metrics to assess their exposure to climate-related risks.
Financed emissions are the GHG emissions generated by activities that a financial institution has supported through its loans and/or investments. Put simply, they represent the carbon footprint of money.
These emissions fall under Scope 3, category 15 (“Investments”) of an institution’s carbon footprint, according to the GHG Protocol. In most cases, they account for over 99% of a financial institution’s total footprint.
They reveal an institution’s vulnerability to climate risk. The higher the financed emissions, the more carbon-intensive the clients, and the greater the institution’s exposure to transition risks.
They reflect the institution’s real-economy impact. By showing the amount of emissions being financed, they provide insight into how lending and investment decisions influence the broader economy.
They enable science-based emissions reduction targets. A financed emissions inventory serves as a baseline for setting Paris-aligned targets and guiding mitigation efforts.
They send a strong signal to stakeholders. Measuring financed emissions is a first step toward meaningful climate action—and a key diagnostic indicator in the decarbonization journey.
The Partnership for Carbon Accounting Financials (PCAF) provides a public methodology—developed by the financial industry itself—for measuring financed emissions.
More than 40 commercial banks, development banks, and financial institutions affiliated with PCAF in Latin America have been actively involved in applying this methodology, with many doing so since 2015. Together, they have inventoried more than USD 1.2 trillion in financial assets.
The only essential data needed to get started is the balance of the institution’s lending and investment portfolios. The PCAF standard offers various methodological tiers depending on the level of data institutions have on their clients—so lack of information is not a barrier to beginning the process.
Designing and implementing the systems and processes needed to accurately measure financed emissions can be a significant challenge for organizations with limited experience.
At ImplementaSur, we’ve spent years supporting this transition. Our team brings hands-on experience in developing tools, building internal capacity for financed emissions accounting, and integrating this key metric into the decarbonization strategies of financial institutions across the region.
