Financed Emissions: PCAF Is Just The Start Line

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Financed Emissions: PCAF Is Just The Start Line

Introduced almost 10 years ago to standardize the measurement and reporting of financed emissions, PCAF (the Partnership for Carbon Accounting Financials) has come a long way: almost 500 firms use it today. But it’s not enough. Put simply, financial institutions are too complex for one calculation methodology to encompass all. For this reason, it is commonplace to see large institutions adapting the PCAF methodology to suit the needs of their firms. Barclays, for instance, has created BlueTrack; Wells Fargo utilizes its CO2eMission framework; and JP Morgan has produced Carbon Compass – to name a few. All of these methodologies are loosely based around PCAF, but reflect the requirements of the specific firm.

Verdantix recently undertook research into challenges and best practices for measuring financed emissions. In our report on the subject, we provide examples of the questions surrounding PCAF and indicate how firms are adapting the methodology for their own purposes.

A major issue concerns the attribution factor utilized in the PCAF calculation methodology, which can allow public firms to report decreased emissions, without actually lowering such emissions. The attribution factor is created by the ratio between the outstanding borrowing and the value of the business being financed, expressed as enterprise value including cash (EVIC). When a portfolio company’s value increases, financial institutions appear to be reducing their emissions, because the firm’s share of the portfolio company goes down, and it is therefore attributed fewer emissions. In fact, nothing physically has changed. Banks such as Citigroup and Deutsche Bank recently experienced this phenomenon, with the latter reporting a notable 29% reduction in emissions tied to oil and gas enterprises – a shift predominantly attributed to the increasing market value of its fossil fuel clients.

Financial institutions must be conscious of the shortcomings in the PCAF methodology and modify their own processes accordingly. PCAF has publicly acknowledged that financial institutions using its methodology can implement 'corrections' to the EVIC calculation to mitigate fluctuations. By using a multi-year EVIC average, firms can reduce volatility and create an estimate that is closer to the true mean of the EVIC, thereby producing more accurate financed emissions data. By incorporating a three-year average EVIC into its Carbon Compass approach, JP Morgan effectively reduced distortions resulting from swings in firm valuations.

Given the potential for misinterpretation and inaccuracy arising from the PCAF calculation, it is important for financial institutions to exercise diligence in their reporting practices. By incorporating corrective measures such as multi-year EVIC averages, institutions can enhance the reliability of their disclosed emissions data. This not only creates transparency, but provides for more informed decision-making regarding investments and sustainability initiatives in the financial sector.

For further analysis into the issues firms must address, and best practices in this area, read Verdantix Strategic Focus: Strategies For Measuring Financed Emissions.

Gus Brewer


Gus is an Analyst in the Verdantix Net Zero & Climate Risk practice. Prior to joining Verdantix, Gus worked at Rio ESG, where he gained experience as a sustainability consultant, specializing in carbon accounting and environmental strategy. Gus holds a BA in Geography from the University of Exeter and a MSc in Carbon Management from the University of Edinburgh.