Emission reporting in the financial industry
We often hear that the financial sector is uniquely positioned to leverage the transition towards a sustainable future. Unlike energy companies or manufacturers, financial institutions do not emit large amounts of greenhouse gases themselves. Their offices, data centres, or company cars account only for a rather small fraction of their climate footprint. But here is the big difference: financial institutions finance everything else. Through loans, investments, and insurance, they relate to almost every sector of the economy. This means their climate impact depends less on their own operations and more on the companies they fund. The funding of companies is crucial to enable the transition through investments in new products and technology and contribute to a resilient and futureproof economy. That’s where Scope 3 emissions come in. Consequently, when examining emissions reporting within financial institutions, it is essential not only to consider their direct emissions but also the emissions of their portfolios.
Beyond Scope 1 and 2: The Dominant Factor of Scope 3 Emissions
Traditional corporate carbon reporting focused on Scope 1 (direct emissions from owned operations) and Scope 2 (indirect emissions from purchased energy). For financial institutions, a significant impact lies in Scope 3 emissions, which account for the vast majority – often more than 90% - of their total emissions. These emissions are not generated by the institutions themselves but their clients and investees, making the measurement and management of Scope 3 emissions particularly complex. In essence, the emissions of the companies that they finance. There are various categories for Scope 3 emissions. To name the conceptually key ones in the financial industry, we can focus on three categories. 1) Financed Emissions – the share of emissions generated by companies and projects that financial institutions invest in or lend to, 2) Insured Emissions – the share of emissions from activities that insurance companies underwrite and 3) Facilitated Emissions – emissions linked to transactions where financial institutions act as intermediaries or advisors, such as capital market deals. Capturing and reporting these emissions accurately requires robust methodologies and reliable data, both of which have historically been challenging.
PCAF – The Gold Standard in the Financial Sector
To address the complexity of Scope 3 emissions accounting, the Partnership for Carbon Accounting Financials (PCAF) has emerged as the leading standard for the financial sector. PCAF provides a harmonized global method for calculating and reporting financed emissions across asset classes such as listed equities, corporate bonds, mortgages, and project finance. Today, PCAF is considered the gold standard, and many leading European and Norwegian financial institutions have adopted to it. This uptake reflects a broader industry trend toward aligning methodologies to ensure transparency and comparability. PCAF also complements global disclosure initiatives such as the Task Force on Climate-related Financial Disclosures (TCFD) or the Science Based Targets Initiative (SBTi).
Reporting Frameworks and Challenges
Historically, emissions reporting by financial institutions has been featured in climate transition plans or in sustainability reports. However, regulatory frameworks are now raising the bar. In Europe, the Corporate Sustainability Reporting Directive (CSRD) and the associated European Sustainability Reporting Standards (ESRS) provide a common foundation for disclosures, including financed emissions. These standards aim to provide consistency and reliability of data, though their implementation still leaves room for interpretation and flexibility which we observe already in the first year’s round of reporting. Differences in data access, methodology choices and the depth of analysis create significant heterogeneity between institutions.
Target Setting and Steering Emissions
Reporting emissions is only the first step. An intriguing aspect of emissions reporting is the target setting for scope 3 emissions for reducing their emissions and actively manage their portfolios to achieve them. Financial institutions can actively steer their counterparties' emissions through various levers, such as offering differentiated conditions for their financial services based on the emissions profiles of borrowers or investees, active engagement strategies to encourage clients to adopt low-carbon technologies, or exclusion policies choosing not to invest in high-emitting sectors. These approaches signal a shift to active stewardship of the low carbon transition. Financial institutions that embed such strategies into their core business models position themselves not only as risk managers but as catalysts for meaningful change.
Conclusion
The emissions reporting landscape for financial institutions is evolving rapidly under the dual pressures of regulatory requirements and stakeholder expectations. While Scope 1 and Scope 2 emissions remain relatively minor, the challenge - and opportunity – lies in scope 3 emissions for financial institutions. The adoption of PCAF standards and regulations like CSRD and the ESRS provide regulatory clarity in Europe and helps the financial sector to move toward more consistent and transparent disclosures. However, achieving comparability and reliability across the industry remains a work in progress. Ultimately, the institutions that go beyond compliance and use the reported data to set credible targets, work actively on their emissions strategy and steer their investments towards a greener future, paving the way for a more sustainable global economy.
