Green Bonds

PCAF to Measure Emissions from Sovereigns, Green Bonds

Standard for measuring facilitated emissions for capital markets to be published in 2022.

The Partnership for Carbon Accounting Financials (PCAF) has launched a public consultation on expanding its existing scope for measuring financed emissions to a wider range of fixed income instruments, and has outlined how capital markets can help facilitate the climate transition. The consultation is open until 17 December, with PCAF calling for feedback from financial institutions, regulators, policymakers, supervisors, data providers, consultants and NGOs.

PCAF is an industry-led initiative that seeks to help financial institutions accurately and consistently measure and disclose the greenhouse gas (GHG) emissions associated with their financial activities.

The organisation first published its Global GHG Accounting and Reporting Standard for the Financial Industry in November 2020. A year later, over 170 financial institutions across 45 countries (representing US$54 trillion in assets) have committed to measuring and disclosing emissions associated with their financial activities, with 43 countries publishing aligned reports.

“The uptake of PCAF globally and the continuous industry demand for methods that address all types of portfolios have led PCAF to draft additional methods,” PCAF said.

New guidance and methodologies

The first report proposes draft accounting methods for measuring the financed emissions from green bonds, sovereign bonds, and loans and investments in emissions removals activities. The methods will be refined according to feedback.

The new methodologies for bonds build on the green and social bond principles published by the International Capital Markets Association (ICMA), PCAF said.

Financial institutions adopting the new methodologies need to measure and disclose Scope 1 and 2 emissions, the report noted, adding that Scope 3 should be included “where possible”.

The report further said that issues with the reliability and comparability of climate-related data from corporates will need to addressed through increased standardisation.

Further, there are continued challenges around how to allocate responsibility for emissions between sovereign bond issuers and investors without double counting, PCAF acknowledged.

The Global GHG Accounting and Reporting Standard currently provides methodological guidance for the following asset classes: listed equity and corporate bonds; business loans and unlisted equity; project finance; commercial real estate; mortgages; and motor vehicle loans.

In its recently updated guidance on climate-related metrics, targets and transition plans, the Task Force on Climate-related Disclosures (TCFD) also recommends use of PCAF’s methodology to measure financial emissions. As TCFD becomes mandatory in more countries, more financial institutions will be looking to PCAF to provide methodologies for measuring financed emissions across a wider variety of asset classes.

PCAF is also currently collaborating with the Institutional Investors Group on Climate Change’s Paris Aligned Investment Initiative to advance the development of PCAF’s GHG accounting methodology. This will then underpin the PAII’s Net Zero Investment Framework to ensure alignment between the two organisations.

The second new report is a discussion paper on the importance of capital market instruments in the transition to net zero and introduces the concept of facilitated emissions.

Facilitated emissions are “off-balance sheet (representing services rather than financing) and they can take the form of a flow activity (temporary association with transactions) rather than a stock activity”, the second report said.

“PCAF views facilitation as a separate and significant metric when it comes to climate risk management decisions, and one that wields material impact on the direction of capital towards economic activities that will enable the transition to net zero by no later than 2050,” it added.

The discussion paper outlines the next steps for publishing an accounting methodology for capital markets activities around facilitated emissions, which will be published in 2022. The working group that helped develop this preliminary guidance includes Barclays, Morgan Stanley and the Bank of America.

“The publication of these new methods for green bonds, sovereign bonds and emissions removal, combined with the discussion paper on capital markets instruments highlight another milestone in the progress PCAF has been making to harmonise the measurement and disclosure of GHG emissions associated with financial activities globally,” said Giel Linthorst, Executive Director of PCAF.

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