On April 18, 3Degrees travelled to London to attend the ESG Europe event convening finance professionals, software companies, and consultants to discuss ESG best practices and methodologies to manage risks. The event covered a range of topics, from regulatory requirements and climate risk assessment to the ever-challenging data accuracy.
I had the pleasure of speaking at one of the sessions focusing on the implementation and data challenges within scope 3 calculations, particularly for financial institutions. Calculating scope 3 emissions leads to a better understanding of the environmental impacts of an organisation and the social and corporate governance topics associated with a business. Here are some further remarks from the panel.
FINANCIAL INSTITUTIONS IMPACT ON SCOPE 3 EMISSIONS
According to the CDP, portfolio emissions of global financial institutions are about 700 times larger than direct emissions. Hence, these institutions should clearly understand where their investments are going to mitigate financial risk, comply with regulations, meet stakeholder expectations, and influence and demonstrate environmental stewardship.
Financial institutions have a fiduciary duty to shareholders, but most importantly, to our planet. Funding sustainable activity drives progress towards a low carbon and a positive natural environment. Therefore, it is important to understand what it means to measure scope 3 emissions and how to address data challenges. These companies should follow the Partnership for Carbon Accounting Financials (PCAF) guidance, a standardised GHG Protocol methodology for calculating investment emissions under category 15 and take the following steps:
- Choose the PCAF standard that is applicable (financed, facilitated, or insurance-related emissions)
- Define organisational and operating boundaries
- Identify and segment assets into 1 of 7 asset classes (listed equity and corporate bonds; business loans and unlisted equity; project finance; commercial RE; mortgages; motor vehicle loans; and sovereign debt)
- Determine attribution factors
- Gather data; alternatively, estimate emissions if they are not available
- Disclose emissions
From a practical perspective, it is common for financial institutions to apply a phased approach where data is more readily available, tackling one or two asset classes in the first year and increasing coverage in subsequent years. Organisations are required to disclose quality scores and expected to increase data quality in each reporting year.
Addressing data challenges and third-party reporting
PCAF defines a hierarchy of data quality, which states that, where possible, financial institutions should use verified emissions data from investments or customers. Collecting unverified data is the next best approach if this information is unavailable.
However, if the first two options are unobtainable, calculations can be made from primary energy consumption or production data to calculate emissions. Ultimately, if none of the aforementioned datasets is accessible, company revenue, outstanding finance of asset units, or revenue and turnover could be used.
Given the complexity of gathering data, technology and software solutions serve as allies to ease the burden of automating and providing auditable data. When managing third-party reporting, businesses should be cognizant of the many available guidelines, standards, and regulations. It is important to take a common denominator approach, incorporate all requirements into one effort, and work to proactively engage with customers and investees.
URGENCY TO ACT NOW
The ESG conference as a whole combined a variety of topics to aid financial institutions, like insurance companies, asset managers, and regulators with up-to-date insights to effectively manage risks and address their financed emissions. The main message highlighted throughout the event, and particularly the panel was the urgency for the financial sector to act now and report on their emissions.
As a leading global climate solutions provider, 3Degrees can support those in the financial sector with tailored products and climate advice. Get in touch with us.