Calculating baseline carbon footprint: Facilitated emissions for capital markets
In this paper we highlight the challenges and practical considerations for financial institutions in baselining their facilitated emissions.
This is the third iteration of this exercise focused on 2023 sustainability disclosures. This edition includes more market participants (26 to 47 FIs) as well as an increased coverage of metrics in scope (e.g. facilitated emissions, sustainable finance, restatements). The FIs covered include the following:
- 25 Global Wholesale, Retail and Investment Banks.
- 22 Asset managers and Life insurance companies.
- Asset coverage totaling £25tn on balance sheet.
- Geographical reach spanning the UK, US, Europe, Middle East, and Asia-Pacific region.
The increased coverage and global reach not only reflect the increasing level of transparency of sustainability disclosures within the financial services sector but the growing expectations from local regulators around world on companies operating within their jurisdictions to adhere to implied sustainability disclosure requirements.
The analysis primarily focuses on the carbon footprint metrics disclosed by the aforementioned FIs, specifically covering the lending activities of Banks and investment activities of Life insurers and Asset managers (i.e. financed emissions). Additional data included on operational emissions, target setting, forecasting and sustainable finance activities.
Why is it important?
The sustainability reporting landscape is rapidly evolving and complex, with an increasing number of sustainability frameworks and standards to navigate and comply with, such as TCFD, ISSB, CSRD and SEC.
With increasing scrutiny from management, investors and regulators it is imperative that FIs produce robust sustainability disclosures.
The emission metrics produced not only ensure alignment with sustainability reporting standards but also impacts the strategic direction that institution will undertake from transition planning, impact of decarbonisation levers to use to balance sheet optimisation as FIs looks to achieve their net zero ambition.
What are we seeing?
From our benchmarking exercise and in scope participants, we note the following trends:
- Increasing demand for assurance with 70% of participants having done so: Interestingly we observe that this trend is more prevalent for Banks (83%) compared to Life insurers and asset managers (50%).
- 40% of FIs needed to restate previously disclosed numbers: 19 out of the 47 FIs restated their emission metrics highlighting the ongoing challenges in initial disclosures and the need to adopt clear and robust restatement policies to ensure greater comparability, accuracy and transparency of disclosures.
- Navigating the data challenge: The use of proxies continues to prevail especially for certain industry sectors and asset classes highlighting the uncertainty that persists in sourcing and integrating data within the business which ultimately feeds into sustainability reporting and will drive decarbonisation strategies.
- Whilst PCAF continues to be the most widely used industry standard on financed emissions with 89% adoption, there persists nonetheless ongoing variation in approach: We still observe deviations around key assumptions such as value chain and choice of scenarios to track against net zero alignment highlighting need for ongoing refinement of industry guidance.
- Sustainable finance and lack of global taxonomy: We observe that Banks have been more ambitious in their publicly disclosed commitment to providing sustainable finance compared to life insurers and asset managers. Nonetheless, the adoption of a globally accepted taxonomy proves to be an ongoing challenge.
In the following sections, we bring out the key insights from the benchmarking exercise across 4 key areas: Disclosure, Scope, Data and Target setting and forecasting.
Key insights
Despite existing guidance on scoping and measuring the carbon footprint of financial institutions' lending or investment activities, it is not always prescriptive and often requires judgment. This leads to variations in sustainability reports and carbon footprint figures. Our analysis highlights key findings and considerations for FIs, categorised into the four pillars below: disclosure, scope, data, and target setting and forecasting.
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1. Disclosure
Need for transparency: An increasing number of financial institutions (FIs) are seeking assurance on emission numbers, but variations in disclosure levels persist. Upcoming ISSB and CSRD regulations will improve consistency and transparency. As emissions data availability, asset scoping and model design improve, many FIs are revisiting and restating their previous disclosures. We have identified 19 FIs restating their figures, often citing improved data quality, updated scope, and error correction. Additionally, more FIs are investing in and disclosing targets for sustainable finance indicating a growing commitment to accurate and responsible environmental reporting.
Assurance over emission disclosures
- 33 out for the 47 FIs analysed have had at least limited assurance on the data underpinning the financed emissions disclosures.
- Interestingly, only one FI sought reasonable assurance on their financed emissions.
- We note that the EU’s Corporate Sustainability Reporting Directive (CSRD) will require companies to obtain limited assurance on a number of material metrics.
Use of PCAF (Partnership for Carbon Accounting Financials)
- 23 of the 25 Banks (92%) and 19 of the 22 Life insurers and Asset managers (86%) analysed have measured their financed emissions baseline and reporting metrics in line with PCAF guidance. For Banks, this marks an increase from 86% in YE22. In contrast, all 12 Life insurers and Asset managers surveyed in YE22 already used PCAF methodologies.
- All the Banks analysed have aligned with PCAF methodologies, with 2 exceptions that are leveraging in-house bespoke methodologies and have PCAF-aligned calculations in their appendices for ease of comparison. 1 of these Banks also disclosed its plans to fully align to PCAF over time.
- 3 Life insurers and Asset managers did not disclose whether the calculation methodology used was bespoke or aligned to PCAF.
Need for restatement
- We have identified 19 FIs that have restated both their financed and operational emissions in their 2023 disclosures. Most have provided narratives explaining the reason for restatement, with the primary reason being changes in methodology or improvements in data quality.
- From the underlying data, we have observed 2 Banks and 6 Life insurers and Asset managers which restated operational emissions but not their financed emissions.
Sustainable finance
- We have observed 33 FIs (20 Banks and 13 Life insurers and Asset managers) focusing on sustainable finance, with 20 FIs (15 Banks and 5 Life insurers and Asset managers) also setting targets for future commitments.
- For those FI have have disclosed this information, we note that Banks have set far more ambitious targets than Life insurers and Asset managers. We have observed Banks making progress towards their targets, whereas some Life insurers and Asset managers have already nearly met their targets (based on commitments to date). 1 Life insurers and Asset managers has already met their sustainable finance commitment to date, suggesting that the targets set were not challenging enough.
- We have observed that, on average, Banks have already invested 46% of their future targets and Life insurers and Asset managers 30%.
- Note that only 5 Life insurers and Asset managers disclosed a target investment figure hence the significantly smaller proportion observed.
Variations in disclosures
- Metrics disclosed: We noted a deviation between the metrics disclosed by participants. Some included absolute metrics while others included intensity metrics. Furthermore, this deviation was also noted between sectors/asset classes for selected participants (for example reporting intensity for Sovereign debt but not other asset classes).
- Level and transparency of disclosures vary between participants. Examples include:
- Disclosing the % of assets under management (AUM) as part of emissions for each asset class and clear narrative on exclusions.
- Disclosure of the size of book analysed and the data coverage of financed emissions calculations has significantly decreased compared to prior year disclosures. We have observed that a number of FIs, most notably several major Banks, have moved away from disclosing the size (£) and proportion (%) of portfolio covered from their disclosures this year.
- Disclosure of emissions by PCAF asset class is common, noting where different methodologies have been applied.
- Disclosing multiple reporting years in addition to baseline year has increased as expected compared to prior year disclosures given the additional years worth of data available. The % difference between reporting and baseline year were also commonly included.
- Disclosing scope of emissions numbers such as value chain or counterparty emissions included.
2. Scope
Variations in scope across FIs: Similarly to last year we have noted variations in the scope of carbon footprint numbers in terms of asset classes, scope 3 emissions of borrowers and investees and sector level value chain inclusions / exclusions.
Lack of monitoring of net zero commitment over time: We also note that there continues to be an absence in the disclosure of monitoring emissions numbers and portfolio coverage as institutions take a phased approach to include more asset classes and sectors over time.
Asset classes and sectors
- Remaining consistent with the prior year disclosures, business loans and mortgages were the most reported by Banks. While commercial real estate and listed equity remain the most reported by Life insurers and Asset managers.
- From the disclosures we also noted the following:
- FIs are taking a phased approach to disclosing financed emissions, focusing on the most material asset classes first.
- Life insurers and asset managers’ disclosures continue to be at asset class level while most Banks disclosed at sector level covering different asset classes where relevant (e.g. loans, project finance). However, for the first time we have observed 2 Life insurers and Asset managers disclosing at both asset class and sector level.
Distribution of PCAF asset classes
Baseline and reporting years
- Overall
- Participants reported varying baseline years across asset class or sector, representing variations in the data available and phased-in approach taken by institutions whereby new sectors are added in scope of emissions over time. Furthermore the Net Zero Banking Alliance (NZBA) require the baseline year to be at least 2 years from first reporting.
- For reporting years, we noted that the FIs are reporting emissions over multiple years from the baseline.
- Banks
- From the underlying data, we noted that for some Banks, the chosen baseline year is not consistent between sectors due to the phased approach. To ensure comparability, we have included only those sectors/asset classes which are covered by most, namely Oil and Gas, Power and Utilities, Automotive, Mining and Metals, Mortgages and Commercial real estate.
- For Mining and Metals 4 Banks out of the 9 use a baseline year of 2021. For the Automotive sector, 5 out of the 12 use a baseline of 2019. For the more established sectors such as Oil and Gas and Power and Utilities, we note that the majority of Banks are using a 2019 baseline year. Whereas for typically less material sectors, such as Commercial real estate and Mortgages, we see greater variation in baseline years and even 1 bank using 2023 as a baseline in both cases.
- Life insurers and asset managers.
- The majority of participants have selected a 2019 baseline year and have noted the impact of Covid-19 on their 2020 emissions numbers.
- We have observed a number of participants disclosing emissions without setting a baseline year, reflecting the lack of target setting seen by asset wealth managers. This is observed through 14 disclosing listed equity during 2023, whereas only 8 baseline years have been set.
Greenhouse Gases (GHGs)
- All participants which disclosed absolute emissions reported in either CO2 or CO2 equivalent (CO2e) in line with last year’s disclosures.
- Less than half of both Banks and Life insurers and Asset managers are disclosing which GHGs are within scope of their GHG measurement. Hence only CO2 or CO2 equivalent (CO2e) is included in their disclosures.
Borrowers and investees scope of emissions
- All Banks have disclosed emissions at a sector/asset class level, while Life insurers and Asset managers have disclosed at an asset class level, with 2 also disclosing at a sector level.
- There is a great deviation among FIs regarding the inclusion of scope 3 emissions.
- Banks - Financed emissions
- Banks show variations in sector level reporting for Mining and Metals, with some reporting emissions at a granular level for each individual metal and others reporting on metals in aggregate.
- The Aviation sector shows the greatest variation, with some Banks excluding scope 2 and/or 3 emissions and only a small proportion including all 3 scopes.
- For the Oil and Gas sector, the majority of Banks have included scope 3 emissions.
- Banks - Facilitated emissions
- For the Oil and Gas and Automotive sectors, the majority of Banks have included all scopes of emissions, while the remaining 5 sectors consistently excluded scope 3 emissions.
- The Aviation and Shipping sectors only include scope 1 emissions, noting that only one bank has reported facilitated emissions for these sectors.
- Life insurers and Asset managers
- All institutions have reported scope 1 and scope 2 financed emissions.
- Some participants have not disclosed the scope of emissions included in their in-scope asset classes.
- Only 2 participants have included scope 3 emissions across all asset classes.
1 Across all three graphs if all emissions scopes are disclosed both on an individual and combined basis, we include this in the graphs on a combined basis to avoid double counting.
2 Given facilitated emissions is not calculated for for mortgages and commercial real estate we have included cement and shipping sectors instead.
Sector level value chain considerations
- Banks
- This year we have seen a high proportion of participants including upstream companies in the Oil and Gas and Power and Utilities sector, continuing to dominate over other areas of the value chain reflecting the higher emitting part of the value chain for those industry segments. Similarly for the Automotive sector more upstream companies were included, whilst upstream companies remain consistently excluded for the Mining and Metals sector.
- For the Automotive and Mining and Metals sectors we note that the midstream companies are almost always included since these correspond to manufacturing and is the most carbon intensive area of the value chain.
- Life insurers and Asset Managers
- We note that the value chain information is not disclosed by Life insurers and Asset managers since most of them have not disclosed sector level information.
To ensure comparability, we have included only those sectors which are covered by most of the Banks, namely Oil and Gas, Power and Utilities, Automotive and mining and metals sectors, which are also the highest emitting sectors. Additionally, we note that the concept of value in the context of financed emissions does not apply to mortgages and CRE.
3. Data
Data availability and transparency: There is a gap in the availability of emissions data with institutions having to use proxies to fill these gaps as set out by the guidance.
This is reflected in PCAF data quality scores which have not significantly improved from YE 22. We note that for asset managers and life insurers, 13 participants have either committed to PCAF or disclosed in line with PCAF but have not reported a PCAF data quality score. Please refer to the ‘Financed emissions: Navigating the data challenge’ paper for further insights on the data considerations in emissions modelling.
PCAF score
- For the majority of sectors and asset classes we have observed a large range of PCAF scores, this outlines that FIs are using different sources and types of data to calculate their financed emissions i.e. proxies versus the use of verified emissions. However, within the Mortgages asset class we observe a more compressed range of PCAF scores reflecting the use of proxies approaches primarily, such as publicly available EPC data for UK properties.
- For both Banks and Life insurers and Asset managers we observed that scope 1&2 on average has lower PCAF scores compared to scope 3. This is aligned to expectations, as this is due to the limited number of data sources available as well as inherent uncertainty for scope 3 emissions. We expect this to improve in the future.
Below we have summarized for the most material sectors/asset class the range of PCAF data quality scores in the following box whisker plots:
Data quality score – Banks
Data quality score - Life insurers and asset managers
Please note, some FI are disclosing scope 1, 2 and 3 on a combined basis. This lack of differentiation in emissions scope results in some larger than expected ranges for the scope 3 data quality scores in the graphs above.
To ensure comparability, we have focused on sectors and asset classes which are widely covered by most institutions, namely Oil and Gas, Power and Utilities, Automotive and Mining and Metals sectors. Additionally we have considered the Commercial Real Estate and Mortgages asset classes, which have seen a growing number of disclosures. For Life insurers and Asset managers we have included the listed equity and corporate bonds and sovereign debt asset classes.
4. Target setting and forecasting
Evolving approach to forecasting: Key decisions and assumptions on target setting and forecasting are still evolving and hence FIs are looking to make bespoke assumptions to allow for this. For example, the choice of reference pathways for forecasting purposes. 18 out of 47 FIs (38%) disclosed interim targets at YE23, highlighting a variation in target setting compared to YE22 where 20 out of 26 FIs (77%) disclosed interim targets. We note that some FIs have clearly disclosed these bespoke assumptions as well as how these will be monitored going forwards.
Interim and Net Zero Targets
- Overall, 37 of the 47 FIs analysed have disclosed interim targets.
- We note that Banks are disclosing targets at sector level, while some Life insurers and Asset managers are disclosing a single target as opposed to multiple sector-specific targets.
- 23 out of 25 Banks and 18 of 22 Life insurers and Asset managers have Net Zero Targets for their financed emissions.
To ensure comparability, we have focused on sectors and asset classes which are widely covered by most institutions.
Benchmark scenario selection
- Banks
- For both Oil and Gas and Power and Utilities sectors, 3 different scenarios are being used across Banks with the IEA NZE being the most common.
- Fewer banks disclosed reference pathways for Mortgages and Commercial Real Estate compared to Oil and Gas and Power and Utilities, with IEA NZE and CCC BNZ being the most common among those that did.
- Other sectors/asset classes include far fewer reference pathways. This reflects Banks that have not set targets for other sectors/asset classes as well as Banks that have not used reference pathways to set their targets. We note, in some cases reference pathways do not yet exist for specific sectors/asset classes.
- Life insurers and asset managers
- Only 5 Life insurers and Asset managers have disclosed the benchmark scenarios they have adopted and not necessarily for all of their asset classes. The most common reference pathway used was CRREM.
Banks
Life insurers and Asset managers
How can PwC help?
We have experience supporting our clients in the Financial Services sector with various challenges around sustainability disclosures, including emissions modelling and measuring climate related risks. This includes:
- Data sourcing and processing - selecting appropriate data based on defined criteria, sensitivity and benchmarking analysis, use of proxies when data not available.
- Emissions modelling – model design, development, validation and implementation.
- Governance and monitoring – defining and embedding, risk appetite, governance and monitoring framework.
- Portfolio and counterparty management using analytics and insights - support active portfolio and counterparty management.
- Decarbonisation strategy and optimisation - including dynamic balance sheet and credibility assessment considerations.
- Embedding financed emissions output into the business – sustainability reporting, transition planning.
Across all these offerings, we have a set of digital assets including a cloud-based tool (Portfolio Emissions Manager – PEM) which supports financial services in quantifying their carbon footprint and forecasting their decarbonisation pathway.
Please reach out for a demo of the tool and how it can help your institution in the net zero journey.
Glossary
- IEA NZE: The Net Zero Emissions by 2050 Scenario (IEA NZE Scenario) is a normative scenario that describes a pathway towards achieving net-zero carbon dioxide emissions by 2050, for the global energy sector.
- TCFD: The Financial Stability Board created the Task Force on Climate-related Financial Disclosures (TCFD) to improve and increase reporting of climate-related financial information. TCFD guidance recommends that financial institutions report financed emissions in line with PCAF as it provides the granularity required to contribute to a consistent implementation of TCFD and comply with UK government requirements.
- ISSB: International Sustainability Standards Board (ISSB) is shaping the future of sustainable reporting with global standards on the basis of the recommendation from TCFD. In particular for the UK, they will be endorsed to create the “UK Sustainability Disclosure Standards (SDS)”. Developed by the Department for Business and Trade, the UK SDS are expected to be released in the first quarter of 2025. Source: gov.uk.
- CSRD: The Corporate Sustainability Reporting Directive (CSRD) is an European Union initiative which builds on the existing Non-Financial Reporting Directive (NFRD). It aims to enhance transparency and accountability by requiring all large companies and listed SMEs to regularly report on their environmental and social activities.
- NZBA: The Net-Zero Banking Alliance (NZBA) is the banking member of the Glasgow Financial Alliance for Net Zero (GFANZ). It compromises leading international Banks dedicated to funding ambitious climate initiatives, aiming to transition the economy to net-zero greenhouse gas emissions by 2050.
- SEC: The US Securities and Exchange Commission (SEC) has issued new rules that require disclosure of climate-related risks that could materially impact business or financial statements. The gathering and reporting may require significant changes to a registrant’s systems, processes and controls.
- Portfolio Alignment Team: The Portfolio Alignment Team is responsible for aligning an organization's projects and initiatives with its strategic objectives to maximise performance and resource allocation.
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