Financed Carbon Emissions and Target Setting
Evolving towards an emissions reduction scenario for the financial sector requires estimating current financed emissions (the so-called scope 3, group 15), and setting decarbonization targets.
Financed Carbon Emissions and Target Setting
- The measurement process aims to estimate the emissions or carbon intensity of portfolios. This is achieved by establishing links between the financial instruments and the activities of the financed clients.
- This is the starting point for setting targets for each sector and geography under some future scenario.
- It is then necessary to establish risk mitigation and risk management measures to help redirect financial flows.
- All of this should be supported by a progress monitoring tool to ensure that the emission reduction targets are met.
Among the multiple existing measurement alternatives, the one proposed by the PCAF is the most widely used globally by financial institutions due to its relative methodological simplicity, its flexibility and its broad coverage in terms of sectors and segments.
The PCAF has specialist methods for attributing financed emissions by asset type and use of funding, covering both loan and investment portfolios.
The methodology offers different alternatives, to be applied depending on data availability and data quality.
The general approach is based on calculating total counterparty emissions, and allocating a portion of them through an attribution factor.
The Science Based Targets initiative provides a framework for developing strategies and targets aligned with the Paris Agreement or Net Zero Partnerships. The framework is articulated through four components:
- A set of criteria and recommendations for target setting related to coverage, time horizon, ambition or reporting, among others.
- Specific methodologies for measuring and calculating specific targets.
- A set of tools to facilitate the setting of targets aligned with different emission reduction scenarios.
- And a consolidated guide that incorporates practical implementation references from different financial institutions.
The SBT initiative adoption process starts with an analysis of the feasibility of the SBT methodology, the submission of the commitment letter and the design of GHG reduction targets. This is followed by an accreditation process in which the designed targets must be validated against the SBTi criteria. Once the target is approved, it is published on the official SBTi webpage and associated websites, and internal and external communication takes place, along with a follow-up report.