The financial industry has for several years struggled with quantifying environmental, social and corporate governance (ESG) factors in a manner that makes reporting the impacts of client portfolios straightforward and easy to understand.
An international coalition of banks, asset managers and other financial firms is now making it simpler to understand the cost of greenhouse gas emissions associated with financial assets. The Partnership for Carbon Accounting Officials (PCAF) officially launched its Global GHG Accounting and Reporting Standard for the financial industry in November of last year. Recently, firms like RBC and Deutsche Bank earlier this month and this week HSBC have joined the partnership and adopted the standard.
“These firms are joining our network because I think they all see this as a key instrument to get started on their climate journey,” said Giel Linthorst, the executive director of the PCAF. “This global standard helps identify and quantify emissions ... in a financial portfolio, drives data improvements to mitigate risks and helps to create change globally.”
The standard went public just as major asset managers, including BlackRock and Vanguard, have started to emphasize climate change and emissions reductions in their portfolios. Earlier this year, BlackRock released its first climate-aware capital markets assumptions and, in recent weeks, both firms announced that they were joining a pledge to reach net-zero emissions across all of their holdings by 2050.
PCAF’s standard is an accounting methodology for measuring climate impacts that creates clear and equitable rules for reporting across industries and countries, much like GAAP accounting standards leveled the field for financial reporting. It currently covers six asset classes: listed equity and corporate bonds, business loans and unlisted equity, project finance, commercial real estate, mortgages and motor vehicle loans.
Institutions are using the standard to report emissions by asset class and sector, said Linthorst.
“The main method is to just follow the money to see where money from greenhouse gas polluters ends up in the real economy and to quantify the debt it adds to the real economy,” he said. “It’s a point-in-time measurement that represents the same point as an institution’s financial reporting. It connects emissions data to GAAP.”
This helps investors and intermediaries know where the emissions are within their portfolios, said Linthorst.
The standard, moving forward, may also create a foundation for ESG and climate-aware indexing methodologies.
“Products can be linked to this, there will be funds now where you can really say that their index offers a lower financed emissions number,” said Linthorst. “It could also be used to build bonds that demonstrably help to lower emissions.”
The PCAF standard was created by a team of 16 financial institutions, including ABN AMRO in the Netherlands and Boston Common Asset Management, Bank of America and Amalgamated Bank in the U.S.
Linthorst said that PCAF and the standard have their roots in 2015 in the Netherlands, where a group of insurance companies, banks, and other asset managers and owners sought to harmonize the ways they were measuring climate impact to ease the transition to a less carbon-intensive economy. In 2018, Amalgamated Bank investigated the Dutch standard and chose to bring it to North America to create a combined standard for financial firms in the U.S. and Canada.
The global PCAF initiative was then officially launched in 2019, embarking on an effort to translate North American and Dutch work into a worldwide standard for climate reporting.
Today, more than 106 financial institutions holding more than $24 trillion in assets have adopted the standard, the organization said.