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Financed emissions refer to greenhouse gas emissions associated with the funding of projects, companies, or initiatives.

For example, a bank lending money to a company that wants to expand its operations. The company then emits greenhouse gases during this expansion, and whilst the bank isn’t directly producing the emissions, it is indirectly supporting and enabling those emissions through financial assistance.

Investors and financial institutions are increasingly under pressure to assess and disclose the emissions associated with their financial portfolios, as there is growing recognition of the role finance plays in driving and/or mitigating climate change.

Understanding these emission sources is also beneficial for the institutions themselves, to understand the risks they face related to stranded assets (investments that may lose value due to climate-related factors) and reputational damage if they are seen as contributing to climate change.

This increasing pressure has been heightened by IFRS adding “Financed Emissions” to their new S1 disclosure standards released in June (https://www.ifrs.org/issued-standards/ifrs-sustainability-standards-navigator/ifrs-s1-general-requirements/).

The standards contain new disclosure requirements for the Financial sub-sectors of Asset Management & Custody Activities, Commercial Banks and Insurance, with companies in these industries now asked to disclose:

1. Absolute gross financed emissions, disaggregated by (1) Scope 1, (2) Scope 2 and (3) Scope 3
2. The total amount of assets under management (AUM) included in the financed emissions
   disclosure
3. Percentage of total assets under management (AUM) included in the financed emissions
   calculation
4. Description of the methodology used to calculate financed emissions

Scope of inclusion, as well as differing calculation methodologies, are repeated criticisms of emissions disclosure. However, these four specific disclosure metrics are pre-empting these challenges by asking for increased transparency on both.

Availability and quality of data will remain a challenge with the financial institutions relying on cooperation from the entities they have financed. This may be easier if these entities are companies, due to the disclosure requirements already in place for corporates.

But if financial institutions have funded many distinct projects, and initiatives, or are using complex financial instruments, the % AUM disclosed (under metric 3 above) may initially be very small.

Written by Integrum ESG Head of Research Hannah Bennett.