(This article was published on 20 December 2022 and updated on 30 January 2025)
What's the issue?
The measurement of financed and facilitated emissions is a complex and fast-moving area. These emissions represent key metrics for commercial banks, insurance companies and asset managers (together, ‘financial institutions’). Those metrics help users to understand what the financial institution is funding and therefore both its ability to influence global emissions and its exposure to transition risk.
Many global banks currently quantify and disclose financed emissions for a subset of their lending exposures – i.e. those in specific sectors. However, measurement methodologies and practices continue to evolve and vary, and it is challenging to give users an end-to-end view of total financed and facilitated emissions at this stage. Most banks do not yet disclose facilitated emissions.
Emissions that financial institutions fund is an important area where the ISSB is balancing the drive to consistency while acknowledging that calculation methodologies need to evolve in practice.
What are the requirements?
The climate standard1 requires financed emissions disclosures for companies with commercial banking, insurance, or asset management activities. To avoid restricting the development of industry practice, the measurement requirements are high-level, and companies need to disclose the methodology used.
Facilitated emissions disclosures for investment banking and brokerage activities, and emissions associated with insurance (or re-insurance) underwriting portfolios (insurance-associated emissions), are not explicitly required because the methodology is not yet sufficiently mature.
The financed emissions disclosure requirements include the following.
Reliefs are available, including a later effective date for all Scope 3 disclosures and permitting inclusion of value chain information with non-aligned reporting periods.
When the climate standard was issued, facilitated emissions disclosure was highlighted as an area for future consideration, along with emissions associated with insurance (or re-insurance) underwriting portfolios.
Stakeholders – including regulators, preparers and investors – have provided feedback about potential areas of clarification that would support implementation of the climate standard. In response, the International Sustainability Standards Board (ISSB) plans to propose a set of narrow-scope amendments to the standard.
The proposals include:
- relief from using GICS to disaggregate emissions if not already doing so or if required by a local jurisdiction to use another system; and
- limiting the disclosure of Scope 3 Category GHG emissions to financed emissions as defined in the climate standard and specifically excluding derivatives.
For more information, see Proposals to simplify IFRS S2
What’s the impact?
The requirement to report on financed emissions brings with it various complexities, including determining appropriate measurement methodologies and overcoming issues with incomplete, outdated or inaccurate data. Our benchmarking analysis showed that data challenges currently hinder the quantification of financed and facilitated emissions, and comparability across banks.
Financial institutions reporting these metrics will need a lot of data – it may take many years to gather relevant data and develop effective reporting, so they should make it a priority now.
Actions for management
- Familiarise yourself with the requirements for commercial banking, asset management and insurance activities.
- Work with a specialist to understand how the climate standard applies to your lending or investment portfolio and what data will be required.
- Consider the systems, processes and controls needed to support your reporting.
- Engage with peers – the PCAF2 standard is an example of industry-led collaboration to resolve a complex challenge. This industry-led collaboration is expected to continue.
- Follow the discussion and engage with the ISSB’s consultation on amendments to the climate standard.
1 IFRS S2 Climate-related Disclosures.
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