Sharing a Bloomberg article that highlights the critical importance of financing actual emissions reductions, rather than solely focusing on reducing financed emissions: https://www.bloomberg.com/news/articles/2024-07-24/the-accounting-flaw-at-the-heart-of-financed-emissions?utm_source=website&utm_medium=share&utm_campaign=linkedin
Summary of key thoughts on the financed emissions based on the article and personal experience is below:
Financial institutions are increasingly shifting their focus from measuring financed emissions to direct reductions in emissions. Financed emissions, which often suffer from double counting, may provide a misleading picture of environmental impact. For example, a portfolio holding both airline and banking stocks would account for the airline's direct emissions (Scope 1) and the bank's indirect emissions (Scope 3) related to employee travel. If the airline electrifies its fleet, both Scope 1 and Scope 3 emissions would decrease, artificially inflating the perceived reduction in financed emissions. This could lead to deceptive claims about actual environmental impact of the portfolio.
Beyond double counting, I would also mention criticism of PCAF methodology that relies on the Enterprise Value Including Cash (EVIC) for allocation of emissions. EVIC's volatility can cause significant reductions in financed emissions without actual environmental impact, particularly during market booms. Additionally, the mismatch in reporting time of financial (EVIC) and environmental metrics (scope 1, 2, 3 emissions) introduces inconsistencies in the disclosures as you may need to use data from different periods.
Given these problems, finance industry should probably shift a focus from reductions in financed emissions towards measuring actual (absolute) emissions reductions or avoided emissions. I am sure our community have professionals who are facing with calculation of avoided emissions on day to day basis and perhaps could share their painful points and experience.
On a separate note, it would be also interesting to hear from data vendors or data management professionals about their Fintech solutions to calculation of avoided/Scope 4 emissions. Let's explore this hot issue together.
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King regards,
Anastasia Kuznetsova
Product Analyst
NASDAQ
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