DRAFT

New methods

for public consultation
For financial institutions measuring and reporting scope 3 category 15 emissions

Green bonds

Sovereign bonds

Emissions removals

November 2021

PCAF’s draft new methods for public consultation

Table of contents
Acknowledgements

3

Foreword by the PCAF Steering Committee

4

Introduction

6

The new methods under public consultation

8

2.1 Green bonds

9

2.2 Sovereign bonds

15

2.3 Emissions removals

292

PCAF’s draft new methods for public consultation

Acknowledgements
The Partnership for Carbon Accounting Financials (PCAF) is an industry-led initiative. Createdin 2015 by Dutch financial institutions (FIs), PCAF extended to North America in 2018 and scaled
up globally in 2019. The globalization of PCAF is meant to enable FIs worldwide to consistently
measure and disclose the greenhouse gas (GHG) emissions of their financial activities.
As an industry-led partnership, PCAF is governed by a Steering Committee of ABN AMRO,
Amalgamated Bank, ASN Bank, the Global Alliance for Banking on Values, Morgan Stanley, NMB
Bank, Triodos Bank, and a representative from the United Nations (UN)-convened Net-Zero Asset
Owner Alliance. At the time of publishing this document, more than 170 banks and investors
participate in PCAF.2
Responding to industry demand for a global, standardized GHG accounting and reporting
approach, PCAF developed the Global GHG Accounting and Reporting Standard for the
Financial Industry (“the Standard”). Published in November 2020, the Standard provides detailed
methodological guidance to measure and disclose GHG emissions associated with six asset
classes: listed equity and corporate bonds, business loans and unlisted equity, project finance,
commercial real estate, mortgages, and motor vehicle loans.
Since then, banks and investors have asked to expand the Standard with more methods. Thus, 21
PCAF participants volunteered to develop three additional methods for sovereign bonds, green
bonds, and emissions removals. This group of volunteers makes up the PCAF Global Core Teamand is listed below:
ABN AMRO

CDC

HSBC

AIMCo

CTBC Holding

Landsbankinn

Amalgamated Bank

Deutsche Bank

Morgan Stanley

Banco Pichincha

Federated Hermes

Produbanco

Bank of America

FirstRand

RobecoBarclays

FMO

Triodos Bank

Boston Common AssetManagement

Hannon Armstrong

UN-convened Net-Zero Asset
Owner Alliance

The PCAF Secretariat facilitated the Core Team’s work by moderating their technical discussions,reviewing their content, and compiling and editing this document. The PCAF Secretariat is
operated by Guidehouse, a global consultancy firm specialized in energy, sustainability, risk, andcompliance for the financial industry.

This document is open for public consultation until 17 December, 2021. The methodologies inthis consultation document remain under development and the PCAF Core Team will continue toreview these methodologies in light of the consultation responses.
Please cite this document as: PCAF (2021). PCAF’s draft new methods for public consultation.
2

The full list of PCAF participants can be found at:https://carbonaccountingfinancials.com/financial-institutions-taking-action#overview-of-financial-institutions.

3

PCAF’s draft new methods for public consultation

Foreword by the PCAF Steering Committee
Six years after the Paris Agreement was signed, the world is on the way to breaching
the Agreement’s goal of limiting average global temperature rise to 1.5° C. The latest
Intergovernmental Panel on Climate Change report on the physical science basis of climatechange highlights this risk and shows that the world must accelerate short-term decarbonization
efforts to limit the worst consequences of climate change. These short-term efforts meanachieving interim targets that help us reach net-zero emissions by 2050 at the latest.
Achieving net zero requires unprecedented cooperation and action-oriented commitments, aswell as profound changes in our economies and the way we do business. We believe that this ispossible. The International Energy Agency (IEA)’s Net Zero by 2050 report shows us scenarioswith feasible milestones (actions and proven technologies) in buildings, transport, industry,electricity, and heat that can put the world on the right path.
We believe that financial institutions (FIs) can help achieve these milestones and the ultimate
net-zero goal by lending, investing, and offering financial products and services that enable deep
decarbonization. Measuring, tracking, and reporting are crucial components for accountability.
That is why members of the Steering Committee for the Partnership for Carbon Accounting
Financials (PCAF) have been convening FIs worldwide to collaborate in the development ofmethodologies that help our sector measure and disclose the greenhouse gas (GHG) emissions.
These methodologies apply to emissions from loans, investments, and financial products andservices.
One year ago, PCAF published the Global GHG Accounting and Reporting Standard for the
Financial Industry (“the Standard”), which is currently used by more than 170 FIs worldwide
representing more than $54 trillion in total assets. They use it to assess risk, manage impact,
meet the disclosure expectations of important stakeholders, and assess progress toward theirclimate goals. In the past year, the Standard has become vital for FIs to measure and trackprogress toward their contribution to net-zero emissions.
As such, there has been a surge of interest from FIs worldwide to continue expanding theStandard with more methodologies. As members of the Steering Committee for PCAF, we aredelighted to act upon this request and will continue supporting the needs of the sector in therace to net zero.
This report is a response to this global request. It presents three new draft methodologies that
we aim to add to the Standard in 2022. This draft is the result of the tenacious work of FIs thatare part of the PCAF Global Core Team and that volunteered their time to create it. We encourage
you to engage in the consultation process and provide further feedback to the Core Team and tohelp them deliver the final version to be published next year.

4PCAF’s draft new methods for public consultation

We thank the William & Flora Hewlett Foundation, IKEA Foundation, Tempest Advisors, Sequoia
Climate Fund, and Bloomberg Philanthropies for their generous support of this work. We also thankthe institutions we work for that provided us with the time to work on something that can benefit theindustry as a whole.
The PCAF Steering Committee

Tjeerd Krumpelman

Ivan Frishberg

Jeroen Loots

James Niven

Sean WrightDinesh Dulal

Lizzy Eilbracht

Peter Sandahl
forthcoming representative of the

UN-convened
Net-Zero Asset
Owner Alliance5PCAF’s draft new methods for public consultation

Introduction
The Partnership for Carbon Accounting Financials (PCAF) is an industry-led initiative thatseeks to enable financial institutions (FIs) to consistently measure and disclose the absolutegreenhouse gas (GHG) emissions associated with financial activities.
GHG accounting of financial products and services is the annual accounting and disclosure of
Scope 3 category 15 emissions at a fixed point in time in line with financial accounting periods.
In November 2020, PCAF published the Global GHG Accounting and Reporting Standard for the
Financial Industry (“the Standard”). The Standard is a response to industry demand for a global,
standardized approach to measure and report emissions of financial activities. Written by adiverse, global team of FIs for FIs, the Standard combines deep industry insight with the rigor of
the GHG Protocol, the supplier of the world’s most widely used GHG accounting standards.
The Standard has been reviewed by the GHG Protocol and conforms with the requirements set
forth in the Corporate Value Chain (Scope 3) Accounting and Reporting Standard for Category 15
investment activities.
As of November 2021, over 170 FIs from more than 45 countries globally have committed tomeasure and disclose emissions associated with their financial activities, and 43 have publishedtheir reports. The increased uptake of PCAF methods by FIs worldwide has triggered financial
regulators and other actors to consider PCAF as the Standard for accounting and disclosing theclimate impact of portfolios.
For example, the Task Force on Climate-related Financial Disclosures (TCFD) recommends in its
Proposed Guidance on Climate-related Metrics, Targets, and Transition Plans that FIs use PCAF’s
methodology to measure the GHG emissions of their financial activities. As TCFD becomesmandatory in multiple countries, FIs can count on PCAF for harmonized and robust approaches tomeasure and report these emissions.
Regulators in the European Union (EU) have started to acknowledge the PCAF Standard as amethodology of choice for complying with climate-related regulations:• The European Central Bank Guide on climate-related and environmental risks indicatesthat FIs are expected to disclose the financed emissions for the whole group. The Guide
mentions PCAF as a methodology that FIs are already using to fulfill this expectation.
• The draft regulatory technical standards for the Sustainable Finance Disclosure Regulation(SFDR) require financial market participants to disclose financed emissions following themethods of the PCAF Standard, specifically when referring to listed equity.
• The European Banking Authority proposes to require all banks under its jurisdiction (EUbanks and non-EU banks with EU subsidiaries) to measure and disclose financed emissions
by June 2024 at the latest.

6

PCAF’s draft new methods for public consultation

Similarly, in the US, the Securities and Exchange Commission (SEC) has begun to take steps
toward more stringent disclosure regulation, starting with holding a public consultation in March
2021 to receive comments on climate change disclosures. SEC Chairman Gary Gensler has
indicated his goal to develop a mandatory climate disclosure rule by the end of 2021 that enablesconsistent, comparable, and decision-useful disclosures.
All in all, the uptake of PCAF globally and the continuous industry demand for methods that
address all types of portfolios have led PCAF to draft additional methods. These new methods
cover green bonds, sovereign bonds, and loans and investments in emissions removals. The
following chapter describes them in detail.
The PCAF Core Team drafted these new methods following the principles of the GHG Protocol’s
Scope 3 inventories: completeness, consistency, relevance, accuracy, and transparency. The
methods are also meant to comply with the PCAF Standard requirements of recognition,measurement, attribution, data quality, and disclosure.2
PCAF launched a public consultation of the new methods on 10 November 2021 and seeks
feedback from all stakeholders, including FIs, regulators, policymakers, supervisors, data providers,consultants, and NGOs.
To participate in public consultation, stakeholders should follow the instructions on
https://carbonaccountingfinancials.com/public-consultation.

2

For more information about these principles and requirements, see Figure 4-1 on page 34 of the Global GHG Accounting andReporting Standard for the Financial Industry.

7

PCAF’s draft new methods for public consultation

The new methods under public consultation

Green bonds

Sovereign bonds

Emissions removals

8

PCAF’s draft new methods for public consultation

2.1 Green bonds
ASSET CLASS DEFINITION
This section provides further information on accounting for corporate bonds that have a clear useof proceeds for underlying green projects (i.e., green bonds). This section only applies to green
bonds where the underlying assets are under the operational control of the corporate. It does
not apply to other types of green bonds, such as corporate green bonds where the proceeds areinvested in projects outside the operational control of the corporate or green bonds issued bysovereigns or FIs. These other types of green bonds could be covered by future updates of theStandard once methodologies for indirect investments are available.
While referring primarily to green bonds, the methodology outlined might be applied similarly toother bonds with the use of proceeds such as social or sustainability bonds. This section does
not cover sustainability-linked bonds because sustainability-linked bonds do not have a clear
use of proceeds. In general, green, sustainability, and social bonds are connected to a specificframework—often referred to as green, sustainability, or social bond frameworks, respectively. The
bond framework builds on the green and social bond principles published by the International
Capital Markets Association (ICMA)3 and outlines how the proceeds from the bond issuance will
be used.

EMISSIONS SCOPES COVEREDFIs shall report the absolute Scope 1 and 2 emissions of the project.4 Scope 3
emissions should be covered if relevant.5 Avoided and removed emissions may be reported if
relevant, but they must be reported separately from absolute emissions.

ATTRIBUTION OF EMISSIONSAssessment boundary based on the use of proceeds
When accounting for the emissions impact of a green bond, the assessment boundary shall bedrawn around the projects for which the proceeds of the green bond are used.6 If the impact
report provides attributed absolute, avoided, or removed emissions in line with the PCAF Global
Standard, the FI only needs to implement attribution determined by the ratio of its outstanding
amount in the green bond (numerator) and the par value of the green bond (denominator). Whenan issuer finances a pool of projects with several green bonds and only reports for the aggregatedportfolio, the FI may attribute based on the total sum of green bond par values:
𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓! =

3
4
5
6

𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝑝𝑝𝑝𝑝𝑝𝑝 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 ℎ𝑒𝑒𝑒𝑒𝑒𝑒 𝑏𝑏𝑏𝑏 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖!
𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑝𝑝𝑝𝑝𝑝𝑝 𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣𝑣!
(𝑤𝑤𝑤𝑤𝑤𝑤ℎ 𝑏𝑏 = 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏)

See more information here: https://www.icmagroup.org/sustainable-finance/the-principles-guidelines-and-handbooks/
Impact reporting may need to evolve because it does not yet consitently disclose absolute emissions breakdowns for scopes 1, 2,
and 3.
Examples of projects where scope 3 emissions are relevant include but are not limited to hydroelectric power plants andinfrastructure projects.
Corporates may report emissions from several green bonds. The investor should only calculate emissions for the specific green
bond that it has purchased.

9

PCAF’s draft new methods for public consultation

EQUATIONS TO CALCULATE FINANCED EMISSIONS
When attributed absolute, avoided, or removed emissions in line with the PCAF Global Standard
are not available, then the FI needs to calculate the financed or avoided emissions using thefollowing equation:7

𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 = 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 ∗ >"#$%&'(𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑜𝑜𝑜𝑜 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝∗ 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 + 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑜𝑜𝑜𝑜 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝

The project emissions can be calculated based on the guidance in the Project Finance chapterof the PCAF Standard. This means that these emissions can also be estimated using default
emissions factors based on physical activity (e.g., t CO2e/MWh) or economic activity (e.g., t
CO2e/€ of revenue or t CO2e/€ of asset). To calculate emissions, only the green bond-financed(ring-fenced) activities are included. Emissions and financials related to existing activities outside
the financed project but within the financed organization are not considered.
The following table illustrates the example of a corporate green bond, where an energy corporate
issues a 3 MEUR green bond based on three renewable energy projects it owns and fully fundswith green bonds. This means that the attribution term that appears in the summation part of thefinanced emissions equation above is equal to 1 (i.e., 100% attribution, so the green bond finances
all debt and equity in the project).
Total debt
+ equity(MEUR)

Outstanding Scope 1
investment

Scope 2

Scope 3

Avoidedemissions

500,000

50,000300,000

N/A

1,000

0

50,000100,000

Energycorporate

15

Green bond(total)3

Solar project(operational)

1

500

0

5,000

60,000Wind project(operational)

1

500

0

5,000

40,000

Solar project(construction)

1

0

0

40,0000

1.5

For this example, an investor is investing 1.5 MEUR in the green bond, which means the attribution
factor will be 1.5 MEUR/3 MEUR=50%. Therefore, this investor would calculate the following
emissions impact for this green bond investment:
Scope 1
Financed emissions (green bond)7

Scope 2500

Scope 30

Avoidedemissions
25,00050,000If the allocation of bond proceeds to specific projects is not made clear in the impact reports, the investor should make areasonable assumption on the allocation to underlying projects. If this is not possible, the financed emissions may be calculatedusing the total sum of debt plus equity and emissions for all underlying projects.

10PCAF’s draft new methods for public consultation

These absolute emissions can be added to the overall portfolio emissions of the investor.
Avoided emissions can also be reported as part of the overall portfolio, but they must be reported
separately from absolute financed emissions.

DATA REQUIREDThe use of impact reports
The issuer of a green bond typically publishes an impact report annually. This report indicatesthe estimated environmental impact from projects or activities financed by using proceedsfrom the green bond.8 The information in an impact report can be used to calculate financed
emissions, but the FI has to make sure that all information used is in line with the PCAF Standard.
This means that absolute emissions shall be reported by the FI. If absolute emissions are notavailable in the impact report or the impact report has not been issued, the FI needs to estimate
the absolute emissions using other means—for example, for project finance, investments by using
physical activity-based emissions or economic activity-based emissions (see further detail underlimitations).

LIMITATIONSInsufficient data in impact reports
Many impact reports are not yet in line with the requirements of the PCAF Standard, but thegreen bonds methodology intends to provide an incentive for more issuers to do so.
In addition, issuers of green bonds shall have the impact reports audited or verified by a third
party, confirming that the proceeds have been allocated to eligible projects. Underlying green
bond frameworks shall have received and publicly published a second party opinion.
Method does not convey other environmental or social benefits
Impact reports may report other environmental benefits of green bonds in addition to reduction ofgreenhouse gas (GHG) emissions. Although PCAF recognizes that green, social, and sustainablebonds may provide other benefits and focus on aspects other than GHG emissions reduction,these are not to be considered in the context of climate impacts covered in the PCAF Standard.
Under-allocation or over-allocation of emissions in the context of “use of proceeds”
The PCAF Standard relies on a follow-the-money approach for GHG accounting, and its
attribution method is intended to account for 100% of corporate emissions while minimizing
double counting to the extent possible. Limited data continues to be a main challenge incalculating financed emissions with accuracy, and the incorporation of the green bonds reporting
methodology outlined in the above sections has implications for financed emissions reporting at
the total corporate level.
Where a corporate’s green bond emissions and financials are not both disclosed or not correctly
taken into account, the calculation of financed emissions at a corporate level can result in underallocated or over-allocated emissions. This occurs due to the “use of proceeds” component ofgreen bonds outlined in the ICMA’s Green Bond Principles, which demands that any absolute8

See more information about impact reporting in the International Capital Market Association’s Harmonized Framework for Impact
reporting and the Nordic Public Sector Issuers Position Paper on Green Bonds Impact Reporting.

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PCAF’s draft new methods for public consultation

emissions of a green bond project be “ring-fenced” and solely attributed to owners of that green
bond like avoided emissions.
According to this logic, if a corporate issues a green bond, non-green bond “regular investors”
should restrict their assessment boundary to those corporate assets outside of the green bond.
This means that a green bond project’s absolute emissions should be demarcated from theabsolute emissions of its overall corporate. Likewise, a green bond project’s total value (totaldebt) should be demarcated from the corporate’s total Enterprise Value Including Cash (EVIC).
In practice, this scenario is not usually feasible, so the under-/over-allocation of emissions is alimitation of this method.
An under-allocation of emissions can occur when there is a failure to demarcate (subtract) agreen bond project’s total value from the EVIC of the overall corporate to which it belongs. In
this event, “regular investors” end up calculating their attribution of the corporate’s emissions
based on an inflated denominator (inclusive of green bonds’ total debt, which is supposed to be
ring-fenced). Parallel demarcation of a green bond project’s absolute emissions from those ofan overall corporate is also necessary for methodological accuracy, but failure to do so does notcontribute to the under allocation of emissions.
The following example demonstrates emissions under-allocation as a result of not adjusting total
EVIC of a communication services corporate to exclude the value of its green bond(s). We assume
that three green bond investors each invest 1 MEUR (totaling 3 MEUR green bond investments)
while 397 regular investors each invest 1 MEUR (totaling 397 MEUR regular investments).
Corporate emissions and debt figures remain inclusive of green bond totals:
Scope 1

9

Scope 2

Scope 3

Avoidedemissions9

Total debt
+ equity(MEUR)

Communication
Services Corporate

300,000

4,000,000

9,000,000

900,000

400

Corporate incl. green
bonds (reg. investors)

300,000

4,000,000

9,000,000

900,000

400

Total green bonds(green bond investors)

1,000

0

50,000900,000

3

If the International Capital Markets Association protocol on ring-fencing of green assets is not implemented, a double countingof avoided emissions can also occur (i.e., if regular investors are taking credit for avoided emissions solely funded by green bondinvestors).

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PCAF’s draft new methods for public consultation

Focusing on Scope 1 emissions, regular corporate and green bond investors would then calculate
the following financed emissions:
Scope 1
Total for 397 regular investors(300,000 x 1 / 400 MEUR) x 397 = 297,750 t CO2e

Total for three green bond investors(1,000 x 1 / 3 MEUR) x 3 = 1,000 t CO2e

Total financed emissions calculated

297,750 + 1,000 = 298,750 t CO2e

In this example, the total financed emissions calculated (298,750 t CO2e) are less than the total
corporate emissions (300,000 t CO2e), leaving 1,250 t CO2e in emissions unaccounted for.
An emissions over-allocation can also occur in the following cases:
1. Emissions per MEUR invested into a green bond are greater than emissions per MEUR
invested in an overall corporate.
2. Green bond total value has been successfully demarcated from corporate total EVIC, butparallel adjustment has not been made to demarcate green bond emissions from total
corporate emissions.
To avoid under-allocating or over-allocating emissions:
1. Issuers (corporates) should report the financials and emissions profiles of individual green
bond projects separate from their other assets.
2. To the extent enabled by issuer disclosures, FIs and users of PCAF should make every
effort to demarcate (subtract) green bond “total debt” and emissions from total EVIC andemissions figures used for financed emissions calculation at the corporate level.
The following example demonstrates the correct allocation of emissions by adjusting total
EVIC of the same communication services corporate to exclude the value of its green bond(s).
We still assume that three green bond investors each invest 1 MEUR (totaling 3 MEUR green
bond investments) while 397 regular investors each invest 1 MEUR (totaling 397 MEUR regularinvestments). Corporate emissions and debt figures are no longer inclusive of green bond totals:
Scope 1

Scope 2

Scope 3

Avoidedemissions

Total debt +equity (MEUR)

Communication Services
Corporate

300,000

4,000,000

9,000,000

900,000

400

Corp., ex Green Bond
(reg. investors)

299,000

4,000,000

8,950,000

N/A

397

1,000

0

50,000900,000

3

Total green bonds (green
bond investors)

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PCAF’s draft new methods for public consultation

Focusing on Scope 1 emissions, regular corporate and green bond investors would then calculate
the following financed emissions:
Scope 1
Total for 397 regular investors(299,000 x 1 / 397 MEUR) x 397 = 299,000 t CO2e

Total for three green bond investors(1,000 x 1 / 3 MEUR) x 3 = 1,000 t CO2e

Total financed emissions calculated

299,000 + 1,000 = 300,000 t CO2e

In this example, total financed emissions calculated across regular and green bond investors(299,000 + 1,000 t CO2e) is now equal to total corporate emissions (300,000 t CO2e).
Where there is not yet sufficient data or capacity to demarcate green bond emissions andfinancials from an overall corporate’s figures, an under-allocation or over-allocation of emissions
may occur. Under-allocation may be mitigated in cases where a corporate’s total green bond value
is small compared with its total enterprise value.

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PCAF’s draft new methods for public consultation

2.2 Sovereign bonds
ASSET CLASS DEFINITION
This asset class includes sovereign bonds and sovereign loans of all maturities issued in domestic
or foreign currencies. Both sovereign loans and bonds lead to the transfer of funds to the country,
which in turn creates a debt obligation to be repaid by the borrowing country.
Sovereign debt is typically issued by the central government or treasury. FIs’ exposure to central
banks typically consists of cash, foreign exchange, and derivative (repo) transactions. This central
bank exposure is not within scope of this accounting standard. However, in some countries,
central banks also issue debt on behalf of the sovereign. In those cases, central banks should be
assigned the emissions of the respective sovereign.
It is challenging to extend the accounting standard to sub-sovereign and municipal
counterparties due to very limited data availability and because these counterparties are notdirectly subject to international GHG emissions inventory standards (e.g., by the United Nations
Framework Convention on Climate Change [UNFCCC]). Therefore, these counterparties are notexplicitly part of this asset class, but FIs might consider using an approximation approach (e.g.,by share of GDP generated by sub-sovereigns) to evaluate the emissions attributable to subsovereign and municipal counterparties.
Supranationals are political unions first, and their balance sheets represent the aggregatedbalance sheets of their members. Technically, it is possible to aggregate the GHG emissions ofsupranationals as a weighted sum of the emissions of its members. Practically, this would leadto double counting and could be misleading for financial portfolio assessments. However, theaggregated view can be useful for engagement with respective bodies.

EMISSIONS COVEREDThe GHG Protocol’s definition of Scope 1, 2, and 3 emissions was initially developed forclassification of corporate emissions. PCAF has attempted to mirror this approach for sovereign
debt and has identified two possible scope accounting methods: Territorial Approach andGovernment Approach.
At the same time, PCAF recognizes that both approaches only offer an approximation, and PCAF
recommends accounting for sovereign emissions by using the more readily available standardized
metrics: Production Emissions and Consumption Emissions. However, FIs might have to report
the Scope 1, 2, and 3 emissions due to regulatory requirements in the EU, for example. Therefore,
PCAF suggests two approaches for public consultation as described below.

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PCAF’s draft new methods for public consultation

Territorial Approach

Government Approach

Production Emissions

Production Emissions /Consumption
Emissions

Scope 1: Production excl. exports
Scope 3: Exports

Consumption
Emissions

Scope 1: Production excl. exports

depending whether
only production or also
consumption scope istaken into account

Scope 2: Imports

Scope 1: Direct government
Scope 2: Indirect government
Scope 3: Government
expenditures +non-government country
emissions

In its sovereign GHG accounting approach, PCAF suggests primarily aligning with the metricfulfilling the reporting requirements of UNFCCC territorial GHG emissions (Production Emissions).
Production emissions are emissions attributable to emissions produced domestically and include
domestic consumption and exports. This definition follows the territorial emissions approach
adopted by UNFCCC for annual national inventories and is typically referenced by sovereigns intheir Nationally Determined Contributions (NDCs).
In line with UNFCCC, the emissions should cover GHG emissions from specified key sectors andcategories (energy, industrial processes and product use, agriculture, forestry, other land use, andwaste).10 However, there is a divergence of views among emissions data providers and climate
experts regarding the accounting of land use, land-use change, and forestry (LULUCF) emissions
given significant data uncertainty. Also, LULUCF emissions have the potential to distort theoverall trends of the key sectors (energy, industrial processes) that contribute to global warming.
Because LULUCF emissions are typically included in countries’ mitigation targets in their NDCs,
PCAF recommends using the complete emissions data (including LULUCF) for reporting foraccounting purposes. FIs might also consider tracking and reviewing the data excluding LULUCF
for a deeper assessment of sovereign GHG reduction progress.
Although Production Emissions is currently the key metric to account for sovereign GHG
emissions, PCAF also recommends that FIs track the GHG emissions of countries more holisticallyand use Consumption Emissions as an optional supporting metric (e.g., Absolute Emissions
Levels, Emission Intensity).
Consumption Emissions reflect the demand side of sovereign emissions and account for
consumption patterns and trade effects. This metric provides a broader view of a sovereign’s
GHG emissions and tackles the issue of carbon leakage that arises due to production shifts fromcountries where goods are actually consumed later. It is also an important metric in the context
of broader sovereign responsibility for emissions caused. As sovereigns focus on production
emissions-driven GHG reduction targets, their consumption emissions might follow a different
trend, which can be seen in the example below:11

10 2006 IPCC Guidelines for National Greenhouse Gas Inventories.
11 https://ourworldindata.org/grapher/production-vs-consumption-co2-emissions?country=~CHE

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PCAF’s draft new methods for public consultation

Production vs. consumption-based CO₂ emissions, Switzerland

Annual consumption-based emissions are domestic emissions adjusted for trade. If a country imports goods theCO2 emissions needed to produce such goods are added to its domestic emissions; if it exports goods then thisis subtracted.

120 million t

Consumption-based CO2 emissions

100 million t

80 million t

60 million t

40 million t
Production-based CO2 emissions

20 million t

0t

1990

1995

2000

2005

2010

2015

2020

Source: Global Carbon Project
OurWorldInData.org/co2-and-other-greenhouse-gas-emissions/
Note: This measures CO2 emissions from fossil fuels and cement production only – land use change is not included.

• CC BY

Although consumption emissions are currently not included in the UNFCCC Paris Agreement
Framework and inventory, FIs can use this metric for a more holistic assessment of a sovereign’s
carbon emissions and for engagement with sovereigns. They can also use this metric for potential
collective engagement with UNFCCC to broaden the scope of countries’ accountability.
Nevertheless, PCAF acknowledges that there are current limitations to the usability of this metricgiven the following:• Difficulty in accurate allocation of emissions along the supply value chain• Involvement of input output models that can vary depending on the data provider• Time lag in data availability (approximately 2 years compared with production emissions)• The fact that only CO2 emissions are typically available
PCAF notes that using Production and Consumption Emissions for sovereign GHG accounting
implies that sovereign debt emissions would be considered separately from corporate emissions
and other asset classes in a portfolio when individuals would rather compare these to each otherrather than to GHG accounting of other asset classes. The advantage of using these metrics is
better availability at a global level and stronger alignment with UNFCCC inventory and sovereigns’
national climate plans (at least for Production Emissions). Both metrics can also be used inintensity metrics for comparison of the sovereigns as stated in the following section.
Territorial Approach
Under this approach, a sovereign is seen primarily as a national territory, and its direct (Scope 1)
GHG emissions are attributable to the emissions produced and consumed within its boundaries.
Similar to the Scope 1, 2, and 3 logic of corporate emissions, the indirect emissions have twodimensions:17

PCAF’s draft new methods for public consultation

emissions generated from purchased sources (Scope 2: Imports) and emissions generated by
activities outside of the national boundaries of a country (Scope 3: Exports).
Scope 1

Scope 2

Scope 3

Domestic territorial production
emissions excluding emissions
attributable to gross exports

Emissions attributable to grossimports

Emissions attributable to grossexports

The approach deems capturing emissions generated by a country’s production, consumption, andtrade activity.
One of the limitations of the approach is that given the accounting of all emissions attributable
to a national territory, it introduces double counting of emissions generated by other sectors of
the economy (corporate, sub-sovereign) and complicates GHG accounting for financial portfolios
containing multiple asset classes.
A further limitation of the approach is limited data quality. At the granularity of single Scope 1,
2, and 3 categories, public data is currently available only for Organisation for Economic Cooperation and Development (OECD) countries12 (around 35% of global emissions) and with aconsiderable time lag (2015). The data is derived from allocation of emissions to countries andsectors on the basis of inter country input-output tables. Extension of data coverage in scope
and time is theoretically possible with the help of estimates and modeling, though at a loss of
accuracy. PCAF currently does not recommend a particular modeling approach.
To extend the accounting to sub-sovereign and municipal counterparties, FIs might consider
using an approximation approach (e.g., by share of GDP generated by sub-sovereigns) to evaluate
the emissions attributable to these counterparties, noting that aggregation of GHG emissions at a
portfolio level would involve multiple counting.
Government Approach
Another approach under consideration to account for sovereign GHG emissions is focused on
the central government role of a sovereign, which contains the central government activities
themselves and the influence exerted by policies and regulations on the economy.
Scope 1

Scope 2

Scope 3

Direct emissions of the central
government (e.g., governmentowned buildings, vehicles)

Indirect emissions of thecentral government (emissions
attributable to energy
purchases)

3.1 Indirect emissions of
the central government(expenditures, subsidies,
investments)13
3.2 Non-governmental territorial
production/consumption
emissions of the country (e.g.,
corporate sector) minus 3.1

Similar to companies, a sovereign’s Scope 1 emissions are attributable to emissions generated
by the central government’s buildings and transport vehicles. Scope 2 indirect emissions for
12 https://stats.oecd.org/Index.aspx?DataSetCode=IO_GHG_2019
13 In the case of production emissions, 3.1 should only cover indirect emissions within the country boundary.

18

PCAF’s draft new methods for public consultationcompanies arise from the purchase of electricity, steam, heat, or cooling, similar to corporate
Scope 2 accounting. In a sovereign’s case, Scope 2 indirect emissions would be attributable toemissions associated with a central government’s purchase of energy. Scope 3 indirect emissions
are attributable to sources not owned or controlled by the reporting entity. In PCAF’s opinion,
Scope 3 covers a broad range of emissions for a sovereign:• Emissions of the central government arising from expenditures, transfers, and investments• All the territorial non-governmental emissions attributable to the country that include
territorial Production and Consumption Emissions
The range of Scope 3 emissions reflects the broad influence of a government from its own
operations to all the sectors of its country’s economy, influenced by the government’s policies
and regulations. Notably, Scope 3 emissions introduce double counting with other sectors of theeconomy. At the Scope 1 and 2 levels, this approach allows separating the public sector fromthe private sector and accounting for these economic sectors separately. However, the share of
Scope (1+2) emissions would account for less than 1% of total country emissions as indicatedbelow for the largest European countries, limiting the relevance of accounting for Scope (1+2)
emissions.
The following table indicates the Scope 1 numbers for a pool of European countries, calculated on
the basis of Eurostat input-output tables:
Government operationalemissions (Scope 1)

2015

2016

2017

2018

Austria0.1000%0.1000%0.1000%0.1000%Belgium

0.0012%0.0012%0.0011%0.0011%

Denmark

0.0007%0.0007%0.0010%0.0009%Germany

0.0008%0.0008%0.0007%0.0006%

Ireland0.0008%0.0010%0.0011%0.0011%

Greece0.0025%0.0027%0.0025%0.0023%Spain

0.0012%0.0013%0.0012%0.0012%

France0.0008%0.0008%0.0008%0.0008%Italy

0.0004%0.0005%0.0004%0.0005%

Netherlands

0.0007%0.0006%0.0007%0.0006%The Scope 2 and 3 data can also be calculated on the basis of input-output tables, subject toavailability of raw data.14
It is also possible to approximate the total (direct and indirect) central government emissions by ashare of central government expenditure in relation to GDP:
Sovereign’s Scope (1+2+3.1) =!"#$%&'$&( ("(*+ $,-$&./(0%$GDPi∗ Total Sovereign Emissions s

where s = sovereign, Total Sovereign Emissions = Total Production or Consumption Emissions

14 Sources: World Input-Output Database (WIOD), Eurostat, Global Trade Analysis Project (GTAP)

19

PCAF’s draft new methods for public consultation

Admittedly, this approximation is imperfect because ideally it would be necessary to distinguishbetween local and foreign sovereign expenditures. In this case, local expenditures would allow
approximating a central government’s production emissions, whereas adding foreign expenditures
would allow approximating consumption emissions.
The data covering Total Production or Consumption Emissions is available as described below.
The Scope (1+2+3.1) emissions cover the emissions of the central government and allow
separating public and private sectors in a multi-asset portfolio that already accounts for Scope 3
emissions, noting the double counting contained in the Scope 3.1 emissions.
To calculate Scope 3.2 emissions, one would subtract the Scope (1+2+3.1) emissions from thecountry’s total emissions.

Scope 3.2 emissions = Total Country Emissions – (Scope 1+2+Scope 3.1) Emissions
A similar calculation is applicable to calculate the total Scope 3 emissions of a sovereign:

Scope 3 Emissions = Total Country Emissions – (Scope 1+2) Emissions
If raw data is available (or as it becomes available), the calculation can be extended to the subsovereign sector and be aggregated at Scope 1+2 levels without double counting.
Please see below for a comparison of key features of the two approaches.
Approach

Advantages

Territorial
Approach- Broad sovereign role and responsibility - Double counting emissions with otherat all scope levels, not limited to central sectors (e.g., corporates)
government- Limited Scope 1, 2, and 3 data
- Allows accounting for Production andavailability—extension of coverage
Consumption Emissions
would require estimates and time
extrapolation

Limitations

Government
Approach- Separation of emissions from public- Risk of incomplete accounting forand private sectors at Scope 1+2 levels, sovereign emissions if only Scope
mitigation of double counting
1+2, which typically account for <1% of- Allows accounting for Production andsovereign emissions, is considered
Consumption Emissions if Scope 1, 2,- Limited separate Scope 1, 2, and 3
and 3 are considereddata availability—approximations are
imprecise and complex

With a varying degree of data availability as stated above, Scope 1, 2, and 3 data can be reported
in both approaches. PCAF generally recommends reporting Scope 1, 2, and 3 data while being
mindful of the double counting present for portfolio aggregating purposes, particularly in the
Territorial Approach. On the contrary, the Government Approach allows reporting and aggregating
Scope 1 and 2 level emissions without double counting, noting that Scope (1+2) emissions would
account for <1% of Total Production Emissions of the sovereign.

20

PCAF’s draft new methods for public consultation

Ultimately, as mentioned in the beginning, both approaches converge to the key two metrics thatare widely used for reporting and sovereign comparison purposes: Production Emissions (in linewith UNFCCC inventory requirements) and Consumption Emissions (for a wider holistic view ofthe sovereign).

ATTRIBUTION OF EMISSIONS
According to PCAF requirements, ‘the FI’s share of emissions shall be proportional to the size of
its exposure to the borrower’s total value.’ Another key principle of PCAF is ‘follow the money,’meaning that the money should be followed as far as possible to understand and account for the
climate impact of the real economy.
For a listed company, total value is measured by EVIC. Applying the same logic to countries ismore challenging because there is no appropriate measurement of a sovereign’s equity, leaving
only outstanding debt in the denominator of the attribution factor.
However, using debt for attribution of sovereign emissions has limitations. It is inaccurate
because sovereigns rarely finance themselves primarily with debt as opposed to tax revenue. Thisapproach is controversial because using outstanding national debt levels only (not including ameasurement for equity) as a normalizing factor makes the approach highly dependent on theextent of a country’s government’s debt.
The table below illustrates this point. Singapore and Hong Kong have fairly comparable GHG
emissions outputs and similar GDP levels. However, the low level of outstanding debt contracted
by Hong Kong relative to Singapore leaves a hypothetical investor (with equal $1 million USD
investments in sovereign bonds of both entities) with significant GHG emissions ownership inHong Kong compared with Singapore.
Country

Emissions(t CO2e)

Debt($ Millions USD)

Exposure($ Millions USD)

Debt Ownership
Approach (t CO2e)Singapore

61,451,586

312,935

1

196

Hong Kong

42,654,105

159

1

268,264

The attribution is computed as follows:
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑡𝑡𝑡𝑡 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 (𝑈𝑈𝑈𝑈𝑈𝑈)∗ 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 (𝑡𝑡𝑡𝑡𝑡𝑡₂𝑒𝑒)
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑜𝑜𝑜𝑜 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 (𝑈𝑈𝑈𝑈𝑈𝑈)Singapore’s attribution is computed as follows:
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑡𝑡𝑡𝑡 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 (𝑈𝑈𝑈𝑈𝑈𝑈)$1 𝑚𝑚𝑚𝑚∗ 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 (𝑡𝑡𝑡𝑡𝑡𝑡₂𝑒𝑒) =∗ 61,451,586 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 = 196 𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑜𝑜𝑜𝑜 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 (𝑈𝑈𝑈𝑈𝑈𝑈)$312,935 𝑚𝑚𝑚𝑚

As the example above shows, attributing emissions by government debt only can generate
unwanted incentives in portfolio steering.

21

PCAF’s draft new methods for public consultation

These effects are also present in corporate emissions accounting, where emissions attributed to
FIs are strongly dependent on the underlying enterprise value (EVIC) of the respective corporate.
However, the impacts on portfolio steering tend to be less pronounced because the EVIC metricincludes a measurement for equity (not attributing all emissions to debt) and given that a muchlarger universe of corporates exists compared with sovereigns.
In PCAF’s view, there is an alternative approach to emissions attribution allowing for a link to thereal economy impact. This alternative involves taking Purchase Power Parity (PPP)-adjusted GDP(i.e., the value of a country’s output as a proxy for the ‘value of the country’) adjusted by the PPP
factor to improve the comparison between the actual economy sizes (see the Intensity Section
below to demonstrate the comparison) and attribution of emissions by the sovereign’s GDP:𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 =𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑡𝑡𝑡𝑡 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 (𝑈𝑈𝑈𝑈𝑈𝑈)∗ 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 (𝑡𝑡𝑡𝑡𝑡𝑡₂𝑒𝑒)
𝑃𝑃𝑃𝑃𝑃𝑃 − 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝐺𝐺𝐺𝐺𝐺𝐺 (𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑈𝑈𝑈𝑈𝑈𝑈)Country

Emissions Debt
(t CO2e)($Millions
USD)

PPP-adjusted
GDP($ Millions USD
International)

Exposure Debt($ Millions attribution
USD)
approach(t CO2e)

PPPadjustedGDP
attribution
approach (tCO2e)

Singapore

61,451,586

312,935

579,762

1

196

106

Hong Kong

42,654,105

159

469,1821

268,264

91

Given comparable sizes of the economies as measured by PPP-adjusted GDP, the countries
would receive a more appropriate treatment in terms of owned emissions in investors’ portfolios
proportional to the generated emissions.
The following table illustrates further examples of the difference in ranking by the two attribution
factors. Relating emissions to the sizes of the economy and to produced output (PPP-adjustedGDP) allows for a potentially fairer treatment. For example, the US and Japan—two of the largest
emissions producers in the world—would rank much more favorably by debt attribution factor
given their relatively large sizes of outstanding debt.

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PCAF’s draft new methods for public consultation

Country

China

Absolute
Production
Emissions
Mt CO2eGross
PPP-adj. GDPgovernment Debt ($ Millions Int’l)($ Millions USD)

Rank
Production
Emissions/
Debt

Rank by
Production
Emissions/
PPP adj.
GDP

11.5357.905.659

23.487.798

2

1

Australia

433

573.961

1.324.171

6

2

Canada585

1.528.280

1.898.870

83South Korea

652

667.605

2.209.424

5

4

India

2.597

1.980.623

9.560.220

35

United States

5.107

22.869.681

21.433.226

15

6

Japan

1.154

12.071.286

5.345.808

25

7

Thailand275

225.431

1.342.165

48

Indonesia

626

327.789

3.338.144

1

9Mexico485

686.5992.608.650

710Belgium

104

530.794628.371

16

11

Finland43

161.257

285.024

12

12

Netherlands

156

472.075

1.031.484

9

13

Germany703

2.198.292

4.644.166

10

14

Brazil478

1.662.405

3.229.055

11

15

Austria72

316.751520.804

13

16

Spain

259

1.337.221

1.988.355

17

17Portugal

48285.248378.124

18

18

Italy

332

2.673.312

2.677.118

23

19

UnitedKingdom

365

2.423.556

3.240.511

20

20France315

2.693.686

3.320.559

24

21

Singapore

53

406.936579.763

22

22

Ireland37

242.618430.334

19

23

Sweden45

197.622565.620

14

24

Switzerland

39277.619602.64121

25

Naturally, attribution by PPP-adjusted GDP is not the perfect metric, and countries with larger
PPP-adjusted GDP receive a relatively more favorable treatment. For example, take Thailand
versus Spain: the countries have comparable emissions levels, but Spain’s larger GDP allows it torank more favorably. An improvement for Thailand as compared to attribution by debt exists in its
improved ranking (8 versus 4) when PPP-adjusted GDP attribution is applied.
PCAF admits that there is not a 1:1 relationship between an FI’s investment and a sovereign’s
GDP, in contrast to a more straightforward relationship between an FI’s purchase of a shareof a sovereign’s outstanding debt. However, empirical evidence suggests that there is limited
interdependence between sovereign debt and emissions, whereas a country output production
is linked more closely to the generated emissions. Furthermore, FIs’ funds would typically spur
economic growth and therefore GDP,15 implying impact on production processes and therefore
emissions.
15 Admittedly, this relationship is valid up to a certain threshold because very large public debt might become unsustainable anddetrimental for growth. See The impact of high and growing government debt on economic growth: an empirical investigation for
the euro area (europa.eu).

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PCAF’s draft new methods for public consultation

EQUATIONS TO CALCULATE FINANCED EMISSIONS
The financed emissions of sovereign bonds are calculated by multiplying the attribution factor by
the emissions of the respective sovereign borrower.
𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 = - 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓4 × 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸4
4(𝑤𝑤𝑤𝑤𝑤𝑤ℎ 𝑠𝑠 = 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏)

As described in the attributions section, two options are under consideration to calculate theattribution factor:
Debt Attribution:
𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 = ∑4

GDP Attribution:

𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 = H"

50(4(*&./&6 *'"0&(!

!%"44 !"#$%&'$&( 7$8(!

× 𝑆𝑆𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸4𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎"
× 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸"
𝑃𝑃𝑃𝑃𝑃𝑃 − 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝐺𝐺𝐺𝐺𝐺𝐺"(𝑤𝑤𝑤𝑤𝑤𝑤ℎ 𝑠𝑠 = 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑔𝑔𝑛𝑛 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏)

As specified above, PCAF recommends using Absolute Production Emissions of a sovereign as
the key emissions metric.
Despite the data limitation specified earlier, PCAF considers tracking the development of asovereign’s consumption emissions and using it for broader assessment of a sovereign’s GHG
emissions to be helpful.
Emissions intensities
In the course of the work of PCAF’s sovereign debt working group, the following intensity metrics
for normalization and comparison of sovereign production and consumption GHG emissions
intensity, respectively, have been defined as follows:• For sovereign production: Production Emissions/PPP-adjusted GDP• For consumption emission intensity: Consumption Emissions per Capita

24

PCAF’s draft new methods for public consultation

For a comparison of production emissions intensity, using a GDP metric in the denominatorappears straightforward, given the link between a country’s production and industrial processes
causing emissions and the country’s output (GDP). The PPP adjustment of GDP allows forcomparing the real sizes of the economies and the output by subtracting the exchange rate
effect. This effect becomes relevant for countries with a relatively stronger exchange rate effectin particular and allows for a fairer comparison of the countries, as the table below illustrates(2019 data):
Country

Nominal GDP($ Millions USD)

PPP-adj. GDP($ Millions Int’l)

China

14,279,937

23,487,798

US

21,433,226

21,433,226

India

2,868,929

9,560,220Japan

5,081,770

5,345,808

Germany

3,861,124

4,644,166

Indonesia

1,119,191

3,338,144

France2,715,518

3,320,559

When comparing production emissions intensity, the PPP adjustment mitigates the negative
effect for countries where production and emissions are concentrated:
Country

Absolute
Nominal GDP
Production($ Millions
Emissions Mt USD)
CO2e

PPP-adj. GDP (Production($ Millions
Emissions/Int’l)
NominalGDP)*1,000(Production
Emissions/
PPP-adj.
GDP)*1,000

China

11,535

14,279,937

23,487,798

0.81

0.49

US

5,107

21,433,226

21,433,226

0.24

0.24

India

2,597

2,868,929

9,560,220

0.91

0.27

Japan

1,154

5,081,770

5,345,808

0.23

0.22

Germany703

3,861,124

4,644,166

0.18

0.15

Indonesia

626

1,119,191

3,338,144

0.56

0.19

France315

2,715,518

3,320,559

0.12

0.09

Emissions source: Edgar, 2019. Intensity KPIs are multiplied by 1,000 for better visualization of the comparison.

For consumption emissions, PCAF recommends using normalization per capita. Consumption
emissions reflect the demand side of the economy, and normalization per capita appears natural.
In line with the arguments stated above, PCAF recommends using the consumption emissions
intensity as an additional metric to obtain a holistic view of a country’s GHG emissions.
The table below illustrates that some countries tend to have higher consumption emissions
than production emissions, but the difference is not always significant (e.g., India), implying thatcountries with notable contributions to production emissions can be equally high consumers.
PCAF recommends considering both the production and consumption intensity metrics whencomparing, monitoring, and engaging with sovereigns.
25

PCAF’s draft new methods for public consultation

Country

Absolute
Absolute
Rank by
Production
Consumption
Production
Emissions MtCO2e Emissions MtCO2e Emissions/PPPadj. GDP

Rank by
Consumption
Emissions per
CapitaChina

11,535

8,960

1

5

US

5,107

5,767

3

1

India

2,597

2,355

2

7

Japan

1,154

1,312

4

2

Germany

703

862

6

3

Indonesia

626

591

5

6

France

315

442

7

4

For all of the metrics, PCAF recommends that FIs review at least 5 years of historical data for
a better understanding of sovereigns’ overall emissions trends and underlying patterns (e.g.,
production versus consumption).

26

PCAF’s draft new methods for public consultation

DATA REQUIREDPCAF has identified the following data required for accounting sovereign debt emissions andprovides a list of public data sources16 with the most current and comprehensive data coverage perdata category. However, this list is not exhaustive, and FIs might prefer to use other data providers.
Independently of the data used, PCAF recommends aligning with the definitions of the data categories
and being aware of the possible data specifics indicated earlier (e.g., GHG versus CO2 emissions,
inclusion or exclusion of land use (LULUCF) emissions in a country’s production emissions).
Data Category

Description

SourceScope
Territorial Approach

Scope 1 absoluteemissions

CO2 production –CO2 gross exports
emissions

Scope 2 absoluteemissions

CO2 gross imports
emissions

Scope 3 absoluteemissions

CO2 production
emissions (incl.
gross exports)

Carbon dioxide
emissionsembodied ininternational trade(oecd.org)

OECD countries,
2015 most recent
data

Limitations

Limited country
coverage,significant datatime lag, only CO2
data available

Government Approach

Scope 1, 2, and 3

Raw data on thebasis of data
directly available(Eurostat) or
input-output
tablesWIOD(WIOD Home),
Eurostat, GTAP

Eurostat: only EUR Varying country
data, Global forcoverage, data
WIOD & GTAP
time lags

Aggregated Metrics

Absolute
Production
EmissionsAbsolute
Consumption
Emissions

Territorial
production
emissions in linewith UNFCCC
definition

Domestic
territorial
production
emissions +imports - exports

World | Total
including LUCF |Greenhouse Gas(GHG) Emissions| Climate Watch(climatewatchdata.
org)
EDGAR - The
Emissions
Databasefor Global
AtmosphericResearch(europa.eu)

GHG emissions,
global country
Slight time lag
coverage, other(2018), but in line
sources (PIK,with UNFCCC
UNFCCC) available

CO2 2019
emissions, global
coverage

Most recent GHG
emissions data
available in 2015

Carbon Footprint
Results(worldmrio.com)

Global coverage,
2016 most recent
data

Calculation basedon input-output
models, notabledata time lag(2016)

CO2 emissions Our World in Data

Global coverage,
2018 most recent
data

Complex supply
value chain
allocation,
estimates involved

PPP-adjusted
GDP

GDP adjusted by
PPP

GDP, PPP (current
international $) |Data(worldbank.org)

Global coverage,
2019 data

Nominal GDP,
Population

Standard
macroeconomic
metrics

World Bank/International
Monetary Fund
(IMF)

Global coverage,
2019 data

16 PCAF is currently investigating if these sources are all freely available, or come under certain license restrictions. Depending on
the outcome, this list of data sources might be revised.

27

PCAF’s draft new methods for public consultation

LIMITATIONSEmissions scope
The two approaches to classify Scope 1, 2, and 3 emissions of sovereigns are an attempt to mirror
the approach developed and adopted for corporates. However, sovereigns are different types ofcounterparties than corporates, and it might not be necessary to introduce the Scope 1, 2, and 3
categories for sovereigns.
Double counting
When reporting emissions associated with sovereign bonds beyond the emissions of thegovernmental organization only, double counting occurs with Scope 1 and 2 emissions generated
by other sectors. This double counting may also spill over to GHG accounting from FIs withinvestment portfolios in multiple asset classes (e.g., loans or investments to corporates). This typeof double counting occurs with all approaches described in this chapter including: Production
and Consumption Emissions, the Territorial Approach, and Scope 3 of the Government Approach.
Scope 1 and 2 of the Government Approach avoids double counting but raises the risk of FIs
accounting for only a fraction of sovereign emissions if Scope 1 and 2 emissions are consideredalone. At the Scope 3 level of the Government Approach, there is double counting involved.
However, doubling counting within the GHG emissions reports of FIs is not necessarily
problematic as long as emission results of the different asset classes are clearly reported
separately. Accounting for all emissions indirectly involved with loans and investments of thedifferent individual asset classes does ensure that the right considerations are taken when
making lending or investment decisions.

28

PCAF’s draft new methods for public consultation

2.3 Emissions removals
This draft on emissions removals encompasses narratives that will be added into various sectionsof the current PCAF Standard:• A narrative on net-zero financed emissions by 2050 will be added either into chapter 3 ofthe current PCAF Standard or incorporated as a standalone chapter.
• A description of how to measure emissions removals for three asset classes that alreadyexist in the PCAF Standard will be added. Each approach will be added to the specificsubchapter in the PCAF Standard:- Subchapter 5.1. Listed Equity and Corporate Bonds- Subchapter 5.2. Business Loans and Unlisted Equity- Subchapter 5.3. Project Finance• A description of how to report emissions removals will be added into chapter 6 of thecurrent PCAF Standard (i.e., “Reporting recommendations and requirements”)
The following draft presents the narrative in the same order as listed above.

NET-ZERO FINANCED EMISSIONS BY 2050
The Paris Agreement was reached in 2015 with the express aim of pursuing efforts to limit the
global temperature increase to 1.5°C above pre-industrial levels.17 Achieving this goal requires
global emissions to decline by about 50% by 2030 relative to 2010 levels and to reach net zero by
2050.18 Nonetheless, global emissions continue to increase. The level of ambition to achieve thegoals of the Paris Agreement and steer global emissions toward net zero in 2050 is significant. FIs
play a crucial role in facilitating this transition by facilitating the allocation of capital flows toward
these net-zero goals.
The Race to Zero for businesses and investors has started, a UN-backed global campaign rallying
non state actors to take action to halve global emissions by 2030 ahead of COP26.19 In addition,
the COP26 Private Finance Agenda is building up momentum with the Glasgow Financial Alliancefor Net Zero under Vice Chairman and Head of Impact Investing at Brookfield Asset Management
Mark Carney. It brings together the Net-Zero Asset Owner Alliance, Net Zero Asset Managers
Initiative, and Net-Zero Banking Alliance (launched together in April 2021); the Net-ZeroInsurance Alliance (launched in July 2021); and most recently, the Net Zero Financial Services
Provider Alliance (launched in September 2021).
A critical component in the commitment to these net-zero initiatives is decarbonizing lending andinvestment portfolios following a 1.5°C scenario with low or no overshoot in the global average
17 United Nations Framework Convention on Climate Change, The Paris Agreement, 2015.
18 Intergovernmental Panel on Climate Change, 2018: Global Warming of 1.5°C. An Intergovernmental Panel on Climate Change
Special Report on the impacts of global warming of 1.5°C above pre-industrial levels and related global GHG emissions pathways,
in the context of strengthening the global response to the threat of climate change, sustainable development, and efforts toeradicate poverty [Masson-Delmotte, V., P. Zhai, H.-O. Pörtner, D. Roberts, J. Skea, P.R. Shukla, A. Pirani, W. Moufouma-Okia, C.
Péan, R. Pidcock, S. Connors, J.B.R. Matthews, Y. Chen, X. Zhou, M.I. Gomis, E. Lonnoy, T. Maycock, M. Tignor, and T. Waterfield(eds.)]. In Press.
19 https://racetozero.unfccc.int

29

PCAF’s draft new methods for public consultation

temperature increase. Recently, the International Energy Agency (IEA) launched a climate
scenario that meets this criterion in its Net Zero by 2050 Roadmap. This scenario clearly shows the
rapid transition and milestones that are required to limit global warming to 1.5°C (see chart below).
Key Milestones on the Pathway to Net Zero
2021

2030

No new unabatedcoal plant
approved fordevelopment

Universal energy
accessNo new oil and gas
fields approved fordevelopment; no
new coal mines ormine extensions

2025
No new sales offossil fuel boilers

35
30
25

All new buildings
are zero-carbonready
60% of global car
sales are electric
Most new clean
technologies inheavy industry
demonstrated atscale1020 GW annual
solar and windadditionsPhase-out of
unabated coalin advanced
economies

Buildings

2035
Most appliancesand coolingsystems sold are
best in class
50% of heavy trucksales are electric
No new ICE car
sales
All industrial
electric motor
sales are best inclass
Overall netzero emissions
electricity
in advanced
economies

Transport

GtCO2 202040
50% of buildings
retrofitted tozero-carbon-readylevels50% of fuels usedin aviation are lowemissions

5

More than 90% of
heavy industrial
production is lowemissions

Net-zero emissions
electricity globallyPhase-out of all
unabated coal andoil power plants

Almost 70%
of electricity
generation globallyfrom solar PV and
wind

2045

Industry

50% of heating
demand met byheat pumps

Electricity
&
Heat

0

More than 85% ofbuildings are zerocarbon readyAround 90% ofexisting capacity
in heavy industries
reaches end ofinvestment cycle

15
10

2050

Other

-5
2020

HydrogenCarbon capture

2025

2030

2035

150 Mt low-carbonhydrogen
850 GW electrolysers
4 Gt CO2 captured

2040

2045

2050

435 Mt low-carbonhydrogen3.000 GW electrolysers
7.6 Gt CO2 captured

Source: IEA, “Net Zero by 2050: A Roadmap for the Global Energy Sector,” July 2021, 3rd Edition

30

PCAF’s draft new methods for public consultation

Net zero is reached when anthropogenic emissions in the atmosphere are balanced byanthropogenic removals over a specified period. Climate science tells us that achieving net zero
will help humanity avoid the most catastrophic effects of climate change and huge financial risks.
Achieving net zero requires two primary components:
1. Deep decarbonization in energy, urban infrastructure and industrial systems, as well
as reversing emissions growth from land use systems
2. Permanently removing the residual GHG emissions that are unfeasible to reduce oravoid
FIs can help this transition by lending and investing capital into activities that drive deep
decarbonization, including technology and nature-based emissions removal solutions. Measuring
and reporting both generated emissions and emissions removals enables FIs to track progress
toward net zero.
FIs can finance emissions removals via three ways:• Credits purchases: FIs can buy carbon removal credits20 based in the voluntary carbon
market. Because these purchases are not part of their lending or investment portfolio,
these credits are not incorporated into the PCAF Standard. For more information, FIsshould refer to the GHG Protocol on how to include carbon credits in their accounting.
• Business Loans and Unlisted Equity: FIs can lend to or invest in companies such as
forestry companies that have emissions removals within their organizational boundaries.
They can also lend to or invest in companies that purchase carbon removal credits tooffset their emissions. For more information on the GHG accounting of these lending andinvestment activities, see the chapter on Listed Equity & Corporate Bonds and the chapter
on Business Loans & Unlisted Equity in the PCAF Standard.
• Project Finance: FIs can lend to or invest in nature-based or technological projects
that remove emissions from the atmosphere. They can also lend to or invest in projects
that purchase carbon removal credits to offset their emissions. The general context forthese investments is covered in the next paragraphs; for more information on the GHG
accounting of these lending and investment activities, see the chapter on Project Financein the PCAF Standard.
The global transition to net zero requires increased lending to and investment in both mitigation
solutions (avoided emissions) and emissions removal solutions (emissions removals). The annual
energy sector investment, which averaged $2.3 trillion USD globally over 2016-2020, needs tonearly double to $5 trillion USD by 2030 according to IEA’s Net Zero by 2050 Roadmap. Examplesof mitigation solutions can include renewable energy and carbon capture and storage (CCS), bothof which avoid the release of new fossil fuel emissions into the air whether from industrial sites
or conventional power plants. Examples of emissions removal solutions can include technologicalmethods such as direct air capture or nature-based methods such as forestry and land
management, both of which sequester existing emissions from the atmosphere.

20 Reporting around the use of carbon offsets may need to evolve because it does not yet consistently distinguish between
avoidance (reduction) and removal offsets.

31

PCAF’s draft new methods for public consultation

The distinction between avoided emissions and emissions removals is increasingly important froman accounting standard, which will need to distinguish between avoidance (reduction) offsets andremoval offsets. Classifications of both offset types are illustrated in the figure below:

How is the offset generated?

Emissions reduction

Carbon removal

Is carbon stored?

Is carbon stored?

No

Avoided emissions, or emission
reduction without storage
Forward-looking,
Clear retrospective
counterfactual
emissions data:baseline:• N2O abatement• Renewable energy • Methane• Cleaner cookstoves abatement

Yes

Yes

How is carbon stored?

How is carbon stored?

Emissions reduction
with short-lived storage

Emissions reduction
with long-lived storage

Carbon removalwith short-lived storage

Carbon removalwith long-lived storage• Avoided damage toecosystems• Changes to ag
practices that retain
already-stored carbon• CCS on industrial
facilities• CCS on fossil-fuelpower plant• Afforestation &reforestation• Soil carbon
enhancement• Ecosystem restoration• DACCS• BECCS• Mineralisation• Enhanced weathering

Less permanent
Higher risk of reversal

More permanent
Lower risk of reversal

Less permanent
Higher risk of reversal

Avoided emissions

More permanent
Lower risk of reversal

Emissions removals

Figure adapted from the Oxford Principles on Carbon Offsets21

LISTED EQUITY & CORPORATE BONDS + BUSINESS LOANS & UNLISTEDEQUITY
Companies in an FI’s portfolio can also report on emissions removals, whether nature- or
technology- based,22 as part of their GHG reporting. Reporting should follow existing GHG
Protocol guidance, and total emissions removals shall be reported separately from both absoluteemissions and any carbon credits purchased and sold. A company’s total emissions removals willconsist of:
1. Any removals within the company’s organizational boundary
2. Removals purchased by the company via carbon removal credits
Note that for purposes of transparency, reporting around the use of carbon credits may need to
evolve because it does not yet consistently distinguish between avoidance and removal credits.
Carbon credits purchased and sold should be reported and should be reported separately fromemissions removals. This provides transparency and context for the total emissions removals
figure. However, any purchased removal credits are only a potential subcomponent of total
21 Oxford offsetting principles, accessed athttps://www.smithschool.ox.ac.uk/publications/reports/Oxford-Offsetting-Principles-2020.pdf
22 Note that new GHG Protocol guidance is being developed on accounting for land sector activities and CO2 removals in corporate
GHG inventories, building on the Corporate Standard and Scope 3 Standard. Draft guidance for this is expected in 2022.

32

PCAF’s draft new methods for public consultation

emissions removals; they will not necessarily equal the latter. Ultimately, the goal of the PCAF
Standard is to transparently report the total emissions impacts of investments, not diluted bycredits purchased or sold.
FIs can calculate attribution of companies’ reported emissions removals using the existing GHG
accounting logic set out in the PCAF Standard (see formula below); this same logic applies toany attribution of companies’ reported emissions removal credits. Emissions removals shall bereported separately from absolute emissions.

𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 = >'𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖'
× 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟'(𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑜𝑜𝑜𝑜 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 + 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑)'(𝑤𝑤𝑤𝑤𝑤𝑤ℎ 𝑐𝑐 = 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑜𝑜𝑜𝑜 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐)

Example accounting – a portfolio of different companies
For example, an FI invests into multiple companies with different emissions profiles as illustrated
in the following table. All numbers are in t CO2e for the reporting year 2020 and are dummy data
for the purpose of this example.
Scope 1

Scope 2

Scope 3Emissions Carbon
removals credits
purchased

Carboncreditssold

Attribution
factorForestry
company

1,000

100

5,000

20,000

0

5,000

10%

Industrial
company

20,0005,000

30,000025,000025%Energycompany

5,000

010,000

1,000

5,000

500

20%

The portfolio contains a forestry company that sells carbon credits based on its forestry activities,
an industrial company that buys carbon credits based on forestry activities, and a green energy
company that builds renewable energy plants combined with afforestation activities. The FI would
report aggregated numbers for this portfolio per the table below. This table sums the attributed
emissions and credits of the forestry, industrial, and energy companies from the table above. Notethat reporting carbon credits purchased by clients is optional.
Based on companies inabove tableCalculation

Total portfolio
numberScope 1 – Absolute emissions

1,000 x 10% + 20,000 x 25% + 5,000 x 20%

6,100

Scope 2 – Absolute emissions

100 x 10% + 5,000 x 25%

1,260

Scope 3 – Absolute emissions

5,000 x 10% + 30,000 x 25% + 10,000 x 20%

10,000Emissions removals

20,000 x 10% + 1,000 x 20%

2,200

Carbon credits purchased

25,000 x 25% + 5,000 x 20%

7,250

5,000 x 10% + 500 x 20%

600

Carbon credits sold33

PCAF’s draft new methods for public consultation

FIs may further subdivide these overall reporting categories into subcategories. For example,
carbon credits purchased may be further reported separately by specific type of credit (e.g.,
emissions “avoidance” versus “removal”)23 or classified based on the credit standard (e.g., Verified
Carbon Standard (VCS) or Gold Standard). The FI may choose to separately report ‘net’ numbersthat display total absolute emissions minus total emissions removals, for example. Nonetheless,for the purposes of the PCAF Standard, the fundamental requirement is that companies’ reporting
should include separate total numbers for absolute emissions and emissions removals in addition
to any ‘net’ numbers at a minimum.
Example tool to calculate emissions removals – the FoRESt Carbon Sequestration(FRESCOS) Tool
FMO has been working with three other European development finance institutions (CDC,
Finnfund, and Swedfund) and Finnish forestry expert Simosol to build an online tool toestimate the amount of carbon sequestered through plantation and agroforestry operations,called the FRESCOS Tool. The tool is built upon the IPCC Guidelines for National GHG
Inventories and can be found at https://www.frescos.earth. While PCAF does not endorse theuse of this tool specifically, the FRESCOS Tool is an example of a tool that can be used by FIs
as a basis for calculating financed emissions removals. The FRESCOS tool is open for otherFIs and interested parties to use.

FIs may further subdivide these overall reporting categories into subcategories. For example,
carbon credits purchased may be further reported separately by specific type of credit (e.g.,
emissions “avoidance” versus “removal”) or classified based on the credit standard (e.g., Verified
Carbon Standard (VCS) or Gold Standard). The FI may choose to separately report ‘net’ numbersthat display total absolute emissions minus total emissions removals, for example. Nonetheless,for the purposes of the PCAF Standard, the fundamental requirement is that companies’ reporting
should include separate total numbers for absolute emissions and emissions removals in addition
to any ‘net’ numbers at a minimum.

PROJECT FINANCE
Projects in an FI’s portfolio can also report on emissions removals, whether nature- or technology
based,24 as part of their GHG reporting. Reporting should follow existing GHG Protocol guidance,
and total emissions removals shall be reported separately from both absolute emissions and any
carbon credits purchased and sold. A project’s total emissions removals will consist of:
1. Any removals within the project’s organizational boundary
2. Removals purchased by the project via carbon removal credits
Note that for purposes of transparency, reporting around the use of carbon credits may need to
evolve because it does not yet consistently distinguish between avoidance and removal credits.
23 Reporting around the use of carbon offsets may need to evolve because it does not yet consistently distinguish between
avoidance (reduction) and removal offsets.
24 Note that new GHG Protocol guidance is being developed on accounting for land sector activities and CO2 removals in corporate
GHG inventories, building on the Corporate Standard and Scope 3 Standard. Draft guidance for this is expected in 2022.

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Carbon credits purchased and sold should be reported and should be reported separately fromemissions removals. This provides transparency and context for the total emissions removals
figure. However, any purchased removal credits are only a potential subcomponent of total
emissions removals; they will not necessarily equal the latter. Ultimately, the goal of the PCAF
Standard is to transparently report the total emissions impacts of investments, not diluted bycredits purchased or sold.
FIs can calculate attribution of a project’s reported emissions removals using the existing GHG
accounting logic set out in the PCAF Standard (see formula below); this same logic applies to any
attribution of a project’s reported emissions removal credits.
𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟 = >"𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖"
× 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟"
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 + 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑"(𝑤𝑤𝑤𝑤𝑤𝑤ℎ 𝑝𝑝 = 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝)

Example accounting – a portfolio of different projects
An FI invests into multiple projects with different emissions profiles as illustrated in the following
table. All numbers are in t CO2e for the reporting year 2020 and are dummy data for the purposeof this example.
Scope 1

Scope 2

Scope 3

Avoidedemissions

Emissionsremovals

Carboncreditspurchased

Carboncredits sold

Attribution
factorForestry
project

1,000

100

5,000

0

20,000

0

5,000

10%

Industrial
project

20,0005,000

30,0000

025,000025%Energyproject

5,000

010,00020,000

1,000

5,000

500

20%

The portfolio contains a forestry project that sells carbon credits based on its forestry activities,
an industrial project that buys carbon credits based on forestry activities, and a green energy
project that builds renewable energy plants combined with afforestation activities. The FI would
report aggregated numbers for this portfolio per the table below. This table sums the attributed
emissions and credits of the forestry, industrial, and energy projects from the table above. Notethat reporting of avoided emissions and carbon credits purchased by clients is optional.
Based on projects
in above tableCalculation

Scope 1 – Absolute emissions

1,000 x 10% + 20,000 x 25% + 5,000 x 20%

6,100

Scope 2 – Absolute emissions

100 x 10% + 5,000 x 25%

1,260

Scope 3 – Absolute emissions

5,000 x 10% + 30,000 x 25% + 10,000 x 20%

10,000

Avoided emissions

20,000 x 20%

4,000

Emissions removals

20,000 x 10% + 1,000 x 20%

2,200

Carbon credits purchased

25,000 x 25% + 5,000 x 20%

7,250

5,000 x 10% + 500 x 20%

600

Carbon credits soldTotal portfolio
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PCAF’s draft new methods for public consultation

FIs may further subdivide these overall reporting categories into subcategories. For example,
carbon credits purchased may be further reported separately by specific type of credit (e.g.,
emissions “avoidance” versus “removal”) or classified based on the credit standard (e.g., VCS orGold Standard). The FI may separately report ‘net’ numbers that display total absolute emissions
minus total emissions removals, for example. Nonetheless, for the purposes of the PCAF Standard,
the fundamental requirement is that companies’ reporting should at a minimum include separate
total numbers for absolute emissions and emissions removals, in addition to any ‘net’ numbers.

REPORTING
On page 100 of the PCAF Standard in the section ‘Absolute emissions,’ the following bullet will
be added: ‘Absolute emissions shall be reported without taking into account carbon credits
purchased by clients and projects to offset these emissions. Carbon credits purchased by clientsand projects may be reported, and if so, shall be reported separately.’
On page 101 of the PCAF Standard in the section ‘Avoided emissions and emissions removals,’the following bullet will be added: ‘Avoided emissions and emissions removals shall be reported
without taking into account carbon credits sold by clients and projects for these same emissions.
Carbon credits sold by clients and projects should be reported, and if so, shall be reported
separately.’
Example tool to calculate emissions removals – the FoRESt Carbon Sequestration(FRESCOS) Tool
FMO has been working with three other European development finance institutions (CDC,
Finnfund, and Swedfund) and Finnish forestry expert Simosol to build an online tool toestimate the amount of carbon sequestered through plantation and agroforestry operations,called the FRESCOS Tool. The tool is built upon the IPCC Guidelines for National GHG
Inventories and can be found at https://www.frescos.earth. While PCAF does not endorse theuse of this tool specifically, the FRESCOS Tool is an example of a tool that can be used by FIs
as a basis for calculating financed emissions removals. The FRESCOS tool is open for otherFIs and interested parties to use.
N.B. ‘Carbon credits purchased’ and ‘carbon credits sold’ will be added in the reporting example in the Annex as additional line items(Table 10-8 and Table 10-29).

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PCAF’s draft new methods for public consultation

Website:carbonaccountingfinancials.com
E-mail:info@carbonaccountingfinancials.com

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