Introduction to Financed Emissions:

An Analytical Example Based on Carbon Accounting in the Asset Management Industry

Introduction 

Amid the accelerating impacts of climate change, the financial sector has increasingly assumed responsibility for disclosing and managing climate-related risks, particularly through the measurement and disclosure of greenhouse gas (GHG) emissions associated with investment portfolios. As key participants in financial markets, asset management institutions are required to understand how the portfolios they manage affect the environment, especially with respect to financial risks arising from GHG emissions.

Under international disclosure frameworks such as IFRS S2 (International Financial Reporting Standard Sustainability Disclosure Standard 2: Climate-related Disclosures), asset managers are required to disclose their Scope 3 emissions, which represent indirect emissions generated through investment activities within their portfolios. These emissions do not arise from the institutions’ own operations, but from the entities and activities financed by their capital allocation decisions.

This paper explores how the Partnership for Carbon Accounting Financials (PCAF) methodology can be applied to calculate and disclose financed emissions within the asset management industry. PCAF provides a standardized and transparent framework that enables financial institutions to attribute and report Scope 3 emissions in a consistent and comparable manner.

In recent years, carbon disclosure by financial institutions has attracted growing global attention, particularly regarding Scope 3 emissions embedded in investment portfolios. Scope 3 emissions encompass all indirect emissions generated along value chains and investment activities, making them one of the most material yet complex challenges for financial institutions. By adopting the PCAF methodology, asset managers can improve the accuracy, transparency, and credibility of financed emissions accounting and disclosure, thereby strengthening their ability to manage climate-related risks and respond to evolving regulatory and market expectations.

I. Overview of Greenhouse Gas Emission Scopes

According to international standards, greenhouse gas (GHG) emissions are classified into three scopes:

1. Scope 1 (Direct Emissions):
   Emissions released directly from sources that are owned or controlled by an organization, including emissions generated from fuel combustion during its own operational activities.

2. Scope 2 (Indirect Energy Emissions):
   Indirect emissions resulting from the generation of purchased energy, such as electricity, steam, heating, or cooling consumed by the organization.

3. Scope 3 (Other Indirect Emissions):
   All other indirect emissions occurring across the value chain, including emissions associated with supply chains and investment activities. This scope is of particular importance to the asset management industry, as it represents the greenhouse gas emissions of companies or funds held within investment portfolios.

Among the three scopes, Scope 3 emissions are the most complex for financial institutions, as they require the consideration of emissions data from all investee companies within an investment portfolio. This complexity necessitates the adoption of standardized methodologies—such as the Partnership for Carbon Accounting Financials (PCAF) framework—to accurately quantify portfolio-level financed emissions.

Scope 3 emissions encompass both supply chain activities and financial institutions’ investment activities. Under the GHG Protocol, they are further classified into 15 categories, covering emissions generated across upstream and downstream business activities.

To facilitate understanding, the following table provides a detailed overview of the main Scope 3 categories and their respective application scopes.

Methodology for Calculating Scope 3 Investment Emissions

Category 15 investment emissions under Scope 3 are a key focus for the asset management industry. They represent the responsibility of asset managers for the greenhouse gas emissions associated with their investment portfolios. The calculation of these emissions is primarily based on the framework provided by PCAF, with the following steps:

1. Collect emissions data of investees:
   Gather Scope 1 and Scope 2 emissions data from investees’ annual reports or greenhouse gas disclosures.

2. Calculate the attribution factor:
   Determine the attribution factor based on the asset manager’s ownership or holding ratio in each investee.

3. Calculate attributed emissions:
   Multiply the investee’s emissions data by the attribution factor to obtain the emissions attributable to the asset manager for that investee.

4. Aggregate results:
   Sum the attributed emissions across all investees to calculate the total Scope 3 emissions of the investment portfolio.

In the asset management industry, Scope 3 disclosure is not merely an issue of data reporting; it is closely linked to how investment risks are managed and mitigated. As global awareness of climate risk continues to grow, financial institutions must use emissions data to identify high-risk investees and take actions to reduce the carbon footprint of their portfolios. At the same time, this also presents an opportunity: asset managers can enhance portfolio sustainability by increasing investments in low-carbon companies and sustainable development–related sectors, while meeting market and regulatory requirements for carbon disclosure.

II. Analysis of the PCAF Methodology

PCAF provides a standardized set of tools to help financial institutions calculate the carbon emissions of their investment portfolios and integrate the results into investment decision-making, thereby identifying high carbon-emission risks. The methodology consists of the following key steps:

1. Data Collection

Asset managers must first collect carbon emissions data from their investees, particularly Scope 1 and Scope 2 emissions. These data may be obtained from companies’ annual reports or greenhouse gas emissions disclosures. If company-specific data are unavailable, industry-average data may be used as estimates. In addition, Enterprise Value Including Cash (EVIC) is a critical input in the calculation.

2. Calculation of the Attribution Factor

The attribution factor is a key element in calculating portfolio carbon emissions. It reflects the proportion of ownership or exposure that the asset manager holds in a specific company and is used to determine the share of that company’s emissions attributable to the investment portfolio. This process enables asset managers to more accurately quantify the emissions associated with their investment activities. The specific calculation formula is as follows:

For example: Suppose an asset management company (using its own capital) holds USD 2 million worth of shares in Company A, and Company A’s EVIC (Enterprise Value Including Cash) is USD 2 billion. The attribution factor for financed emissions would therefore be 0.01, i.e., 1%. 

3. Calculation of Financed Emissions

Financed emissions are calculated based on the proportion of ownership held by the asset management company. The formula is as follows:

Financed Emissions = Total Emissions × Attribution Factor

For example: If a company’s annual Scope 1 and Scope 2 emissions are 12,000 tCO₂e, and the asset management company holds 10% of the company’s equity, then the financed emissions attributable to the asset manager’s investment portfolio would be 1,200 tCO₂e.

4. Calculation of the Portfolio Carbon Footprint

The portfolio carbon footprint is an indicator used to measure the amount of carbon emissions associated with every USD 1 million of investment. The specific formula is as follows:

This indicator is used to measure the carbon emissions intensity of an investment company’s portfolio and helps the investment company compare the environmental impacts of different investment strategies.

5. Weighted Average Carbon Intensity (WACI)

WACI is another indicator used to measure the carbon intensity of an investment portfolio. It considers each investee company’s carbon emissions relative to its revenue and calculates a weighted average based on the company’s proportion within the investment portfolio. The formula is as follows:

Practical Application of Financed Emissions Calculation in the Asset Management Industry

For example: Suppose an asset management company invests in Company A, Company B, and Fund C, and has collected the following data:

1. Calculation of Attribution Factors:

Company A: 160 / 2,000 = 0.08

Company B: 290 / 2,500 = 0.116

Fund C: 350 / 3,000 = 0.117

2. Calculation of Financed Emissions:

Company A: 9,000 tCO₂e × 0.08 = 720 tCO₂e

Company B: 11,000 tCO₂e × 0.116 = 1,276 tCO₂e

Fund C: 15,000 tCO₂e × 0.117 = 1,755 tCO₂e

3. Calculation of Total Financed Emissions:

Total financed emissions = 720 + 1,276 + 1,755 = 3,751 tCO₂e

4. Calculation of Carbon Footprint:

Assuming the total investment amount is USD 800 million, the carbon footprint is:
(formula/result to be calculated in the next step)

• The term (10⁶) in the formula

Its purpose is to standardize the result on a per-million basis. This is because carbon footprint indicators are typically expressed per USD 1 million (or per million monetary units), which helps more clearly illustrate the carbon intensity of investment activities.

Here, 10⁶ represents “per million,” ensuring that the calculated result is expressed as “carbon emissions generated per USD 1 million invested.” This standardized expression makes the carbon intensity of different investment portfolios comparable, regardless of the absolute size of total investments.

When financial institutions measure portfolio carbon emissions, the use of the PCAF methodology provides a transparent and systematic approach. This helps enhance understanding of climate risks embedded in investment portfolios and supports the transition of companies toward a low-carbon economy. As IFRS S2 strengthens its requirements for carbon emissions disclosure, investment firms are encouraged to proactively adopt standardized carbon accounting methods to further enhance their sustainable investment capabilities and meet market expectations for environmental information transparency.

When financial institutions assess portfolio carbon emissions, applying the PCAF approach offers a transparent and systematic framework. This not only improves awareness of climate risks within investment portfolios but also promotes corporate transition toward a low-carbon economy. With the tightening of carbon disclosure requirements under IFRS S2, asset managers should actively adopt standardized carbon accounting methodologies to strengthen sustainable investment performance and satisfy growing market demands for environmental data transparency.

When financial institutions measure the carbon emissions of their investment portfolios, the use of the PCAF methodology provides a transparent and systematic approach. This helps enhance understanding of climate risks embedded in investment portfolios and promotes corporate transition toward a low-carbon economy. As disclosure requirements for carbon emissions are strengthened under IFRS S2, investment firms should proactively adopt standardized carbon accounting methods to further enhance their sustainable investment capabilities and meet market expectations for environmental information transparency.

Challenges and Opportunities of Scope 3 Carbon Emissions Disclosure

In the asset management industry, Scope 3 disclosure is not merely an issue of data reporting; it is more fundamentally about how to manage and reduce investment risk. As global awareness of climate risks continues to deepen, financial institutions must use carbon emissions data to identify high-risk investment targets and take actions to reduce the carbon footprint of their portfolios. At the same time, this also presents an opportunity: asset managers can enhance portfolio sustainability by increasing investments in low-carbon companies and sustainability-related sectors, while meeting market and regulatory requirements for carbon emissions disclosure.