Reclaim Finance recently responded to a consultation from the Partnership for Carbon Accounting Financials (PCAF) that proposes new methodologies for reporting bank and investor climate impacts. These include protocols for estimating emissions that will supposedly not happen due to \u201cgreen\u201d financing. The proposed methodologies for counterfactual-based reporting would open the door to a huge increase in greenwashing by financial institutions. The consultation also fails to adequately address criticisms of PCAF\u2019s \u201cfinanced emissions\u201d methodology. Reclaim Finance has discussed our concerns with PCAF and submitted recommendations to improve its guidance.<\/p>\n<\/div>
PCAF is a financial industry-led initiative to set standards for financial institution greenhouse gas emissions accounting. It has influenced reporting and target-setting across the financial industry. Its methodology for measuring \u201cfinanced emissions,\u201d the emissions due to lending and investing activities, is widely used by financial institutions in their climate disclosures and target-setting.<\/p>\n
PCAF originally published its methodology for reporting financed emissions in 2020, with a revised version two years later. (1) In December 2024, it launched an extensive consultation on additional guidance, including on how financial institutions should disclose estimates of emissions avoided by their financing activities. (2) Reclaim Financed provided detailed answers to the questions asked in this consultation. (3) We have also prepared a briefing based on key issues in the consultation, including our recommendations for how financial institutions should report on their emissions and set decarbonization targets. (4)<\/p>\n<\/div>
PCAF previously recommended that financial institutions only reported on avoided emissions from stand-alone finance for renewable projects. PCAF is now proposing broadening this to general corporate loans and investments in all types of activities. PCAF defines avoided emissions as:<\/p>\n
\u201cthe reduction in systemic emissions resulting from a project, product, or service compared to a counterfactual scenario, or put simply, emissions reductions that would not occur should the project, product, or service in question not exist.\u201d (5)<\/p>\n
Counterfactual scenarios of \u201cemissions that would not occur\u201d can never be proven or disproven. While emitted emissions can be measured with at least some degree of accuracy, avoided emissions are necessarily based on a story of what might have been, and the outcome of the story will necessarily be shaped by whoever tells it. (6) Financial institutions will always have an incentive to build their story using assumptions which will tend to favor high estimates of avoided emissions.<\/p>\n
PCAF proposes methodologies for two different types of avoided emissions:<\/p>\n
The first type of avoided emissions is essentially backward looking; emissions that are supposed to have already been avoided. The second is forward looking; emissions that are supposed to be avoided in future.<\/p>\n
The counterfactual problem is particularly severe for \u201cexpected avoided emissions\u201d as in this case the story can be projected an unlimited number of years into the future. And this story will require coming up with values for an unknown number of unknowables: economic growth rates, consumer spending patterns, government policies, energy prices, public sentiment, technological changes, demographic changes, tariffs, wars, and pandemics, to name but some.<\/p>\n<\/div>
\u201cExpected avoided emissions\u201d are a variant of the \u201cexpected emission reductions\u201d (EER) concept initially proposed by the Glasgow Financial Alliance for Net Zero (GFANZ). EER are claimed to encourage financing of high-emission companies that are supposedly committed to transitioning. (7) Reclaim Finance and other NGOs have criticized EER, including because of the risks of it being used to justify continued financing for fossil fuel developers while doing nothing to guarantee that this money exclusively benefits non-fossil activities. (8)<\/p>\n
By legitimizing avoided emissions reporting far beyond just renewables project finance, PCAF is opening the door to a huge increase in greenwashing by financial institutions. PCAF stresses that financed avoided emissions and EER must be reported separately from financed emissions. However, while PCAF members may follow this requirement in their formal annual reports, they are unlikely to feel constrained from using \u201cavoided emissions cancel out emitted emissions\u201d arguments in press releases and public comments. (9)<\/p>\n<\/div>
PCAF\u2019s consultation draft includes a discussion of criticisms that have been made of PCAF\u2019s formula for attributing corporate emissions to financial institutions. (10) The core of these criticisms is that the PCAF attribution factor results in financed emissions varying as much with changes in corporate value as with changes in the real-world emissions of the companies in financial portfolios, and in the composition of these portfolios. The discussion paper, however, fails to address this issue, and instead focuses on the related but secondary issue of interannual fluctuations in financed emissions.<\/p>\n
Comprehensive \u201cattribution analyses\u201d explaining the factors behind apparent rises or falls in emissions from clients and investees could be a useful supplement to financial institution emissions reporting. Unfortunately, while noting the usefulness of emissions attribution analyses, PCAF fails to propose that they be mandatory.<\/p>\n<\/div>
PCAF\u2019s previous guidance recommended that banks should only report the drawn amounts from revolving loan facilities, also known as revolvers. These common facilities act like a credit card for companies: they allow companies to only take on interest costs from the amount they draw, but give them the certainty of knowing they will have access to up to a certain credit limit when needed.<\/p>\n
Despite the previous PCAF guidance, many banks already report their full revolver commitments, and this reporting is now recommended by the International Sustainability Standards Board (ISSB). PCAF proposes to require banks to report both their full revolver commitments and the drawn amounts. Reclaim Finance supports this proposal while noting that the key indicator is the committed amount.<\/p>\n<\/div>
We have discussed a draft of our briefing with PCAF. PCAF agrees that their proposed avoided emissions metrics can be vulnerable to greenwashing. But they believe that as financial institutions are already starting to report avoided emissions, PCAF needs to establish guardrails and standardized reporting requirements. PCAF also agrees that financed emissions should not be the sole metric for target setting.<\/p>\n
Reclaim Finance appreciates this dialogue but\u202fmaintains the position that by publishing these methodologies, PCAF is legitimizing and encouraging avoided emissions reporting.\u202fReclaim Finance also continues to insist that absolute financed emissions should not be used for target setting.<\/p>\n<\/div>
Our recommendations specific to this PCAF consultation include the following:<\/p>\n
Our more general recommendations on what PCAF should require from its members on target setting include:<\/p>\n