The core purpose of any financial institution (banks, investment funds, etc.) is to allocate capital to finance the economy. In doing so, they enable the development of activities that generate greenhouse gas (GHG) emissions.

These emissions, indirectly generated through lending and investment activities, constitute the bulk of a financial institution's GHG footprint. Measuring the carbon footprint of their portfolios is therefore both a strategic and regulatory imperative. 

PCAF is the standard that addresses this challenge.

What is PCAF and what are financed emissions?

Definition and objectives of PCAF

Launched in 2015, the PCAF (Partnership for Carbon Accounting Financials) is a global initiative. It now brings together nearly 780 financial institutions committed to measuring and disclosing the greenhouse gas (GHG) emissions associated with their financial activities.

Its goal is to standardize GHG accounting methodologies for the financial sector, thereby strengthening transparency and environmental accountability.

Essentially, a financial institution's GHG emissionsare its financed emissions , meaning the emissions it generates indirectly through its lending and investment activities.

These financed emissions are classified under Scope 3 Category 15 of the GHG Protocol : Category 15 covers GHG emissions associated with investments (including equity and debt investments as well as project financing).

Difference between operational emissions and financed emissions

Financed emissions are distinct from operational emissions : these stem from the daily operations of the financial institution: 

• they encompass the direct and indirect carbon footprint associated with the financial player's internal management;
• they cover all of Scope 1 and Scope 2, as well as a portion of Scope 3 (excluding investments).

Examples: energy consumption of offices and bank branches, employee travel, digital infrastructure, etc.

financed emissions, on the other hand, concern the environmental impact of capital injected into the real economy.

• the financial player enables activities that emit GHGs
• the more its portfolio is concentrated in carbon-intensive sectors (fossil fuels, heavy industry, air transport, etc.), the higher its financed emissions.

Examples: a pension fund holding shares in an oil group, a retail bank and its mortgage loans, a bank granting a loan to a cement manufacturer, etc.

We will now look at the calculation method for financed emissions according to the PCAF.

How does the PCAF methodology work?

Emission attribution principle

The PCAF is based on a principle of proportional attribution: if a company or institution finances or holds a fraction of an asset or a company, it must account for an equivalent share of its GHG emissions.

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Financed emissions = (Financial outstanding / Total company value) × Counterparty GHG emissions

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The total enterprise value (or EVIC for “Enterprise Value Including Cash”) serves as the denominator for listed shares and bonds. For loans, the total external financing serves as the basis. In principle, this attribution ratio ensures that a single company financed by multiple institutions does not generate more aggregate emissions than its actual footprint.

Example: A bank grants a €2 million loan to a company for its development. If this company has a total of €10 million in debt or external financing, the bank is therefore financing 20% of the company's financial needs. If this company emits 1,000 tonnes of CO₂e per year, the bank must account for 200 tonnes in its own carbon footprint as financed emissions.

Carbon data and data quality

The PCAF standard recognizes different levels of data quality and requires each institution to publish the distribution of its portfolio by quality level for greater transparency.

Data quality levels range from 1 for the highest level (third-party verified data) to 5 (for SMEs with no reporting; national or regional carbon intensity ratios are used instead).

PCAF requires each institution to specify what proportion of outstanding amounts is covered by score 1, 2, 3, etc. data.

The goal is to improve year after year.

Financed, facilitated, and insurance-associated emissions

PCAF has gradually expanded its methodology beyond traditional financed emissions (loans and investments, asset management) to cover financial intermediation activities (referred to asfacilitated emissions) and the insurance sector (these are insurance-associated emissions).

• The financed emissions are the historical core of PCAF (“Part A Standard”). They measure the carbon impact directly linked to outstanding loans and investments (the institution's balance sheet).
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• facilitated emissions concern capital market activities (off-balance sheet), where the financial institution does not invest its own money directly but facilitates fundraising for a third party.‍

Covered activities : equity underwriting, corporate bond structuring, M&A advisory, and loan syndication.

• Finally, insurance-associated emissions (published in the Part B Standard) allow insurers and reinsurers to measure the emissions of their underwriting portfolios.

Covered activities : primarily commercial lines property and casualty insurance and personal auto insurance.

PCAF is not just a transparency tool. It should be viewed as a strategic asset. Let’s look at why.

Why is PCAF strategic for financial institutions?

PCAF is strategic for financial institutions because it… 

Enables the measurement of portfolio carbon exposure: 

For a financial institution, climate risk impacts portfolio valuation. A loan granted to a highly carbon-intensive company with no credible decarbonization trajectory is an asset that could be impaired in the medium term. PCAF provides a common methodology to quantify this exposure, making it a vital financial risk management tool.

Identifies the highest-contributing assets and drives their decarbonization

Once the portfolio carbon footprint has been measured, PCAF makes it possible to identify the counterparties responsible for the majority of financed emissions. Financial institutions can then rebalance their portfolios in line with net-zero targets and link their internal carbon pricing to PCAF data, which increases the cost of financing for high-emission investments. PCAF becomes a strategic management tool: guiding new financing, engaging the most carbon-intensive counterparties in a reduction trajectory, or making divestment decisions.

Aligned with the European regulatory ecosystem: 

The standardized reporting approach of PCAF enables financial institutions to comply with the requirements of the EU Taxonomy and the SFDR. The methodology helps institutions demonstrate the sustainability characteristics of their financial products and ensures the compliance and transparency of their offerings regarding climate impact. PCAF data feeds into the Principal Adverse Impact (PAI) indicators required by the SFDR and contributes to portfolio clarity while adhering to the EU Taxonomy. 

Meets the transparency expectations of investors and regulators

The PCAF standard has become a benchmark methodology for climate reporting by financial institutions under numerous regulatory frameworks, including: 

• the CSRD
• the European Banking Authority’s Pillar 3 (standardized risk disclosures, including ESG risks)
• and the ISSB’s IFRS S2 standards (climate-related disclosures)

Institutional investors, ESG rating agencies, and regulators are converging toward the same transparency requirements. PCAF provides the common language to address them.

But PCAF also concerns companies.

Why does PCAF also concern companies and their CFOs?

As we have seen, financial institutions require increasingly reliable data to meet PCAF requirements. Consequently, they will encourage the companies in their portfolios to publish verified carbon footprints, SBTi targets, or CSRD-compliant reports. The Finance Department, pillar of the environmental transition, is on the front line to provide this information.

A third-party verified carbon footprint allows the bank to assign a level 1 or 2 PCAF score to this counterparty, which is the most reliable level. Conversely, a company without published data will be assessed using a sector average, which can distort its actual footprint and deprive the bank of any visibility into its trajectory.

As a CFO, when you have structured, consistent, and documented carbon reporting you show lenders that your company is anticipating future carbon taxes and avoiding value loss linked to polluting activities.

Green financing (green loans, sustainability-linked bonds, impact loans) is contingent upon specific ESG criteria . Preparing your carbon reporting in advance means expanding your access to capital and improving your financing terms.

When a company does not publish its carbon data, its bank calculates its financed emissions based on average sector ratios. These estimates can be far from reality and overestimate the footprint of a company that has already begun its decarbonization. The company then loses control over how it is perceived climatically by its lenders. Corporate Finance departments are directly affected by the PCAF.

What are the limitations of the PCAF?

Data availability and quality

The PCAF relies on emissions data from counterparties, but this data is not always available. Large listed companies, subject to the CSRD or the CDP publish verified carbon footprints. However, SMEs, which make up a significant portion of bank loan portfolios, often have no carbon reporting at all. A significant part of these portfolios therefore remains covered by scores of 4 or 5, relying on imprecise sectoral estimates.

Reliance on estimates

A sectoral estimate does not reflect the actual performance of a specific company: it could be half as carbon-intensive (or twice as much) as the average. Under these conditions, it is impossible to measure year-on-year changes in emissions.

Portfolio comparability

Comparing the carbon footprints of two institutions is difficult: sectoral composition, asset classes, and data quality levels make direct comparison challenging. A bank heavily exposed to heavy industry will mechanically have a higher footprint than a bank specializing in service activities, without this necessarily reflecting a lower level of climate commitment. PCAF improves transparency but not comparability.

Do not confuse financed emissions with the actual impact of financing

A bank can green its financial portfolio simply through divestment, without reducing global emissions. Furthermore, PCAF penalizes the financing of the transition for heavy industries, as this temporarily degrades the financial actor's carbon balance sheet.

Conclusion

PCAF bridges the gap between carbon accounting and finance.

It enables financial actors to play a role in the low-carbon transition.

For companies, it reinforces the strategic importance of climate reporting: data quality is a central issue. It determines access to capital, the cost of debt, and relationships with investors.

By encouraging the decarbonization of portfolios, this standard opens the door to sustainable finance.