PCAF: A Practical Guide to Financed Emissions Accounting

Understanding the Partnership for Carbon Accounting Financials (PCAF) and why it matters now

As the world nears critical thresholds to reduce greenhouse gas emissions and limit the impacts of global warming, sectors across the economy need to decarbonize and collectively reach net-zero emissions by 2050. For many, decarbonization is rooted in electrification and renewable power sourcing. But for financial actors, the greatest opportunity to drive change and transition toward a low-carbon society in line with the Paris Climate Agreement is through financing and investment activities.

With new global mandates for emissions disclosure proliferate, such as California's climate laws, the CSRD in the EU, and the ISSB's global baseline, financial institutions are under increased pressure to properly account for the emissions impact of their financing activities. What's emerging is a new era of climate accountability grounded in standardized methodologies and data. At the heart of this standardization is the Partnership for Carbon Accounting Financials (PCAF), a global partnership of financial institutions working together to develop and implement a harmonized approach to assess and disclose the greenhouse gas (GHG) emissions associated with financing loans and investments.

This primer provides a high-level overview of financial sector emission sources, the core tenants of the PCAF standard, review of calculation methodologies for Part A of the PCAF standard for financed emissions, and how to translate PCAF from acronym to action.

The role of the financial sector in decarbonization

For financial institutions, GHG emissions tied to lending, investing, and underwriting activities aren't just part of the carbon footprint-they are the footprint. While often challenging to measure, these indirect scope 3 value chain emissions inherently outweigh a firm's operational footprint by orders of magnitude. A global study found that, in 2022, reported emissions related to institutions' financing activities were, on average, 750 times greater than their direct operational emissions-a figure that soared to a staggering 11,000 times in North America. Crucially, these financed emissions typically account for over 99% of a financial institution's total GHG inventory.

Recognizing this profound impact, PCAF has developed a global accounting standard, providing a clear and consistent framework for measuring and disclosing these significant emissions, thereby establishing the foundation of how to reduce exposure to carbon intensive sectors and divert capital toward more strategic and resilient opportunities throughout the transition toward net-zero.

So why does this matter now? Financial institutions, particularly banks, play a pivotal role in facilitating the transition to a net-zero economy. According to PCAF, "since the Paris Climate Agreement, the world's largest banks have still invested more than $4.6 trillion into the fossil fuel sector. This is equivalent to $1.8 billion for every day since the end of 2015, with no downward trend and no assessment of the carbon impact of that finance."

Given the scale of the climate challenge and the crucial role of the financial industry to direct capital, the PCAF standard was developed to enable transparency and accountability in measuring impact, setting science-based targets, and aligning portfolios with the goals of the Paris Climate Agreement.

By measuring the emissions impact of financing activities, institutions can better understand their exposure to climate risk, which covers everything from asset valuation to regulatory scrutiny. And in a world that's pricing carbon, transparency is becoming a prerequisite for resilience.

Introducing PCAF: Mission and scope

PCAF started in 2015 with a bold goal: standardize how financial institutions account for emissions tied to their portfolios. Since then, it's grown into a global coalition of over 400 institutions committed to consistent, transparent carbon accounting.

The initiative builds on the Greenhouse Gas Protocol and aligns with other leading frameworks like the Science Based Targets initiative (SBTi) and UN Principles for Responsible Investment (UNPRI). In short, if you're a financial institution aiming for credible net-zero targets-or preparing for mandatory disclosures-PCAF is the industry-specific carbon accounting standard to cover your most critical scope 3 business activities.

What you need to know about the PCAF Standard for Financed Emissions

At its core, the PCAF Standard gives institutions a way to measure and disclose emissions from financing activities using a structured, scalable approach. Here's what that looks like.

Standards

PCAF has published three distinct standards for different actors within the financial ecosystem:

This guide will focus on Part A: Financed Emissions, which enables financial institutions to

• Assess climate-related risks in line with the Task Force on Climate-related Financial Disclosures (TCFD)
• Set science-based targets (SBTs) using the sectoral decarbonization approach developed by the SBTi
• Report to stakeholders like the Carbon Disclosure Project (CDP)
• Inform climate strategies and actions to develop innovative financial products that support the transition toward a net-zero emissions economy

Asset classes

• The standard offers tailored methodologies for seven key asset classes, including:
• Listed equity and corporate bonds
• Business loans and unlisted equity
• Project finance
• Commercial real estate
• Mortgages
• Motor vehicle loans
• Sovereign Debt

These categories reflect real-world portfolios and guide how emissions are allocated based on financial exposure.

Attribution factors

Not all capital carries the same weight. PCAF uses attribution factors to assign emissions proportionally. It essentially determines how much of a borrower's emissions are attributed to the financial institution based on the size of their investment relative to the borrower's total financing. It's a practical way to ensure emissions accountability matches financial influence.

Data quality scoring

One of PCAF's most important (and honest) features is its 1-to-5 data quality scoring. It acknowledges the reality that the underlying activity data used to calculate emissions is far from perfect. The data quality scoring system gives institutions a transparent way to disclose assumptions, flag gaps, and map out improvements.

While the different asset classes have different data quality scoring options to reflect the nuances of each asset class, the structure of the data quality scoring system is based on the three data options used to calculate financed emissions. In order of preference, these options are:

1) Reported emissions
2) Physical activity based emissions
3) Economic activity-based emissions

These options further break down into subcategories specific to each asset class with a numeric ranking 1-5, where 1 represents the highest quality and 5 the poorest. Read more about the PCAF Standard Methodological Principles.

Parts A, B, and C: The Structure Behind the Standard

The PCAF methodology is organized into three logical parts:

• Part A: Overview and Principles covers scope, principles, and ties to the GHG Protocol
• Part B: Asset Class Methods details how to calculate emissions for each asset type
• Part C: Reporting and Disclosure explains how to communicate findings clearly and consistently

Full standard: PCAF Global GHG Accounting and Reporting Standard

How PCAF Connects to the Broader Landscape

Think of PCAF as part of a larger puzzle. It doesn't stand alone-it integrates seamlessly with:

• GHG Protocol: PCAF supports scope 3 category 15 accounting
• SBTi: A foundation for financial institutions setting science-based targets
• CDP: Both PCAF and CDP encourage transparency and comparability of emissions disclosure across financial institutions. They have worked together to better align the data quality scoring systems within each standard
• UNPRI: Reinforces climate risk transparency and responsible investing
• CSRD, SB 261, ISSB: Regulatory frameworks increasingly require disclosure of scope 3 emissions. The PCAF standards provide the methodologies for financial actors to meet those disclosure requirements

Becoming a PCAF signatory

While the PCAF standards are open source and available for download from their website, signatories have access to additional resources and peer interaction. Becoming a PCAF signatory provides financial institutions with access to technical assistance in the implementation of the Standard, a database of emissions factors to begin the accounting journey and training via the PCAF Academy. Institutional members, which include commercial banks, development banks, asset owners/managers, insurance companies, and more, have collaborated since 2015 to standardize carbon accounting methodologies which set the foundation for strategic work such as scenario analysis and portfolio decarbonization.

Signatories are able to partake in this collaborative process, developing new methodologies across priority areas such as transition finance and green finance, fluctuations in absolute GHG inventory over time from financial attribution metrics, additional insurance products, and securitized and structured products. PCAF makes the disclosure of its signatories available on their website for member transparency.

Financial institutions interested in joining the organization can follow the below five steps:

1. Learn more about PCAF's objectives, scope, and implementation plans
2. Submit a commitment letter to assess and disclose greenhouse gas emissions of financial activities in line with the PCAF standard (signatory can determine the scope of portfolio coverage)
3. Participate in a regional team - being part of a regional implementation team enables your institution to work with other banks and investors at the regional or country level
4. Assess the emissions
5. Disclose financed emissions of your financial institution

For financial institutions, the process of accurately assessing and subsequently managing greenhouse gas emissions encourages greater accountability, allowing for the integration of climate considerations into critical financial decision-making and ultimately raising transparency across the global financial sector. By thoughtfully implementing PCAF's industry-led accounting standards-and choosing the right technological platforms-organizations can shift from a reactive compliance exercise to a strategic asset to assess climate-related risks, set targets in line with the Paris Climate Agreement, and develop effective strategies to decarbonize global economies.

Want to turn PCAF-aligned carbon accounting from theory into action?

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