Update (September 2026): PCAF published the 3rd edition of Part A (Financed Emissions) and an updated Part C (Insurance-associated Emissions) in December 2025, adding methods for use-of-proceeds structures, securitisation, sub-sovereign debt and undrawn commitments, and in July 2026 set seven priorities for its 2026-2028 cycle. The ISSB's December 2025 amendments to IFRS S2 let entities limit Scope 3 Category 15 to financed emissions from 1 January 2027, mirrored by AASB S2025-1 and the SSBJ.
Scope3 financed emissions refer to the greenhouse gas emissions associated with a company's investments, lending, and financial activities. This includes emissions from:
- Loans: Emissions from companies or projects financed through loans.
- Investments: Emissions from companies or projects financed through equity or debt investments.
- Underwriting: Emissions from insurance underwriting activities.
Financial institutions, such as banks and insurers, have a critical role in influencing the transition to a low-carbon economy. By understanding and managing their Scope3 financed emissions, they can:
- Reduce climate risk: Minimize the risks associated with climate change and regulatory action.
- Improve ESG performance: Enhance their environmental, social, and governance (ESG) performance.
- Support sustainable finance: Encourage sustainable finance practices and the transition to a low-carbon economy.
Emissions Allocation:
Emissions allocation is the process of assigning emissions to a specific lender or investor based on their exposure to a portfolio company's emissions. This involves:
- Identifying emissions data: Obtaining emissions data from the portfolio company.
- Determining exposure: Calculating the lender's or investor's exposure to the portfolio company's emissions.
- Allocating emissions: Assigning emissions to the lender or investor based on their exposure.
Emissions allocation methods include:
- Proportional allocation: Allocating emissions based on the lender's or investor's proportion of exposure to the portfolio company's debt or equity.
- Risk-weighted allocation: Allocating emissions based on the lender's or investor's risk-weighted exposure to the portfolio company.
- Emissions intensity-based allocation: Allocating emissions based on the emissions intensity of the specific debt instrument or investment.
Accurate emissions allocation requires:
- High-quality emissions data: Reliable and detailed emissions data from the portfolio company.
- Transparent allocation methods: Clear and consistent allocation methods that reflect the lender's or investor's exposure.
- Regular monitoring and reporting: Ongoing monitoring and reporting to ensure accurate and up-to-date emissions allocation.
By understanding Scope3 financed emissions and emissions allocation, financial institutions can make informed decisions to manage climate risk, improve ESG performance, and support sustainable finance practices.
