Capital markets and facilitated emissions: Where are you with the carbon accounting standards?

If you are a facilitator in capital markets, here is a deep dive on what you should know to measure and implement.

What is PCAF and its purpose?:

PCAF is industry led partnership with more than 431 financial institutions, including banks, investors, asset managers, re/insurers as participants. It will help financial institutions assess and disclose their indirect greenhouse gas (GHG) emissions related to their financial activities (Scope 3 emissions classified as category 15).

Its purpose is to harmonize greenhouse gas (GHG) accounting methods and to enable financial institutions to consistently measure and disclose the GHG emissions associated with financial activities.

PCAF (Partnership for Carbon Accounting Financials) aims to standardize the way financial institutions measure and report financed emissions, insurance-associated emissions, and facilitated emissions.

PCAF has 3 areas:

GHG accounting provides the starting point to assess and disclose climate-related risks, set science-based targets, and inform climate strategies and actions that direct capital in support of the alignment of financial flows with the Paris Agreement’s goals

Coverage: Within the financial sector, Capital Markets (where companies and governments raise debt and equity) play a crucial role in fueling economic activity and providing needed funding. In 2022 alone, total capital market issuance was $22.9 trillion.

Why we should do it?:

1. Capital Markets sit at the nexus of financial flows that must increasingly be directed towards more sustainable practices if we are to avoid the worst effects of climate change.

2. Capital market issuances that occurs in a particular year will impact the climate for many subsequent years.

3. This Facilitated Emissions Standard is based on the facilitation activity of the bookrunners and managers in a capital market issuance. Although these financial institutions do not provide the capital directly, they play a key role in an issuer’s capacity to expand or transition. Crucially, this activity can include a material part of business activities

The Gap : When we talk about financed emissions, PCAF views facilitation as a separate but important metric, which exerts a material impact on the direction of capital towards economic activities that will enable the transition to net-zero by 2050.

What's included?

Facilitated Emissions Standard includes the primary issuance of capital market instruments and loan syndication-

Facilitated issuance of new: - Public debt: all types of bonds issued for general purposes (including sustainability linked bonds, corporate bonds, and corporate medium-term notes ) - Public equity: common stock (IPOs and follow-on issuances) and preferred shares • Facilitated equity investments in private companies (including private placements) • Facilitated debt investments in private companies (including private credit) • Syndicated loans

Not included-

Sovereign bonds, securitized products (including asset-backed securities), covered bonds, derivative financial products (e.g., futures, options, swaps) and advisory services such as mergers and acquisitions (M&A)

Note – Facilitated emissions are rarely held on a financial institution’s balance sheet (representing services rather than financing); and a financial institution’s association with the transaction is temporary.

Emissions ownership:

Given the temporary association with transactions, capital market facilitations are treated differently than lending and investing, both will earn revenue but…..

Sticky wicket?

• What portion of the capital market issuance is the responsibility of the facilitator?

•Addresses approach for data quality issue

•Minimize double counting

•there are no final international rules for carbon removals accounting

•Facilitated Emissions Standard does not cover methods to quantify avoided emissions, in absence of credible and widely accepted standards for corporate and financed emissions.

Note: PCAF 

1. looks at GHG accounting and disclosure and NOT target setting

2. determines the percentage weighting of GHG emissions to facilitators

3. is a Facilitated Emissions Standard that will supplement the GHG Protocol 'Corporate Value Chain (Scope 3) Accounting and Reporting Standard’

GHG ACCOUNTING HELPS MEASURE THREE TYPES OF CLIMATE IMPACT: GENERATED EMISSIONS, EMISSION REMOVALS, AND AVOIDED EMISSIONS

How will GHG accounting help business Goals?

Measuring facilitated emissions through GHG inventory will aid businesses achieve their goals of-

1.Bringing transparency for shareholders

2.Creation of climate friendly products

3.Following Paris agreement and decarbonization goal

4.Managing Transition risk

5.Disclosure that is accurate and verifiable information that is complete, consistent and relevant

6.The financial institution’s share of facilitated emissions shall be proportional to the share of its exposure relative to the total value of the intended borrower or investee

Emissions Attribution:

To quantify and attribute the facilitated emissions from primary issuance of capital market instruments three key elements need to be considered. :

# Time period over which the facilitation activity is captured?

# Quantum: How are emissions allocated between the different facilitators of an issuance?

# Apply weightage based upon the responsibility of a facilitator for the issuer's emissions valued? E.g. lead book runner vs co-manager.

Limitations and assumptions:

1. Expected time lag in data availability given that emissions data will typically be available 12-15 months after the calendar year

2. In contrast to financed emissions ie Part A of PCAF done for every year of investment- the facilitator will only report its association with the instrument in the year that the instrument is issued, and the facilitation takes place.

3. To determine what proportion of the ‘facilitated’ part of the transaction each facilitator takes responsibility for, one could use League tables

4. PCAF has decided a 33% weighting for all capital market issuances and is applied irrespective of use of proceed

5. Additionally, financial institutions may report their facilitated emissions without weightage as long as this is reported separately, and the rationale is clearly disclosed

6. Same std. for debt or Equity transaction

7. One limitation of economic activity data, is the generalized nature and necessary assumptions made in applying region- or sector-specific average values (both for emissions and financial data). This makes calculations less robust and more uncertain.

PCAF distinguishes three options to calculate the facilitated emissions from capital market transactions depending on the emissions data used: