PCAF Launches Consultation on New Methodologies for the Global GHG Accounting and Reporting Standard

On 3 December 2024, the Partnership for Carbon Accounting Financials (PCAF) launched a consultation to gather financial industry feedback on its newly proposed methodologies for measuring and reporting greenhouse gas (GHG) emissions associated with financial activities.

As part of the consultation, PCAF released new guidance and methods for financial institutions (FIs) that measure scope 3 category 15 emissions under the Global GHG Accounting and Reporting Standard (PCAF Standard).

Additionally, PCAF presents a guidance document for FIs on reporting of (i) financed avoided emissions, sometimes referred to as “scope 4” emissions; and (ii) forward-looking emissions metrics, such as expected emissions reductions (EER). The guidance document incorporates prior PCAF guidance and accompanies the PCAF Standard.

Global GHG Accounting and Reporting Standard for the Financial Industry

In November 2020, PCAF published the Global GHG Accounting and Reporting Standard for the Financial Industry (PCAF Standard). Since then, the PCAF standard has been further developed and has become a methodology of reference for FIs’ climate-related reporting under various global and regional frameworks, including the Corporate Sustainability Reporting Directive (CSRD) and the European Banking Authority’s Pillar 3 framework in the EU, as well as ISSB’s IFRS S2.

PCAF is now gathering feedback from the financial sector on new methodologies for measuring financed emissions (scope 3 category 15) under the PCAF Standard. The new methodologies relate in particular to (i) Use of Proceeds accounting; (ii) Securitized and Structured Products; and (iii) Sub-Sovereign Debt.

Guidance on Avoided Emissions

As part of the consultation, PCAF also published a guidance document envisioned to serve as separate guidance supporting the PCAF Standard, specifically covering avoided emissions.

Avoided emissions are sometimes referred to as “scope 4”, although the term is not used by PCAF or officially recognized within the GHG Protocol Standard. The GHG Protocol Scope 3 Standard refers to avoided emissions as “GHG reduction opportunities [that] lie beyond a company’s scope 1, scope 2, and scope 3 inventories.”

PCAF defines avoided emissions in the guidance document as “the 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.”

While guidance on avoided emissions is available for companies and corporate avoided emissions (e.g., by the World Business Council for Sustainable Development), PCAF notes that financial sector guidance is limited.

Reporting of Avoided Emissions by FIs

PCAF is therefore calling for feedback on the document with guidance for FIs on how to approach the reporting of avoided emissions. The guidance currently covers financed emissions, across asset classes.

The guidance document outlines how FIs can report financed avoided emissions on a voluntary basis, and provides that these should be reported separately from absolute emissions and emission removals.

For the purpose of accounting for financed avoided emissions, PCAF identifies two ways avoided emissions can be attributed to FIs:

1. General corporate instruments: loans and investments to counterparties with general purposes (unknown use of proceeds under the GHG Protocol)
2. Specific corporate instruments: loans and investments in projects, assets, or structures (known use of proceeds under the GHG Protocol)

The guidance document clarifies the distinction and provides that financed avoided emissions from general corporate instruments should be reported separately from financed avoided emissions resulting from specific corporate instruments.

The consultation and the guidance document further also cover forward-looking emissions metrics, including EER, which PCAF identifies as an emerging topic in the industry.

Next Steps

The consultation will remain open until 28 February 2025, with feedback informing the final methodologies and guidance.

Latham & Watkins will continue to monitor developments in relation to the GHG Protocol and sustainability reporting.

This post was prepared with the assistance of Toon Dictus.