Data Collection for Financed Emissions
Financial institutions are required to collect and analyze data to accurately report the scope 1, 2, and 3 greenhouse gas emissions of their portfolio, from lending to investments. But there's a problem with the quality of that data.

For financial institutions, every dollar they invest, every infrastructure project they fund, every company they support has a climate footprint. Under new disclosure regulations in the UK, EU, NZ and the US in the near future, financial institutions are responsible for the carbon emissions of their portfolio… the financed emissions.

Customers know this, and they’re switching banks. In fact, according to AltFi, 1 in 4 customers are evaluating their banking partners based on ESG factors.

The good news is that many firms are committing to frameworks such as the TCFD and net-zero targets, such as those established by the SBTi. The FCA confirms that everyone from customers to regulators wants to see financial institutions taking action in the right direction.

That means accurately reporting scope 1, 2, and 3 greenhouse gas (GHG) emissions.

  • Scope 1 measures direct emissions – company buildings and vehicles.
  • Scope 2 is indirect, associated with the purchase of electricity.
  • Scope 3 is also indirect. It includes emissions the company doesn’t own or control
    • upstream – business travel, commuting, waste generated in operations or raw materials
    • downstream – leased assets, investments, emissions from transportation after point of sale

Scope 3 is where things get complicated and difficult to measure. Partnership for Carbon Accounting Financials (PCAF) enables financial institutions to measure and disclose the greenhouse gas emissions associated with their lending and investment portfolio.

PCAF’s goal is to standardise the way institutions report their financed emissions so that customers and investors can compare and make informed choices about where to place their capital/money.

PCAF standardises the way FIs collect data too. And this has created a big challenge for banks because it’s not the way they’re used to doing things.

Currently, firms don’t have the tools to properly measure emissions and make informed decarbonisation decisions.

Financial institutions are relying on proxy/indirect data to set targets, define their decarbonisation strategy and report their progress towards net-zero.

Proxy/indirect data doesn’t provide sufficient insight into the portfolio emissions. It’s based on estimates so it’s not accurate.

Without precise, direct data, it’s unlikely they will even be able to track their progress towards net-zero.

Institutions are therefore either being held responsible for more emissions than they’re actually funding or not enough.

In either case, proxy data doesn’t allow for the tracking of decarbonisation incentives or actions – progress can’t be measured using economic-based estimates. It also doesn’t allow them to accurately evaluate opportunities and risks in their investment strategy.

Why does this matter?

Banks have committed to the Net Zero Banking Alliance, but if they’re using proxy data, they won’t be able to accurately measure and meet the goals they’ve agreed to.

That could also lead to an increased reliance on carbon offsets, which are expensive and must be purchased annually.

Where the financial sector is today

Financial institutions are using compliance-grade data, which gives a low PCAF score of 4 or 5. With that score, they can set portfolio-level carbon reduction targets, but they’re not advised to set those targets based on asset class or implement decarbonisation strategies. And they’re not able to track progress toward meeting those targets.

With better data – primary data with a PCAF score of 1 or 2 – they can achieve those goals and effectively lower their financed emissions.

How do you get primary data for a lending portfolio?

A PCAF score of 1-2 relies on primary data from customers/clients/borrowers in the portfolio. That means gathering data across thousands of third parties.

It requires institutions to have the internal capability to collect and process this amount of data.

This is where carbon accounting steps in with a digital solution that allows firms to collect and process primary data from their clients.

Software solutions like carbon accounting platforms remove complexity, reduce data-gathering headaches, and provide smart insights enabling financial institutions to decarbonise faster.

By implementing advanced carbon accounting tools like the one created by Bloom ESG, they can accurately measure the GHG impact of their portfolio, incentivize decarbonisation action, and make a positive impact on the path to net zero.

Data capture from multiple portfolios and thousands of borrowers can only really be achieved with digital tools. They allow firms to maximise impact, reduce time, and minimise cost.

Benefits for financial institutions

When institutions are able to measure, track, and reduce the GHG emissions of their lending book and investment portfolio, the benefits triple. They

  • comply with the demands of regulators.
  • better anticipate risks and opportunities related to the impacts of climate change.
  • protect their reputation with customers and stakeholders.

At Bloom, we understand the problems with data collection and want to see higher-quality data that enables better decisions. That’s why we’re constantly working with financial institutions and their partners to ensure we have the most innovative approach to enable primary data collection and reporting.

We’ve created an easy-to-use software solution to capture, process, and report financed emissions more accurately because it’s time to move from compliance to action and impact.

There’s more where that came from!

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