In the fight against climate change, the focus on greenhouse gas emissions has mainly centered around the emissions generated directly by companies' operations (Scope 1) and those arising from purchased energy (Scope 2). However, an often overlooked but equally crucial aspect of emissions is Scope 3, which encompasses a wide range of indirect emissions from a company's value chain, including Investments/Financed Emissions under Category 15. 

In this blog, we'll delve into the complex world of Scope 3 Emissions: Category 15-Investments, its significance, challenges, and how businesses can address this critical issue.

Understanding Scope 3 Emissions

Scope 3 emissions account for a considerable share of an organization's total carbon footprint. These emissions arise from sources not owned or controlled by the company but are related to its activities. The Greenhouse Gas Protocol defines 15 categories of Scope 3 emissions, including emissions from business travel, employee commuting, upstream and downstream transportation, waste disposal, and more.

Scope 3 Category 15: Investments/Financed Emissions

Financed Emissions, falling under Category 15, refer to the greenhouse gas emissions associated with the investment and lending activities of financial institutions. When financial institutions, such as banks, insurance companies, and investment funds, provide capital to companies or projects, they indirectly support activities that may generate significant emissions.

Included in this category are Scope 3 emissions from the reporting company's investments during the reporting year that were not previously covered by Scope 1 or Scope 2. Investors (i.e., firms that make investments with the intention of profiting from them) and firms that offer financial services fall under this category. The same calculating techniques should be applied to investors in this group who do not prioritize making a profit (such as multilateral development banks). Because providing funding or finance is a service that the reporting company offers, investments are designated as a downstream scope 3 category.

Investments may be included in a company’s scope 1 or scope 2 inventory depending on how the company defines its organizational boundaries. Investments not included in the company’s Scope 1 or Scope 2 emissions are included in Scope 3, in this category. A reporting company’s scope 3 emissions from investments are the scope 1 and scope 2 emissions of investees.

Consider a bank providing a loan to a coal mining company. While the bank does not directly engage in mining operations, it enables the mining company to continue its activities, which release vast amounts of carbon dioxide and methane. The emissions resulting from burning fossil fuels for energy production are considered Investment Emissions.

How to Calculate Financed Emissions

There are 2 methodologies to calculate the Category 15-Investments of Scope 3 emissions:

• Investment-specific method: This involves collecting scope 1 and scope 2 emissions from the investee company and allocating the emissions based on the share of investment.

• Average-data method(less Accurate): This involves using revenue data combined with EEIO data to estimate the scope 1 and scope 2 emissions from the investee company and allocating emissions based on the share of investment.

(Decision tree for selecting a calculation method for emissions)

Investment-specific method

Activity data needed 

Companies should collect:

• Scope 1 and Scope 2 emissions of the investee company

• The investor’s proportional share of equity in the investee 

• If significant, companies should also collect scope 3 emissions of the investee company (if investee companies are unable to provide scope 3 emissions data, scope 3 emissions may need to be estimated using the average-data method described in option 2)

Emission factors needed

If using the investment-specific method, the reporting company collects emissions data from investees, thus no emission factors are required.

Data collection guidance

Sources for data may include:

• GHG inventory reports of investee companies 

• Financial records of the reporting company

Calculation Formula

Emissions from equity investments = 

The sum across equity investments: ∑ (scope 1 and scope 2 emissions of equity investment × share of equity (%))

Average-data method(less Accurate)

Activity data needed 

The reporting company should collect: 

• Sector(s) the investee company operates in 

• Revenue of investee company (if the investee company operates in more than one sector, the reporting company should collect data on the revenue for each sector in which it operates) 

• The investor’s proportional share of equity in the investee

Emission factors needed

EEIO emission factors for the sectors of the economy that the investments are related to (kg CO2 e/$ revenue).

Data collection guidance

Sources for data may include:

• Revenue data and equity share data will be available from the financial records of the reporting company and the investee company.

• Emission factors are available from EEIO databases (a list of databases is provided on the GHG Protocol website (http://www.ghgprotocol.org/Third-Party-Databases). Additional databases may be added periodically, so continue to check the website.

Calculation Formula

Emissions from equity investments = 

The sum across equity investments: ∑ ((investee company total revenue ($) × emission factor for investee’s sector (kg CO2 e/$ revenue)) × share of equity (%))

Addressing Financed Emissions

To address the challenges associated with Financed Emissions, financial institutions must take proactive steps to manage their carbon footprint responsibly. Here are some strategies they can adopt:

1. Emission measurement and disclosure: Financial institutions should collaborate with investee companies and project proponents to obtain comprehensive emission data. Transparent disclosure of Financed Emissions will enable stakeholders to better assess the institution's environmental impact.

2. Setting emission reduction targets: Financial institutions can establish science-based emission reduction targets aligned with climate goals. By targeting reductions in their portfolios, they can drive investment towards sustainable and low-carbon projects.

3. Climate risk assessment: Integrating climate risk assessments into investment decisions can help identify financially risky assets exposed to climate change impacts. This ensures that investments are resilient to the challenges posed by climate change.

4. Green finance initiatives: Encouraging and promoting green finance initiatives can steer capital towards sustainable projects and technologies. Implementing sustainable finance frameworks and offering green financial products can incentivize low-carbon investments.

5. Engaging clients and stakeholders: Collaboration with clients, investors, and other stakeholders is essential to foster a collective effort in reducing Financed Emissions. Financial institutions can influence companies to adopt sustainable practices and disclose their emission data.

Conclusion

Financed Emissions under Category 15 of Scope 3 represent a significant but often overlooked component of an organization's carbon footprint. Financial institutions play a pivotal role in addressing climate change by recognizing their role in these indirect emissions and taking proactive measures to manage and reduce their impact. By transparently reporting Financed Emissions, setting reduction targets, and promoting green finance initiatives, financial institutions can contribute significantly to the global effort to combat climate change and create a more sustainable future for future generations.