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Financed Emissions: How Financial Institutions Can Lead the Net Zero Transition



Financial institutions are at the heart of the global economy, and now, they are also at the forefront of the climate transition. As the world races to meet net-zero targets, banks, asset managers, and insurers face mounting pressure to align their capital allocation with climate goals. The challenge is not just about reducing their operational emissions, but about understanding, measuring, and managing the emissions generated by their portfolios, known as financed emissions. This blog explores how financial institutions can lead the transition to net zero, leveraging tools like the StepChange Net Zero Navigator and global standards such as PCAF, to decarbonize portfolios and drive real-world impact.


Understanding Financed Emissions: The Foundation of Net Zero 

Financed emissions refer to the greenhouse gas (GHG) emissions associated with a financial institution’s loans and investments. Unlike operational emissions (Scope 1 and 2), financed emissions fall under Scope 3, Category 15 of the GHG Protocol, often representing the largest share of a financial institution’s total climate impact.


Financed Emissions Meaning and Definition

  • Financed emissions definition: The total GHG emissions attributed to a financial institution’s lending, investment, and other financial services activities.

  • Financed emissions scope 3: These are categorized under GHG Protocol Scope 3, Category 15, which covers “investments” for financial institutions.


Understanding and managing financed emissions is essential for any credible net zero strategy. This is where frameworks like the Partnership for Carbon Accounting Financials (PCAF) and tools like the Net Zero Navigator become indispensable.


What is Partnership for Carbon Accounting Financials - PCAF?


The Partnership for Carbon Accounting Financials (PCAF) is a global, industry-led initiative that enables financial institutions to measure and disclose the greenhouse gas (GHG) emissions associated with their loans and investments. Established in 2015 by a group of Dutch financial institutions, PCAF has expanded rapidly and now includes hundreds of banks, asset managers, insurers, and pension funds worldwide.


Purpose and Mission:

PCAF was created in response to the urgent need for a standardized approach to GHG accounting in the financial sector, especially given the sector’s significant influence on the global transition to net zero. Prior to PCAF, there was no harmonized methodology for financial institutions to consistently assess and report the carbon impact of their financial activities. The lack of standardization made it difficult for stakeholders to compare data, set targets, and track progress toward climate goals.


PCAF’s mission is to enhance transparency and accountability, empowering financial institutions to:


  • Measure financed emissions: Quantify the GHG emissions indirectly generated through lending and investment activities, which often dwarf their own operational emissions.

  • Disclose emissions consistently: Provide clear, comparable data to regulators, investors, and the public.

  • Align with global climate goals: Support the financial industry’s alignment with the Paris Agreement and broader net zero ambitions.


The PCAF Framework


At the heart of PCAF is the Global GHG Accounting and Reporting Standard for the Financial Industry (“the Standard”). This open-source framework provides detailed guidance for measuring and reporting financed emissions across a range of asset classes, including:


  1. Listed equity and corporate bonds

  2. Business loans and unlisted equity

  3. Project finance

  4. Commercial real estate

  5. Mortgages

  6. Motor vehicle loans


PCAF’s Standard is closely aligned with the GHG Protocol, particularly Scope 3, Category 15, but goes further by offering specific methodologies tailored to financial products and services. The framework also introduces a data quality scoring system, encouraging institutions to improve the accuracy and completeness of their emissions data over time.


Adoption and Impact

Since its inception, PCAF has grown into a global movement, with over 550 financial institutions (as of early 2025) committed to measuring and disclosing their financed emissions. By adopting the PCAF framework, these organizations are not only improving their own climate risk management and regulatory compliance but also catalyzing a shift of capital flows toward sustainable investments and supporting the world’s net-zero transition.


Why PCAF Matters

  • Consistency: The PCAF methodology ensures that financial institutions measure financed emissions in a standardized way, enabling comparability and transparency across the sector.

  • Comprehensiveness: The standard covers a wide range of asset classes, including listed equities, corporate bonds, business loans, mortgages, commercial real estate, and even private equity and sovereign bonds.

  • Alignment: PCAF’s approach is closely aligned with the GHG Protocol’s Scope 3, Category 15 requirements, filling a critical gap in previous reporting frameworks.


PCAF Methodology in Practice

  • Financed emissions: Financial institutions use the PCAF methodology to quantify the GHG emissions associated with each asset in their portfolio.

  • PCAF data quality: The standard includes a data quality score, encouraging continual improvement in emissions data collection.

  • PCAF reporting: Institutions disclose their financed emissions, often as part of broader ESG and TCFD-aligned reporting.


Net Zero Navigator: Technology for Sustainable Finance

The StepChange Net Zero Navigator is a comprehensive suite of tools designed to help financial institutions decarbonize portfolios, manage climate risks, and optimize ESG metrics. It offers a dedicated Financed Emissions Module that leverages international best practices—including the PCAF standard—to measure, analyze, and reduce the carbon footprint of financial portfolios.


The Business Case: Why Financial Institutions Must Act

Aligning capital allocation with net zero is not just about compliance or reputation—it is a strategic imperative.

  • Risk Management: Climate risks—both physical and transitional—pose significant threats to portfolio value. Measuring and managing financed emissions helps institutions identify and mitigate these risks.

  • Regulatory Pressure: Disclosure requirements for Scope 3 emissions, including financed emissions, are tightening globally. Early adoption of PCAF and advanced tools like Net Zero Navigator positions institutions ahead of regulatory curves.

  • Market Opportunity: The transition to a low-carbon economy creates vast investment opportunities in clean technologies, sustainable infrastructure, and climate solutions.


Here Are Four Steps to Align Capital Allocation with Net Zero


Financial institutions can lead the transition by following a structured approach:


  1. Measure and Disclose Financed Emissions

    1. Adopt the PCAF Standard: Use the PCAF methodology to quantify financed emissions across all asset classes, including private equity and sovereign bonds.

    2. Leverage Technology: Deploy platforms like Net Zero Navigator to automate data collection, calculation, and reporting.

    3. Disclose Transparently: Report financed emissions publicly, aligned with TCFD and other global frameworks.

  2. Set Ambitious, Science-Based Targets

    1. Portfolio Decarbonization: Establish clear, science-based targets for reducing portfolio emissions, using the latest guidance from SBTi and PCAF.

    2. Net Zero Financed Emissions: Commit to net zero financed emissions by 2050, with interim targets and clear milestones.

    3. Sector Pathways: Develop sector-specific decarbonization pathways, focusing on high-impact sectors such as energy, transport, and real estate.

  3. Integrate Climate into Capital Allocation

    1. Strategic Allocation: Shift capital toward companies and projects aligned with net-zero pathways, using emissions intensity and ESG performance as key criteria.

    2. Active Engagement: Engage with high-carbon portfolio companies to support credible transition plans, rather than simply divesting.

    3. Innovative Instruments: Develop and deploy green bonds, sustainability-linked loans, and transition finance solutions.

  4. Monitor, Report, and Improve

    1. Continuous Benchmarking: Use tools like Net Zero Navigator to track progress, benchmark against peers, and refine strategies.

    2. PCAF Data Quality: Invest in improving data quality and coverage, moving from estimates to primary data wherever possible.

    3. Stakeholder Engagement: Communicate progress to stakeholders, including clients, regulators, and civil society, to build trust and accountability.


The Future: Scaling Impact Through Collaboration and Innovation


The journey to net zero is complex, but financial institutions have a unique ability to drive systemic change. By adopting robust standards like PCAF, leveraging advanced technology like the Net Zero Navigator, and integrating climate into every capital allocation decision, they can accelerate the transition to a sustainable future.


The next frontier is collaboration—across institutions, regulators, and sectors—to harmonize methodologies, share data, and scale solutions. Initiatives like the Financial Institutions Net-Zero Standard by SBTi, and the ongoing evolution of PCAF are critical to building a credible, science-based pathway for the entire sector.


Aligning capital allocation with net zero is not just a moral obligation—it is a business imperative and a strategic opportunity. Financial institutions that lead in financing emissions measurement, disclosure, and reduction will not only future-proof their portfolios but also unlock new value in the transition to a low-carbon economy.


StepChange’s Net Zero Navigator, combined with the PCAF standard, empowers financial institutions to measure, manage, and reduce their financed emissions - turning ambition into action, and capital into climate solutions.


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