Background:

SustainOpp undertook a comprehensive engagement with a large Retail and Consumer Bank. The client was striving for an in-depth understanding of its financed emissions in line with the Paris Climate Agreement and IPCC carbon budgets. Drawing from the PCAF (Partnership for Carbon Accounting Financials) and insights from SustainOpp’s expertise, a tailored approach was designed.

Objective:

To systematically calculate, verify, and report on financed emissions from its lending and investment portfolios, while ensuring integration with broader sustainable finance initiatives. This engagement was intended to target the following asset classes:

• Listed Equity & Corporate Bonds

• Business Loans & Unlisted Equity

• Project Finance

• Residential & Commercial Mortgages

• Asset Financing

• Sovereign Debt

Approach:

1. Scope and Portfolio Segmentation: Working in sync with the client, SustainOpp initiated the process with the portfolio segmentation approach. Priority was given to asset classes such as corporate loans, mortgages, project finance, and government bonds, taking into account existing data architecture and legacy system limitationss

2. Data Strategy: Transactional datasets, crucial to both PCAF and SustainOpp’s methods, were assembled. Essential metrics like counterparty-specific emissions, sectoral GHG intensity, and loan duration were extracted.

3. Application of PCAF Methodology:

• For corporate loans, a blend of the Emission Factor Approach (from PCAF) and Absolute Emission Metrics was used. This provided a holistic view by considering both the attributed and absolute emissions from corporates.

• Mortgages were addressed using PCAF’s Average Emission Factor Approach combined with SustainOpp’s risk mitigation techniques, offering a clearer depiction of emissions vs. credit risks.

• Project finance utilised PCAF’s Share of Financing Approach. Additionally, SustainOpp’s insights on risk-adjusted carbon intensity allowed the bank to factor in the financial risks linked with carbon-intensive projects.

• For government bonds, Sovereign Emission Metrics were integrated, offering a macro view of financed emissions from state-related activities. Sustainopp’s network of data solutions were key to enabling this activity, balancing the data coverage, completeness and quality benefits with client value.

4. Validation, Verification & Reporting: Beyond PCAF’s control and validation criteria, SustainOpp’s granular reporting guidelines were adopted. This mitigated the risk of double-counting counterparty-level exposures, across asset classes and ultimately absolute emissions, lowering the risk of misreporting.

An external auditor verified the accuracy, and results were presented in line with the Task Force on Climate-related Financial Disclosures (TCFD) and International Sustainability Standards Board (ISSB) recommendations.

Results:

• The Client’s financed emissions were meticulously calculated and the attribution factor training provided to Finance and Sustainability reporting teams.

• Corporate loans, when viewed through the combined PCAF-SustainOpp lens, revealed nuanced insights about sectors needing immediate intervention and enhanced benchmarking provided the foundations for board-level decision-useful information to channel through to investor affairs teams.

• SustainOpp’s Sovereign Emission Metrics highlighted the bank’s exposure to carbon-intensive state policies, a previously under-explored area.

Impact:

• The Client adopted a dynamic portfolio management strategy, leveraging both emission data and associated financial risks.

• Transparent reporting and increased financed emissions accountability, aligned with TCFD, bolstered stakeholder trust and investor confidence.

• The Client also commenced green financing initiatives, spurred by insights from the combined PCAF-SustainOpp methodology.

Conclusion:

Merging the rigorous standards of PCAF with the detailed insights from SustainOpp, SustainOpp enabled the Client to redefine its approach to carbon accounting, calculation and reporting. This comprehensive methodology not only quantified financed emissions but also integrated broader financial risks, paving the way for a climate resilient and sustainable financial future.