The GHG Protocol is the world's most widely used framework for measuring and reporting greenhouse gas emissions. Developed by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD), it provides the accounting architecture that underpins virtually all corporate climate disclosures.
To understand financed emissions, you need to understand how the GHG Protocol organises emissions into three scopes, and specifically how Scope 3, Category 15 applies to the financial sector.
The Three Scopes of Emissions
The GHG Protocol classifies all emissions into three scopes based on where in the value chain they occur:
| Scope | Definition | Examples for a Bank |
|---|---|---|
| Scope 1 | Direct emissions from sources owned or controlled by the reporting company | Company cars, on-site generators, gas heating in office buildings |
| Scope 2 | Indirect emissions from purchased electricity, steam, heating, or cooling | Electricity powering data centres, lighting, and air conditioning in branches |
| Scope 3 | All other indirect emissions in the company's upstream and downstream value chain | Business travel, employee commuting, purchased goods, and critically: emissions from loans and investments |
For most companies, Scope 3 emissions dwarf Scope 1 and 2. This is especially true for financial institutions, where the physical operations (offices, data centres, travel) are modest compared to the economic activities they finance.
Scope 3 Category 15: Investments
The GHG Protocol's Corporate Value Chain (Scope 3) Standard defines 15 categories of Scope 3 emissions. Category 15 covers emissions associated with investments. The GHG Protocol identifies several types of activities under this category:
- Equity investments: Emissions from companies in which the reporting company holds equity
- Debt investments: Emissions attributable to loans, bonds, and other debt instruments
- Project finance: Emissions from specific projects funded by the reporting company
- Managed investments and client services: Emissions from asset management, underwriting, and advisory services
- Other investments or financial services: Emissions from insurance contracts, pension funds, credit guarantees, and similar instruments
The first three subcategories correspond to what PCAF calls financed emissions (Part A). The fourth corresponds to facilitated emissions (Part B). The fifth encompasses insurance-associated emissions (Part C) and other services.
The GHG Protocol treats Category 15 as optional for most companies, but for financial institutions, it represents the overwhelming majority of their climate footprint. PCAF was created precisely because the GHG Protocol provided only general guidance for this category, leaving financial institutions without a detailed, standardised methodology.
Why the GHG Protocol Alone Was Not Enough
The GHG Protocol's Scope 3 Standard (2011) and its supplemental Technical Guidance for Calculating Scope 3 Emissions (2013) provide high-level direction for Category 15. They state that companies "may account for" emissions from investments, but the guidance stops short of prescribing:
- Which financial products should be included (loans, bonds, equities, derivatives?)
- How to attribute emissions to a specific financial institution (what denominator to use?)
- What data quality standards to apply (company-reported vs estimated?)
- How to handle multiple asset classes with fundamentally different structures
This lack of specificity meant that before PCAF, two banks financing the same company could report very different financed emissions depending on their chosen methodology. Comparability was essentially impossible.
The comparability problem before PCAF
Consider two banks, Bank A and Bank B, both holding a $100 million loan to the same steel manufacturer. Without a standardised methodology:
Bank A might use the steel company's total assets as the denominator, arriving at an attribution factor of 2%.
Bank B might use the company's total equity plus debt, arriving at an attribution factor of 5%.
The same loan to the same company would produce financed emissions estimates that differ by a factor of 2.5x. This made it impossible for investors, regulators, or the public to meaningfully compare the climate performance of different financial institutions.
PCAF resolved this by prescribing specific denominators and formulas for each asset class.
How PCAF Supplements the GHG Protocol
PCAF is not a replacement for the GHG Protocol. It is a supplement that provides the detailed, asset-class-specific methodologies that the GHG Protocol's Category 15 guidance lacks. The relationship is hierarchical:
- The GHG Protocol provides the overarching framework (scopes, categories, principles)
- PCAF provides the granular accounting rules (attribution formulas, data quality scores, reporting templates)
Financial institutions that follow PCAF are, by extension, also compliant with the GHG Protocol's requirements for Scope 3 Category 15. The five core principles of the GHG Protocol (Completeness, Consistency, Relevance, Accuracy, Transparency) form the foundation of PCAF's own accounting requirements, as we will explore in Module 1.
The Seven GHGs Covered
Both the GHG Protocol and PCAF require accounting for all seven greenhouse gases mandated under the Kyoto Protocol:
- Carbon dioxide (CO2)
- Methane (CH4)
- Nitrous oxide (N2O)
- Hydrofluorocarbons (HFCs)
- Perfluorocarbons (PFCs)
- Sulphur hexafluoride (SF6)
- Nitrogen trifluoride (NF3)
For ease of reporting, these gases are converted to carbon dioxide equivalents (CO2e) using their respective Global Warming Potentials (GWPs). All financed emissions figures in this course are expressed in tCO2e (tonnes of carbon dioxide equivalent).
Think of CO2e as a universal currency for greenhouse gases. Just as currencies are converted to a common unit (say, US dollars) to compare economic values across countries, different greenhouse gases are converted to CO2e to compare their warming impact. Methane, for example, traps roughly 28 times more heat than CO2 over 100 years, so 1 tonne of methane equals 28 tCO2e.
Reporting Under Scope 3 Category 15
PCAF requires that financed emissions be reported under Scope 3 Category 15 in the financial institution's GHG inventory. The standard also requires that:
- Facilitated emissions (Part B) are reported as a separate, supplementary accounting note within Category 15
- Insurance-associated emissions (Part C) are similarly reported as a supplementary note
This structure ensures that all three types of emissions (financed, facilitated, and insurance-associated) are captured within the same GHG Protocol category, while remaining distinguishable from each other.
Beyond Category 15, financial institutions must also measure and report their Scope 1 and 2 emissions, as well as other relevant Scope 3 categories (such as business travel, employee commuting, and purchased goods and services) in line with the GHG Protocol's standards.
Key Takeaways
- 1Financed emissions fall under Scope 3 Category 15 (Investments) of the GHG Protocol, which is the dominant emissions category for financial institutions
- 2PCAF supplements the GHG Protocol by providing the detailed, asset-class-specific methodologies that Category 15 guidance lacks
- 3Before PCAF, two banks financing the same company could report vastly different financed emissions due to inconsistent denominators and formulas
- 4All seven Kyoto Protocol greenhouse gases are covered, converted to CO2 equivalents (tCO2e) for standardised reporting
- 5Facilitated and insurance-associated emissions are reported as supplementary notes within Category 15, kept distinct from financed emissions