What are “financed emissions”?

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A firm’s activities can be very diverse, but some activities are difficult to include in a carbon footprint assessment. For instance, this is the case of financial activities

To account for their carbon impact, we refer to Chapter 15 of the GHG Protocol. The latter defines financed emissions. This means that an investment fund with shares in a firm is responsible for the latter’s greenhouse gas emissions, proportionally to its investment

How should a firm calculate its financed emissions? Why should they be limited? How can you reduce your fund’s or firm’s exposure to carbon intensive activities? Read along to find out all the answers to your questions about financed emissions.

Financed emissions and Chapter 15 of the GHG Protocol 

What is the GHG Protocol? 

The Greenhouse Gas (GHG) Protocol was established in 1998. It is a standard designed to help firms identify and calculate their main greenhouse gas (GHG) emissions. It is very similar to the Bilan Carbone method, but the GHG Protocol is aimed at a much more international audience.

Whether direct or indirect, these emissions are divided into three scopes, depending on their origin. Determining the correct scope allows firms to find solutions to reduce emissions and limit their climate impact. 

A firm’s carbon footprint, therefore, includes emissions indirectly linked to its activity, particularly finance activities. These are studied in Chapter 15 of the GHG Protocol.

What does Chapter 15 of the GHG Protocol deal with? 

The GHG Protocol divides scope 3 into 15 categories. Chapter 15 is called “Investments” and applies to banks and investment funds.

This chapter defines financed emissions, i.e. indirect emissions that are not directly generated by a firm but by the activity of firms in which it has shares. It must still integrate these emissions into its GHG reduction strategy.

Example: an investment fund has shares in a firm producing concrete. The fund’s direct activities (mainly office activities) have a low carbon footprint. 

However, according to Chapter 15 of the GHG Protocol, the fund must include the GHG emissions it finances in its carbon footprint, i.e. those generated by the companies in which it holds shares. Thus, owning assets in the concrete firm increases its climate impact.

Similarly, a bank financing a firm emitting GHGs is also indirectly carrying part of the latter’s carbon footprint. 

This method of integrating financial activities into a firm’s carbon footprint, therefore, accounts for both equity (owned assets or capital invested) and debt.

However, should a fund integrate all emissions of a firm in which it holds only 10% of shares, for instance? The answer is no, a fund only bears the carbon footprint of a company to the extent of its investment. To calculate its share, we use the allocation key

What is the allocation key? 

The allocation key is a method of breaking down indirect costs. In the case of carbon impact, it is used to determine a fund’s carbon footprint based on its financing of firms. 

For instance, a fund lending assets to or investing in a firm does not carry the entire carbon footprint weight of the target firm. It only carries the carbon footprint relative to its investment. If the fund holds 20% of the firm’s assets, then it carries 20% of the GHG Protocol’s category 15. 

The Partnership for Carbon Accounting Financials (PCAF) defines these allocation keys. The PCAF is a financial sector initiative establishing an international standard for measuring and calculating GHG emissions from loans and investments. 

To calculate the allocation key, the ratio between the capital invested by the fund or the debt it holds and the firm’s total value is calculated. This ratio is then applied to the target firm’s emissions. 

Indicators for measuring a fund’s activities’ carbon intensity

There are several indicators for measuring the carbon intensity of a fund’s financial activities, such as the EVIC and the WACI.


The Weighted Average Carbon Intensity (WACI) is a measure of a fund’s carbon exposure. This indicator measures the average carbon intensity of the assets held by a fund, expressed in tCO2e/m€ of turnover.

Its formula is as follows: 

WACI = (total emissions of the firm / firm turnover) * share of the total amount invested by the fund in the said firm.

The share of the total amount invested by a fund in a firm is the amount invested by the fund in that firm divided by the total amount invested by the fund in all its investments. 

Limiting portfolio exposure to carbon intensity

What are the risks of having too much carbon exposure in your portfolio?

Having a carbon-intensive portfolio exposes your fund or firm to several risks. Indeed, regulations combating climate change (such as environmental standards or taxes) have increased in recent years and will become even more stringent in the future. 

These can lead to additional costs for polluting firms, forcing them to adapt their activities. This can result in reduced turnover. Your portfolio may therefore be affected. 

Beyond this, exposure to carbon risk is often highly correlated with exposure to rising energy and commodity prices. This is an increasing financial risk for many firms.

To understand your firm’s carbon intensity exposure, there are two things to consider: 

  • Which firm is invested into;

  • What each investment represents in regards to the total portfolio

For example, owning 80% of a concrete firm with a large carbon footprint can greatly increase your carbon intensity. However, if your shares in this firm represent only 5% of your total portfolio, the risk is limited. 

It is therefore crucial that you carry out a detailed carbon footprint analysis of each firm in which you own shares to determine how much each one weighs in regard to your total portfolio. 

How can Carbometrix help you calculate and reduce your financed emissions?

Carbometrix helps you calculate and reduce your financed emissions based on two main elements:

  • Carbometrix can calculate the total carbon footprint of the firms you invest in. This includes scope 3, relating to indirect emissions. Carbometrix can then help your portfolio companies reduce their carbon footprint, and thus that of your fund.

  • Based on these data, Carbometrix can produce a dashboard of your financed emissions, to help you make better-informed investment decisions.

  • Carbometrix can also leverage sectoral averages to produce intermediary-financed emissions dashboards. 

Would you like to build your financed emissions dashboard to better report to all your key stakeholders? Get in touch with us today!

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