The Complexity of Measuring and Reducing Financed Emissions


  • Ben Harding, Spencer Schulten, and Mitch Meyer
  • Published: 13 May 2021
A Three-Legged Stool

“Anyone who believes in indefinite growth on a physically finite planet is either mad, or an economist.” – Sir David Attenborough

While still a subject of political controversy, the need for serious carbon emissions reduction plans within broader CSR programs is rapidly becoming de rigueur for multinational corporations. No longer the provenance of a vanguard of early movers, the world’s largest corporations, including mainline industrials like General Motors , are now leaders in our collective global efforts to address climate change. The global response to climate change can be viewed as a three-legged stool—individuals, government/NGOs, and corporations. Emerging corporate leadership is key because it can combine scale with a consistency that the vicissitudes of public opinion can make elusive for governments.

Financial Services (“FS”) is among the most complex industries in terms of understanding and measuring greenhouse gas (“GHG”) impact. This is due to FS firms’ large balance sheets and/or investment portfolios creating a concept of “financed emissions” incremental to a bank’s own resource consumption. At Capco, we have developed a three-step framework to help our clients define their financed emissions remediation programs—including deriving actionable strategies to integrate the capture and measurement of financed emissions into business line and corporate day-to-day activities.

Capco’s Framework:

1. Segmentation

“To be useful, segments must be measurable, substantial, accessible, differentiable, and accountable.” – Philip Kotler

The Greenhouse Gas Protocol (“GHG Protocol”) is the source for “the world’s most widely used greenhouse gas accounting standards.” These standards are the starting point for any segmentation effort.

Accounting for emissions from investments

Equity Investments – Equity investments made by the reporting company using the company’s own capital and balance sheet, including subsidiaries, associated companies, joint ventures, and neither control nor influence.

Debt Investments (with known use) – Corporate debt holdings with known use of proceeds (i.e., use of proceeds is identified as going to a particular project, such as to build a specific power plant).

Debt Investment (unknown use) – General corporate purposes debt holdings (such as bonds or loans) held in the reporting company’s portfolio where the use of proceeds is not specified.

Project Finance – The long-term financing of projects (e.g., infrastructure and industrial projects) by the reporting company as either an equity investor (sponsor) or debt investor (financier).

Managed Investments & Client Services – Investments managed by the reporting company on behalf of a client (using a client’s capital), or services provided by the reporting company to a client.

Other – All other types of investments, financial contracts, or financial services not included above.

While an effective starting point, these standards are also geared toward investments and potentially imperfect when applied to large banks (>$250bn USD in assets). Specifically, banks must be diligent: in (1) understanding each category’s application to their own balance sheet; (2) defining and applying standards for categorization to each client/business; and (3) actively managing the categorizations in a dynamic portfolio.

2. Measurement

“If it can’t be expressed in figures, it is not science. It is opinion.” – Robert Heinlein

Banks must not only categorize their balance sheets via the GHG Protocol, but they must then define and operationalize the measurement methodologies — sometimes at a client level. GHG protocol stipulates two measurement options, the “investment-specific” approach where clients track and provide their own GHG emissions and an “average data” method which multiplies an industry scaling factor by corporate revenue to estimate emissions.

Considerations for approaching measurement can be distilled into three main categories: (1) measurement approach (e.g., LOB or client specific and how will methodologies change as clients get more sophisticated?); (2) implementation of the measurement strategy (e.g., when/how is investment-specific data gathered?); and (3) data storage and management strategy (e.g., do you build a custom system, retain a vendor, or pursue a hybrid approach?).

3. Target Setting

“You hit what you aim at, and if you aim at nothing you will hit it every time.” – Zig Zigler

Like the first two pieces of the framework, target setting is complex and requires a flexible, multiyear strategy. The complexity comes from two major sources: (1) the involvement of multiple stakeholders (e.g., target settings for LOBs, including historically emissions-heavy industries); and (2) the dynamic nature of clients own GHG reduction and tracking efforts (e.g., a client’s emissions will likely decrease over the measurement window).

Overreliance on client reduction may create scenarios where banks appear to have not made tangible progress against their aggressive financed emissions targets (e.g., Wells Fargo recently set a goal of carbon neutral financed emissions by 2050 ). First-mover analysis can help banks plot achievable reduction efforts for clients; additionally, the Science-Based Target Initiative (“SBTi”) has set objective standards for reduction targets. Banks can baseline reduction goals to SBTi standard to demonstrate progress while utilizing more complex, first-mover analysis for ultimate financed emissions targets.


“The secret of change is to focus all of your energy, not on fighting the old, but on building the new.” - Socrates

It is an objective good that multi-national corporations are assuming leadership in limiting global carbon emissions. Capco believes these activities can create a vibrant, sustainable economy — in short, that we collectively work on “building the new.” We are partnering with our clients to plan and execute these journeys; we would love to schedule a call with your team to discuss in greater detail.

Contact us to learn more.





[1] https://media.gm.com/media/us/en/gm/home.detail.html/content/Pages/news/us/en/2021/jan/0128-carbon.html

[2] https://ghgprotocol.org/about-us

[3] https://ghgprotocol.org/sites/default/files/standards/Scope3_Calculation_Guidance_0.pdf

[4] https://newsroom.wf.com/English/news-releases/news-release-details/2021/Wells-Fargo-Sets-Goal-to-Achieve-Net-Zero-Greenhouse-Gas-Emissions-by-2050/default.aspx