The disclosures under Scope 3 are complex, and category 15 (investments) is an opaque segment designed to cover issues that arise as a result of one company engaging in another (i.e. financial transactions)1. For most companies, this is a proverbial footnote in their entire emissions profile. Given the conceptual and data-related challenges unique to category 15, it is no coincidence that it is at the bottom of the Scope 3 catalog.
However, for financial institutions, financial transactions are the business, which makes Category 15 issues a critical part of their overall issue disclosures.
Compared to other industries, financial institutions typically result in low scope 1 and scope 2 emissions, which mainly come from offices and electricity consumption. Financial institutions cause limited emissions of most Scope 3 categories, and these emissions are mainly related to the purchase of goods and services, as well as business travel.
On the contrary, its Category 15 emissions are exceptionally high. On average, more than 99% of a financial institution’s total emissions footprint comes from category 15.2 emissions.
Financed and facilitated emissions
The emissions of Category 15 financial institutions include financed emissions and facilitated emissions. The financed emissions are emissions related to the balance sheet of direct lending and investment activities. These include the issues of a company to which a bank grants a loan or in which an asset manager owns shares. The facilitated issues are off-balance sheet issues derived from the provision of capital market services and transactions. An example are the issues of a company that supports an investment bank in the issuance of debt securities or equity securities or for which it grants a loan through syndication.
Financed and facilitated emissions are the key to understanding the climate risk exposure of financial institutions. This could be significant, for example, for a bank with a large loan portfolio focused on airlines or an insurance company specializing in oil and gas activities. Therefore, it is not surprising that several interest groups have advocated for more disclosures. These include the Partnership for Carbon Financial Accounting (PCAF), the Principles for Responsible Investment (PRI), the Glasgow Financial Alliance for Net Zero (GFANZ), the Science-Based Targets Initiative (SBTi), CDP and the Transition Pathway Initiative (TPI).
As Scope 3 disclosures become mandatory in several countries, this is becoming even more urgent for the financial industry. For example, the European Union’s Corporate Sustainability Reporting Directive requires all large companies listed on its regulated markets to report on their Scope 3 emissions, and similar requirements arise in other countries around the world. While disclosure rules generally do not specify which categories of Scope 3 emissions should be included in disclosures, they generally require essential categories to be covered, making it difficult for financial institutions to object to the disclosure of their funded and facilitated emissions.
This poses a considerable challenge. Figure 1 shows that financial institutions’ scope 3 reporting rates are among the highest of all industries. Only a third disclose their funded issues and often they cover only parts of their portfolio.3 To date, only a few have attempted to disclose their facilitated broadcasts. A recent report by the TPI, which examined climate data from 26 global banks, shows that none have fully disclosed their financed and facilitated emissions.4
