Overcoming Data Challenges in Portfolio Measurement

As the global push to reach zero net energy by no later than 2050 drives financial institutions to begin developing a net zero pathway, the first step of which is the daunting task of reducing the financed emissions within their portfolios, the challenges they will encounter are broad, ranging from pushback from stakeholders to integrating climate risk into current risk management processes. One of the first challenges financial institutions are encountering, however, is data, as they seek to assess their current level of financed emissions. Broader acceptance of the standards set by the Partnership for Carbon Accounting Financials (PCAF) may eventually alleviate some of the issues arising out of limited available data or poor data quality.

The Need for Better Data in Measuring Financed Emissions

On July 11, 2021, Randal Quarles, Federal Reserve Board Vice Chair for Supervision, who also chairs the Financial Stability Board (FSB), addressed the issue of data in combating climate-related financial risks in a speech at the International Conference on Climate Change, in Venice, Italy. Quarles believes that “a broader set of high-quality, relevant data” is foundational to assessing the impact of climate risk on financial stability and cited the need for “international initiatives…to improve data quality and address data gaps, and ultimately to establish a basis of comprehensive, consistent, and comparable data for global monitoring and assessing climate-related financial risks.” Financed emissions is an area in which the provision of better data could have a significant impact on global efforts to address climate-related risk.

Task Force for Climate-Related Financial Disclosures Recommends PCAF for Measuring Financed Emissions

The Task Force for Climate-Related Financial Disclosures (TCFD), which was established by the FSB to identify what the financial market needs to assess and price climate-related risks and opportunities, has published recommendations for reporting financial risk that have been broadly accepted as the standard framework, and, in some jurisdictions, TCFD disclosures are mandated. In its original recommendations, the TCFD described greenhouse gas (GHG) emission metrics that organizations should include in their disclosures. Recently, the TCFD proposed updating its guidance for the financial sector “to clarify that banks, asset owners, asset managers, and the asset management side of insurers should disclose financed emissions” in line with the methodology set forth by PCAF,  an industry-led global partnership that has developed standard methodologies across six different asset classes for assessing and disclosing the GHG emissions from their loans and investments (financed emissions). In addition, noting the critical role the financial sector plays in helping ensure that “capital flows toward activities needed for the net-zero transition,” the TCFD recommended that financial institutions measuring the alignment of their financial portfolios with their climate goals apply the PCAF standard. Notably, PCAF provides in-depth guidance on managing data limitations, including the use of estimated or proxy data where reported data is not available. It also includes a data-quality scoring matrix for increased transparency.

We are on a journey toward better data. Data is a critical component of assessing current risks and opportunities, from climate change to the financial system, and is the foundation to finding ways to mitigate those risks and contribute toward a net zero economy. We must start improving our data collection and analysis processes now to ensure a better future.  Initiatives such as PCAF, which recognize the limitations stemming from poor or nonexistent data, but provide actionable solutions to overcome these limitations, can help us develop a path to higher-quality data over time.