Financed emissions | IFRS S2

See IFRSS2.29, definitions, B58 to B63

Paragraphs C4 and C5 of IFRS S2An entity lending or investing money, attributes a portion of an investee's or counterparty's gross greenhouse gas emissions to its loans and investments: "financed emissions" are part of Scope 3 Category 15 (investments) as defined in the "Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard (2011)".

Entities involved in financial activities face risks and opportunities linked to the greenhouse gas emissions of their activities. Counterparties, borrowers or investees with high emissions may pose risks due to technology changes, supply-demand shifts, and policy changes; which in turn may impact the entity's credit, market, reputational or operational risks.

For instance, credit risk may stem from stringent carbon taxes or technology shifts, while reputational risk can result from financing fossil-fuel projects. Therefore, financial entities manage these risks by measuring financed emissions, which reflect their exposure to climate-related risks and potential necessary adaptations over time.

Paragraph 29(a)(i)(3) mandates entities to disclose their total gross Scope 3 greenhouse gas emissions from the reporting period, encompassing both upstream and downstream emissions. Entities involved in asset management, commercial banking, or insurance are required to disclose additional information about their Category 15 financed emissions.

Asset management category 15 additional diclosures | IFRSS2.B61

Entities with asset management operations are required to disclose the following additional information with respect to their category 15 financed emissions:

(Illustrative 29(a) Category 15 disclosures)

Scope 1 emissions

Scope 2 emissions

Scope 3 emissions

(a) Absolute gross financed emissions

23 tonnes C02E

910 tonnes C02E

2576 tonnes C02E

(b) Assets under management included in financed emissions disclosure

Euro600bn

Euro600bn

Euro600bn

(c) % of entity's total AuM included in financed emissions calculation (if less than 100% explain the types of assets excluded & their associated AuM)

100%

100%

100%

(d) Method used to calculate financed emissions, including the method of allocation the entity used to attribute its share of emissions in relation to the size of investments.

Direct measurement and equity share methods were used.

CO2E is Carbon dioxide equivalent

Disaggregation by asset class

Consider an asset manager with funds under management across multiple portfolios of bonds and stocks, which aggregate to:

The asset manager reports carbon emissions linked to stocks and bonds, but assesses that the assets in cash don't contribute to emissions.

Whilst asset managers are not required by IFRS S2 to disaggregate their emissions by asset class, IFRS S1 B29-B30 requires consideration of whether presenting the data in an aggregated format conceals material information. The entity considers that bonds and stocks are affected differently by climate-related risks and opportunities.

Despite no rule specifying a split of carbon emissions by bonds and stocks, the firm does so:

Example of an asset manager which disaggregates its financed emissions disclosures into asset classes

Disaggregation by active/passive investment strategies

IFRS S1 paragraph B29An asset manager may offer both active as well as passive investment strategies. When the asset manager does its IFRS S2 paragraph 29(a) emissions disclosures; it will consider whether the principles of aggregation and disaggregation in IFRS S2 (B29 and B30) require it to disaggregate emissions from active and passive investment strategies.

The asset manager shall consider:

IFRS S1 paragraph B30Although IFRS S2 does not explicitly require an asset manager to disclose its passive strategy emissions seperately to its active strategy emissions; IFRS S1 B29-B30 prohibit information from being aggregated if doing so would obscure info that is material.

For the reasons above, asset managers may want to disaggregate their disclosures of paragraph 29(a) emissions between active and passive investment strategies.

Commercial banking | IFRSS2.B62

Entities which participate in commercial banking activity need to report financed emissions seperately for each industry and each asset class:

    If the commercial bank discloses financed emissions for other asset classes, it shall substantiate why the inclusion of those additional asset classes provides relevant information.

So here's an illustrative example of what a bank must report for each industry and asset class, e.g. :

GICS code: 251020 Automobiles
Asset class: equity investments

Scope 1 emissions

Scope 2 emissions

Scope 3 emissions

Absolute gross financed emissions

23 tonnes C02E

910 tonnes C02E

2576 tonnes C02E

Funded carrying amounts*

Euro600bn

Euro600bn

Euro600bn

Undrawn loan commitments*

Euro700bn

Euro100bn

Euro300bn

% of gross exposure included in financed
emissions calculation. (if less than 100% explain the exclusions including the types of assets excluded)

100%

100%

100%

% of undrawn loan commitments included in financed emissions calculation.

100%

100%

100%

Method used to calculate financed emissions, including the method of allocation the entity used to attribute its share of emissions in relation to the size of its gross exposure.

Direct measurement and control approach methods were used.

* Funded carrying amounts are before subtracting the loss allowance, when applicable, whether prepared in accordance with IFRS Accounting Standards or other GAAP. For funded amounts, exclude from gross exposure all impacts of risk mitigants, if applicable

Insurance | IFRSS2.B63

Entities which participate in insurance-related activities need to report financed emissions seperately for each industry and each asset class:

    If the insurer discloses financed emissions for other asset classes, it shall substantiate why the inclusion of those additional asset classes provides relevant information.

So here's an illustrative example of what an insurer must report for each industry and asset class, e.g. :

GICS code: 251020 Automobiles
Asset class: equity investments

Scope 1 emissions

Scope 2 emissions

Scope 3 emissions

Absolute gross financed emissions

23 tonnes C02E

910 tonnes C02E

2576 tonnes C02E

Funded carrying amounts*

Euro600bn

Euro600bn

Euro600bn

Undrawn loan commitments*

Euro700bn

Euro100bn

Euro300bn

% of gross exposure included in financed
emissions calculation. (if less than 100% explain the exclusions including the types of assets excluded)

100%

100%

100%

% of undrawn loan commitments included in financed emissions calculation.

100%

100%

100%

Method used to calculate financed emissions, including the method of allocation the entity used to attribute its share of emissions in relation to the size of its gross exposure.

Direct measurement and control approach methods were used.

* Funded carrying amounts are before subtracting the loss allowance, when applicable, whether prepared in accordance with IFRS Accounting Standards or other GAAP. For funded amounts, exclude from gross exposure all impacts of risk mitigants, if applicable

man in suit with smoke in front of face

Resources

IFRS S2 reference documents