Category 15: Investments
This category is applicable to companies that provide financial services and companies that make an investment with the objective of making a profit (investors). It is designed primarily for private financial institutions (e.g., commercial banks), but it is also relevant to public financial institutions (e.g., multilateral development banks, export credit agencies, etc.) and other entities. It includes scope 3 emissions associated with the reporting company’s investments in the reporting year, that are not included in scope 1 and scope 2.
Investments are categorised as a downstream scope 3 category because the provision of capital or financing is a service provided by the reporting company.
Investments may be included in a company’s scope 1 or scope 2 inventory depending on how the company defines its organisational boundaries 1.
For example, companies that use the equity share approach include emissions from equity investments in scope 1 and scope 2. Companies that use a control approach account only for those equity investments that are under their control in scope 1 and scope 2. Investments not included in the company’s scope 1 or scope 2 emissions are included in this category.
A reporting company’s scope 3 emissions from investments are the scope 1 and scope 2 emissions of investees.
Scope 1 emissions are direct emissions of the investee or project. Scope 2 emissions are the indirect emissions from the generation of electricity consumed by the investee or project. Scope 3 emissions are the indirect emissions from the investee’s downstream activities. For example, if a financial institution provides equity or debt financing to a light bulb company manufacturer, the financial institution is required to account for the direct emissions during manufacturing (scope 1) and indirect emissions from electricity consumed during manufacturing (scope 2). The financial institution should also account for scope 3 emissions of the light bulb producer, such as emissions from consumer use of light bulbs sold by the manufacturer, when the scope 3 emissions are significant compared to other sources of emissions, or if they are relevant.
Projects considered here are those in GHG-intensive sectors such as power generation, that exceed a specified emissions threshold, or projects that meet other criteria developed by the company or industry sector.
Emissions from investments should be allocated to the reporting company based on the company’s proportional share of investment in the investee.
There are four types of financial investments considered in this category:
Equity investments
When a reporting company makes an equity investment in a company, they become a partial owner of that entity, and their financial returns depend on its performance.
These investments can either be in:
subsidiaries, where the reporting company has financial control, typically more than 50% ownership,
associate companies, where the reporting company has significant influence but not financial control, and typically has 20-50% ownership,
joint ventures where partners have joint financial control, and
companies where the reporting company has neither financial contol nor significant influence over the entity, and typically has less than 20% ownership.
In general, companies in the financial services sector should account for emissions from equity investments in scope 1 and scope 2 by using the equity share consolidation approach to obtain representative scope 1 and scope 2 inventories.
If emissions from equity investments are not included in scope 1 or scope 2, either because the reporting company uses the operational control or financial control consolidation and does not have control over the investee, the reporting company should account for proportional scope 1 or scope 2 emissions of equity investments that occur in the reporting year in this category.
Proportional emissions from equity investments should be allocated to the investor based on the investor’s proportional share of equity in the investee.
Debt investments (with known proceeds)
These are corporate debt holdings held in the reporting company’s portfolio, including corporate debt instruments such as bonds or convertible bonds prior to conversion, or commercial loans where the use of proceeds is identified as going to a particular project such as to build a specific power plant.
For each year during the term of the investment, companies should account for proportional scope 1 and 2 emissions of relevant projects that occur in the reporting year in this category.
Debt investments (without known proceeds)
These are general corporate purpose debt holdings such as bonds or loans, held in the reporting company’s portfolio where the use of proceeds is not specified. Companies may account for scope 1 and 2 emissions of the investee that occur in the reporting year, in this category.
Project finance
This is 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).
For each year during the term of the investment, companies should account for proportional scope 1 and 2 emissions of relevant projects that occur in the reporting year in this category. If the reporting company is an initial sponsor or lender of a project, the reporting company should also account for the total projected lifetime scope 1 and scope 2 emissions of relevant projects financed during the reporting year, and report those emissions separately from scope 3.
Proportional emissions from project finance and debt investments with known use of proceeds should be allocated to the investor based on the investor’s proportional share of total project costs (total equity plus debt).
Managed investments and client services
These are investments managed by the reporting company on behalf of clients using clients’ capital or services provided by the reporting company to clients, including:
investments and asset management (equity or fixed income funds managed on behalf of clients, using clients’ capital),
corporate underwriting and issuance for clients seeking assistance with mergers, and
financial advisory services for clients seeking assistance with mergers and acquisations or requesting other advisory services.
Reporting companies may account for emissions from managed investments and client services in this category.
Other investments or financial services
This includes other investments, financial contracts or services not included above such as pension funds, retirement accounts, securitized products, insurance contracts, credit guarantees, financial guarantees, export credit insurance, credit default swaps, etc.
Reporting companies may account for emissions from these investments in this category.
Since financial service companies may have a large number of investments, they should carry out a screening process to identify and prioritize investments with the highest emissions.
1) Calculating emissions from equity investments
This section describes the procedure for calculating emissions from equity investments in:
subsidiaries, where the reporting company has financial control with over 50% ownership,
associate companies, where the reporting company has significant influence but no financial control, with 20-50% ownership,
joint ventures where partners have joint financial control, and
companies where the reporting company has neither financial control nor significant influence over the investee (typically has 20% ownership). For this category, the reporting company should establish a threshold to determine the companies that it should include in its GHG inventory.
Emissions from equity investments should be allocated to the investor based on the investor’s proportional share of equity in the investee.
There are two main methods used to calculate emissions from equity investments:
Investment-specific method. This involves collecting scope 1 and scope 2 emissions from investees and allocating them based on the investor’s proportion of equity in the investee.
Average-data method. This involves using EEIO data2 combined with revenue data from the investee to estimate scope 1 and scope 2 emissions, and allocating them to the investor based on their share of equity. This method should be used if it’s not possible to collect scope 1 and scope 2 emissions data from the investee.
At a minimum, investors should account for the scope 1 and scope 2 emissions of their investees. But at times, the investees’ scope 3 emissions may be significant when compared to their scope 1 and scope 2 emissions. If this is the case, just focusing on scope 1 and scope 2 emissions doesn’t provide a clear picture of the company’s risks. It’s important to account for emissions in the investee’s value chain. This way, investors can understand and manage climate-change risks associated with their investments. The EEIO data can be used to quickly determine the relative size of scope 3 emissions, compared to scope 1 and scope 2 emissions.
Method 1: Investment-specific
This method involves directly obtaining scope 1 and scope 2 emissions from investees and allocating them based on the proportion of the investment. As mentioned above, it’s also wise to consider scope 3 emissions, especially when they represent a significant chunk of the investee’s total emissions. These emissions data can be obtained from the investee’s GHG inventory reports or the financial records of the reporting company. Since the investor collects emissions data from the investee, emission factors are not needed.
Calculating emissions using this method involves multiplying the emissions data by the investor’s proportion of equity in the investee, then summing the results across all the investees.
An example is shown below:
Method 2: Average-data
When scope 1 and scope 2 emissions data are unavailable, they can be estimated using EEIO data. This involves multiplying the revenue of the investee by the EEIO emission factor that are representative of the investee’s economic sector and location. The investor should then allocate these emissions to itself based on its share of equity in the investee.
To do this, the investor should collect data on the sector the investee company operates in, the investee’s revenue and the investor’s proportional share of equity in the investee. Revenue and equity share data can be obtained from the financial records of the reporting company and the investee company. EEIO emission factors can be obtained from EEIO databases.
The formula for calculating emissions for equity investments is as shown below:
The image below shows a basic example of how this method can be applied.
2) Calculating emissions from project finance and from debt investments with known use of proceeds
This section provides essential information for calculating emissions from project finance and debt investments where the use of proceeds is known. Project finance is the long-term financing of projects e.g. infrastructure and industrial projects, by the reporting company as either an equity investor or debt investor.
Similar to calculating emissions from equity investments, proportional emissions from project finance and debt investments with known use of proceeds should be allocated to the investor based on the investor’s proportional share of project costs (i.e total equity plus debt). Additionally, it’s important to consider scope 3 emissions, especially when the project is in operation, since in this phase, scope 1 and scope 2 emissions may be insignificant, relative to scope 3 emissions. For example, consider an express highway. Scope 3 emissions in this case would be emissions from vehicles passing through the highway. These emissions would be significantly larger than the highway’s scope 1 and scope 2 emissions.
Calulating emissions for this sub-category can be done using two methods.
Project-specific method. This method involves collecting scope 1 and scope 2 emissions data from the relevant projects and allocating them to the reporting company based on the proportional share of total project costs i.e. total equity plus debt.
Average-data method. This method involves using EEIO data to estimate scope 1 and scope 2 emissions and allocating them to the investor based on their proportional share of the total project costs. It should be used when scope 1 and scope 2 emissions data are not available.
Method 1: Project-specific
Similar to the investment-specific method used to calculate emissions from equity investments, this method involves obtaining scope 1 and scope 2 emission data from investees. These emissions are then allocated to the investor based on their proportional share of total project costs, which are calculated by adding the total equity and debt. Scope 1 and scope 2 data can be obtained from the GHG inventory reports of the investee companies or the financial records of the reporting company. Obtaining emissions data from investees means that the reporting company does not need to request for emission factors.
The formula for calculating emissions for these types of investments is given below.
The following example demonstrates how the above formula can be applied.
Method 2: Average-data
The average-data method used to calculate emissions from project finance and debt investment with known proceeds is slightly different from the method used for equity investments. While both methods make use of EEIO emission factors, the data and type of emission factors required to calculate emissions in this sub-category depends on the phase in which the project is currently. If the project is in the construction phase, project costs and construction-phase emission factors should be used. If it is currently operational, the revenue of the project and the operation-phase emission factors should be used. Regardless of the phase, the estimated emissions should be allocated to the investor based on their share of total project costs.
However, if a project is in the operational phase but it does not generate revenue, the EEIO emission factors can not be used. In this case, the reporting company should use other data or assumptions to estimate emissions, such as industry or government studies of similar projects.
Data on the costs of the project and the revenue it generates can be obtained from the financial records of the reporting company and the investee, while EEIO emission factors can be obtained from EEIO databases.
Emissions from this sub-category can be calculated using the following below:
The example below demonstrates how the formula above can be applied.
3) Calculating total projected lifetime emissions from project finance and debt investmets with known use of proceeds
In addition to the emissions covered in the previous section, the total projected lifetime time emissions should also be calculated and reported. This should be done by the company that is an initial sponsor or lender. These emissions reflect the longer term nature of these forms of investment. They should be reported separately from scope 3.
Total projected lifetime emissions should be considered in the initial stages of the project hence should only be reported in the first year. They should not be amortized or discounted. This is because reporting them every subsequent year in addition to scope 1 and scope 2 emissions would be double counting.
In situations where scope 3 emissions are significant and included in the GHG inventory, the total projected lifetime emissions for these emissions should also be factored in.
Calculating projected lifetime emissions involves making assumptions about the expected average annual emissions and the expected lifetime of a project. In case there are uncertainties regarding the projects anticipated lifetime, a range of values may be used e.g. 30-60 years.
The formula below can be used to calculate these total projected lifetime emissions.
Below is an example that demonstrates how the formula above can be applied.
Footnotes
EEIO models estimate energy use and/or GHG emissions resulting from the production and upstream supply chain activities of different sectors and products within the economy. The resulting EEIO emission factors can be used to estimate GHG emissions for a given industry or product category. They are derived by allocating national GHG emissions to groups of finished products based on economic flows between industry sectors. These models vary in the number of sectors and products included and how often they are updated.↩︎