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PCAF launches sovereign bonds assessment plan

Government holdings are a long-standing obstacle for investors trying to assess their climate impacts

The Partnership for Carbon Accounting Financials (PCAF) has launched draft guidance on how investors should measure the financed emissions of their sovereign bond holdings.  

The proposals were released for consultation yesterday, alongside similar plans for green bonds and emissions removal tools.  

Sovereign bonds have been a sticking point for investors seeking to steer their portfolios towards Net Zero by 2050, partly because it is difficult to meaningfully quantify emissions associated with governments. Standing at more than $60trn, the asset class is a key part of most mainstream investment portfolios. Earlier this year, asset owners including BT Pension Scheme and the Church of England Pensions Board in the UK launched a project to asset the climate implications of their government debt holdings.  

In its report, which is informed by some of the same asset owners, PCAF identifies the risk of ‘double counting’ – by assigning emissions to both private sector companies and the states in which they operate – as a major issue, as well as low quality and limited sovereign emissions data across all scopes.  

To tackle this, it suggests two approaches to measuring emissions financed by sovereign bonds: classifying domestic production emissions as Scope 1, gross import emissions as Scope 2, and gross export emissions as Scope 3; or calculating the Scope 1, 2 and 3 emissions of central government operations. 

In its report on green bonds, it warns that investors may be under-reporting the emissions linked to such instruments because of inadequate reporting from issuers, or because they simply overlook green bond emissions in their broader calculations. Green bond proceeds are ring-fenced for green projects, so PCAF argues that shareholders and buyers of conventional debt should exclude those in their financed emissions calculations, and ensure they are accounted for in green bond assessments instead. 

In a separate discussion paper, the group, which includes asset owners, managers and banks – mainly from Europe – also propose new accounting standards for banks to calculate the emissions associated with their work facilitating capital market issuances, such as underwriting and arranging bonds.

While distinctions should be made between ‘facilitated’ and ‘financed’ emissions, PCAF said the industry needed to develop a mechanism to provide transparency about the climate impact of their capital markets activities, especially since facilitating transactions can form a material part of a bank’s business activities. 

The paper, written by a working group of seven banks co-chaired by Barclays and Morgan Stanley, proposes four methods for reporting these emissions: reporting in the year the transaction takes place, reporting across the entire length of the transaction, reporting the average emissions per client over a certain number of years, and reporting over the life of the transaction but gradually decreasing the emissions from 100% to 0%.  

It also identifies a number of potential issues with reporting facilitated emissions, including potential double counting and how to calculate emissions where a bank both facilitates transactions for a company and lends to them directly. The working group plans to develop the discussion paper into official guidance based on the feedback they receive. 

Both consultations close on the December 17th.