Carbon Accounting for Financial Services

Harpreet Ghai

ESG, Sustainability, and Impact Research | ESG Data | Research Publications | Impact Assessments | Executive Education

Published May 14, 2025

Climate change presents financially material risks that are increasingly being priced into the global financial system. For financial institutions, the challenge is twofold as they are not only responsible for managing their own operational emissions (Scope 1 and 2), but more importantly, for accounting for the emissions they finance (Scope 3, Category 15) through loans, investments, and underwriting activities. As systemic actors, they have a unique responsibility and opportunity to influence climate outcome not just through their own operations but through what they finance. This means being more than neutral actors and actively supporting clients in accelerating their net-zero transitions, allocating capital to low-carbon solutions, and phasing out exposure to high-emitting sectors.

A massive $9 trillion in climate finance is needed annually by 2030, the Sustainable Development Goals (SDGs) are to be achieved by 2030, and the global target for net-zero emissions is set for 2050. This transformation can only happen if finance is made consistent with the goals of the Paris Agreement. For that, financial institutions must start by measuring their carbon footprint and setting science-based decarbonization targets. Herein, Scope 3 emissions matter because they often exceed Scope 1 and 2 emissions by three to five times.

The shift toward net zero means financial institutions must re-examine the climate impact of their loan books. Detailed loan book analysis is becoming crucial to identify carbon-intensive exposures, conducting scenario analysis, setting targets, and supporting client transitions. Institutions are now walking away from deals where clients don’t have credible transition plans. They are actively working with clients via Green finance for low-carbon solutions, Transition finance for decarbonization efforts, and Phase-out finance for disengaging from unaligned clients or sectors.

In India, the urgency is clear. The country is the third-largest CO₂ emitter globally, and 25–35% of Indian bank loans are to carbon-intensive sectors such as coal mining, fossil-fuel-based energy, and diesel-reliant transport. As of August 2023, loans to petroleum, coal, and nuclear fuels stood at ₹1.20 trillion (approx. $14.42 billion), while lending to infrastructure-related sectors totaled ₹12.40 trillion.

Moreover, an increase in extreme weather events such as floods, droughts, and cyclones poses a risk to debt worth more than approximately $84 billion at India’s leading financial institutions. As of March 2024, close to 50% of retail banking exposure is now classified as highly sensitive to climate risk. Among major public sector banks, about 53% of the credit portfolio is exposed to climate risk, with 17% linked to agriculture lending, a sector especially vulnerable to climate variability. India’s COP26 pledge to make renewables 50% of its energy mix by 2030 and the anticipated peak of coal use by 2040 raise the stakes. State-owned banks, holding 65%+ of assets, face particular exposure to stranded asset risk as the economy transitions.

To prevent extreme and abrupt disruptions, banks are now conducting audits on borrowers' carbon footprints, slowly aligning their ESG practices with global expectations. A range of global standards exist to guide climate transparency. Notable among these are the TCFD (Task Force on Climate-related Financial Disclosures), CDP (formerly Carbon Disclosure Project), SBTi (Science Based Targets initiative), which provide climate disclosure guidance and climate setting targets for organizations.

However, for financial institutions specifically, the Partnership for Carbon Accounting Financials (PCAF) is the most relevant. PCAF enables measurement of Greenhouse Gas (GHG) emissions - Scope 3, Category 15 - across seven asset classes as well as guidance on emission removals (Financed emissions), capital markets issuances (Facilitated emissions), and re/insurance underwriting (Insurance-associated emissions).

In November 2023, the Reserve Bank of India (RBI) released a draft disclosure framework for climate-related financial risks for scheduled commercial banks and large Non-Banking Financial Corporations, closely aligned with TCFD (phased implementation starting 2025-26 onwards). It expects financial institutions to integrate climate risks into governance, with clear roles for boards and senior management. They must assess how climate risks impact their strategy, operations, and financial planning over different time horizons (short, medium, and long). Institutions are also required to embed climate risks into their overall risk management processes and disclose relevant metrics, including Scope 1 and 2, though financed emissions (Scope 3, Category 15) are not yet mandatory, along with targets to manage and monitor these risks.

Examples/Case-Studies from the Industry – Practical Application

Case Study 1: Bank

ING Bank

ING Bank has taken a leading role in climate action through robust carbon accounting and efforts to reduce financed emissions. Since launching its net zero climate-alignment approach called Terra in 2018, ING has worked to align its loan portfolio with the Paris Agreement by measuring client emissions in high-impact sectors and comparing them to science-based decarbonization pathways. As a founding member of PCAF, ING follows standardized methods for disclosing financed emissions. In March 2025, it became the first globally significant bank to have its climate targets validated by SBTi. It includes a commitment to reduce its scope 3 portfolio targets that cover at least 67% of its portfolio, alongside absolute scope 1 and scope 2 emissions by 44%, compared to a 2023 baseline (this includes a commitment to increasing its annual renewable energy sourcing from 98.3% of its electricity consumption to 100% by the end of the decade). This example focuses on financed emissions (Scope 3, Category 15).

Strategy - ING focuses on the most carbon-intensive sectors it finances by adopting a portfolio-level approach (called Terra) and uses a data-driven client engagement approach.

Sector Focus - 12 sectors – (i) Power generation (ii) upstream oil & gas (iii) mid- and downstream oil & gas (iv) automotive (v) shipping (vi) aviation (vii) steel (viii) cement (ix) aluminium (x) dairy (xi) residential real estate and (xii) commercial real estate

Methodologies Used to Measure Portfolio – PCAF, Paris Agreement Capital Transition Assessment (PACTA), Sustainable STEEL Principles, Sustainable Aluminium Alliance Framework, Pegasus Guidelines, Poseidon Principles, SBTi

Loan Book Management and Impact

Emission monitoring across the loan portfolio - By measuring the absolute financed emissions of its portfolio, the bank is able to perform hotspot analyses to monitor its loan book, identify risks and opportunities, and define next steps for expansion of Terra's scope (net-zero climate alignment approach).
Clients’ climate assessment and supporting them in their climate transitions - It assessed around 2,000 large clients on their climate disclosures and transition planning, including those in the most carbon-intensive sectors. The resulting scores are now part of its transition risk assessment and transaction approval processes.
Climate risk oversight across lending segments - It has thus far successfully covered most of its loan book, comprising of three main areas - Wholesale Banking (corporate clients), Business Banking and Retail Banking Mortgages (retail customers). They cover almost the entire Mortgages book, and the majority of the emissions associated with its Commercial Real Estate book. For the large corporate clients in its Wholesale Banking book, it covers over 50% of financed (scope 1 and 2) emissions and over 30% of scope 3 emissions. They have started expanding Terra to include Business Banking and plan to gradually increase emissions coverage in this portfolio segment.

Major Decisions and Targets

Phasing Out Upstream Oil & Gas Financing - Following COP28, ING announced in December 2023 that it would phase out financing for upstream oil and gas to zero by 2040.
Emissions Targets for Midstream and Downstream Activities - For midstream and downstream activities such as oil and gas processing, transport, storage, handling, liquefaction, and refining, ING has set emissions intensity targets to support its long-term net-zero-by-2050 goals.
Tighter Restrictions on New Oil & Gas Developments - It also expanded its policy to halt all new general financing to pure-play upstream oil and gas companies that continue to develop new fields. Additionally, ING committed to stopping new financing for LNG export terminals after 2025.
Scaling Up Sustainable Finance - The bank aims to mobilise €150 billion in sustainable financing annually, focusing on supporting clients in transitioning to more sustainable business models.
Supporting Retail Customers in the Green Transition - On the retail front, ING is also working to support customers by promoting the purchase of energy-efficient homes and enabling retrofitting for improved cost and environmental efficiency.

Challenges

For some sectors in scope, the bank anticipates challenges in aligning its portfolios with relevant science-based pathways. These include long lead times to scale new technologies in sectors like cement and steel, the absence of mainstream low-carbon fuel alternatives in aviation and shipping, and limited government incentives to influence customer behaviour in residential real estate.
The other issue is data management and access to good quality data.

Case Study 2: Asset Manager

Andra AP-fonden (AP2)

AP2 is committed to achieving net-zero greenhouse gas emissions across its entire portfolio by 2045, aligning with Sweden’s national climate goals, which are more ambitious than the global Paris Agreement target of 2050. The Fund’s aim is for its portfolio to reduce emissions at a pace consistent with limiting global warming to 1.5°C. The long term climate targets use a 2019 baseline and set a net zero target for 2045 with an interim target of 55% reduction by 2030. In 2024 AP2 shows progress towards the interim target, having cut carbon by 44% versus 2019.

Strategy – AP2 uses an internally developed model to measure its carbon footprint. It focuses on integrating climate risk analysis into investment decisions, prioritising high-impact engagement, and using ownership tools such as voting and KPIs to drive decarbonisation across its portfolio. It expects its portfolio companies to report on their transition, indicate the share of green revenue and be transparent about how much capital they plan to invest in order to reach net zero. Also, AP2 expects the Fund’s external managers to commit to net zero goals and to have a plan to reach net zero emissions both for themselves but also in their portfolio companies.

Asset Class Focus – (i) Global equities (ii) Private equity (iii) Swedish equities (iv) Government bonds (v) Global credits (vi) Unlisted credits (vii) Green bonds (viii) Real estate (ix) Timberland & farmland (x) Sustainable infrastructure

Methods Used to Measure Portfolio - Net Zero framework by IIGCC, TCFD, GHG Protocol, SBTi

Investment Portfolio Management and Impact

Climate Footprint and Risk Assessment - AP2 regularly analyses the portfolio’s climate footprint and evaluates expected development within the various asset classes. The Fund’s portfolio is also screened and analysed for climate risks, both transition risks and physical risks, using different methods depending on the type of asset.
Integration into Investment Processes - This analysis forms the basis for the integration in investment processes, and for priority setting in the Fund’s climate engagement work
Active Ownership and Engagement – AP2 engages as an active owner to influence portfolio companies to reduce their carbon emissions followed up by KPIs to monitor and compare progress and uses its vote at general meetings to support strong climate agendas (AP2 voted on 96 percent of its Swedish and 89 percent of its foreign equity portfolio).

Major Decisions and Targets

Does not invest in companies with more than a certain percentage of sales from coal, oil, and/or gas, or in power companies where over 50 percent of revenue comes from burning fossil fuels with maximum revenue thresholds: 1% from coal, 10% from oil, and 50% from gas.
In connection with implementing the EU Paris-Aligned Benchmark (PAB) for global equities and corporate bonds, AP2 divested from approximately 250 companies with fossil fuel exposure
Invests in:

Private equity funds with a special focus on positive climate impact, investing in companies whose products and services enable resource-efficient solutions, renewable energy, and reduced emissions
Green bonds that, among other things, finance wind and solar power
Timberland assets that meet AP2’s criteria for sustainable forestry
Sustainable infrastructure, including renewable energy and energy storage

Challenges

Fails to assess the investments’ total climate impact because only certain emissions are included, emissions data from companies is incomplete, only certain asset classes are assessed, reductions in emissions derived from products and services not included information about fossil-based reserves not included. Fails to assess a portfolio’s total climate risks, such as the physical risks of extreme weather, flooding and drought or the consequences of more stringent legislation governing energy efficiency.
Fails to assess what is required to achieve the CO2 target and provides no guidance on how investors can help achieve it. A narrow focus on the reduced footprints of individual portfolios risks diverting attention from actual emission reductions and ways for investors to realize solutions for achieving a carbon-efficient economy.
Poor quality of the underlying companies’ reporting. It is also easier to get the data for listed equities but harder to get the data for other asset classes

Case Study 3: Multiple Indian Banks

Indian Banking Landscape for Climate Measurement (including Financed Emissions)

Out of the top 35 listed banks (65.8% Private Banks, 32.7% Public Banks, 1.5% Small Finance Banks), only 8 bank, like HDFC, ICICI, YES Bank, SBI, IndusInd, Axis, Federal Bank, and PNB, disclose Scope 1, 2, and 3 emissions with measurement approach, inputs and assumptions. 20 others stick to just Scope 1 and 2, offering a limited view of their climate impact. Meanwhile, Central Bank of India, J&K Bank, and Punjab & Sind Bank and two small finance banks haven’t reported emissions at all.

Yes Bank (sector focus - Electricity generation and cement portfolio) and HDFC Bank (sample internal exercise across 34 sectors) measure financed emissions. Yes Bank achieved ~24% reduction in the financed emission intensity of its electricity generation fund-based portfolio from its base year of FY 2021-22. It has a target to reduce it by 75% by FY32. HDFC Bank, using a sample pool totalling approximately ₹1.5 lakh crore, reported financed emissions of 12.2 million tCO2e. Meanwhile, Punjab National Bank disclosed only the total amount of its financed emissions in its BRSR without providing further details. The country’s largest lender, State Bank of India, has invited proposals from consultants in August to measure its loan book’s carbon footprint.

13 out of 35 banks now conducting or at least initiating climate scenario analyses, while 28 have established dedicated committees or policies for climate risk management. Two banks, Kotak Mahindra Bank and IDFC First Bank have conducted climate stress tests with detailed change to disclosures.

Only 2 banks, RBL Bank and Federal Bank have a coal policy, prohibiting the financing of new or existing coal projects. Federal Bank also stands out as the only bank to disclose the total amount of sustainable loans given, broken down by the ‘green’ category, with details on outstanding loans in 3 green categories green buildings, renewable energy, and special climate initiatives.

8 banks have exclusion lists, though most only restrict ozone-depleting industries. Yes Bank, ICICI Bank, and ESAF SFB cite IFC guidelines but don’t specify excluded activities. 5 banks have set net zero targets, but only Yes Bank specifies aiming for absolute Scope 1 and 2 reductions by 2030. The others, IDFC First, SBI, Union Bank, and Central Bank, have set net zero goals without specifying whether they are absolute or intensity-based targets.

Only 7 out of 35 banks are members or signatories of global climate initiatives such as CDP, SBTi, PCAF, etc. Only 4 banks, IDFC First Bank, Union Bank of India, and Bank of Baroda, and ESAF Small Finance Bank are PCAF signatories.

In the Indian context, there are challenges regarding availability and reliability of emission data. Further, there remains challenges in availability of generic sector specific financed emission intensity (such as financed emission per revenue or finance emission per unit of production)

Global Landscape for Climate Reporting and Disclosures[1]

Voluntary Carbon Measurement & Climate Related Frameworks, Principles, and Guidelines

1. GHG Protocol

2. CDP (formerly Carbon Disclosure Project)

3. Science-based Target Initiatives (SBTi)

4. ISO 14064

5. Taskforce on Climate-related Financial Disclosures (TCFD)

Regulatory Frameworks

1. India – RBI Disclosure Framework on Climate-Related Financial Risks

2. USA - US SEC Climate Disclosure Rule ; Insurance - NAIC - Climate Risk Disclosure Survey

3. EU – Banks - EBA Pillar 3 ESG Disclosures ; Insurance - EIOPA - Climate Risk Reporting

Financial Institutions Specific - Guidance Frameworks and Coalitions

1. PCAF (Partnership for Carbon Accounting Financials) - Scope 3 – Financed Emissions (Category 15)

2. PACTA (Paris Agreement Capital Transition Assessment) - Scope 3 - Portfolio Transition Risk - Scenario-aligned stress testing for investment portfolios

3. NZBA Guidelines (Net-Zero Banking Alliance)

4. NZAM (Net-Zero Asset Managers)

5. Net-Zero Insurance Alliance (NZIA)

6. Net-Zero Investment Consultants Initiative (NZICI)

7. Net-Zero Financial Service Providers Alliance (NZFSPA)

8. Network for Greening the Financial System (NZGFS)

9. Principles of Responsible Business (PRB)

10. Principle of Responsible Investment (PRI)

Supporting Tools

1. CO2FI by BCG - Carbon data platform for financed emissions

2. MSCI, S&P, Moody's ESG – Data for Portfolio-level climate metrics and carbon intensity

3. IMF – Carbon Footprint of Bank Loans - Research + tool on carbon intensity of bank lending

4. Connect Earth – Financed emissions for Insurance sector

Motivations for Prioritizing Carbon Accounting Across Portfolios and Operations

Climate Risk is Financial Risk

Credit Risk from Borrowers - High-emission borrowers are more vulnerable to regulatory fines, carbon taxes, transition costs, or even asset stranding, affecting their repayment capacity and, in turn, increasing credit risk for the lender.
Portfolio Risk - A portfolio heavily weighted towards carbon-intensive sectors may underperform or face devaluation in a decarbonizing economy. Using climate-adjusted risk models, banks can integrate carbon premiums into loan pricing and embed internal carbon pricing to better reflect future risk.

2. Regulatory Pressure is Rising

Regulatory Push - Governments and regulators are mandating climate-related financial disclosures. Proactive carbon accounting, including Scope 3, Category 15, helps institutions stay ahead of these mandates and avoid penalties.
Avoid Litigation - Legal risks are on the rise for inadequate environmental due diligence or greenwashing. Climate data supports defensible, transparent decision-making around financing and valuation, especially for vulnerable or emission-intensive sectors.

3. Transparency Builds Trust

Investor Scrutiny - Climate-conscious investors demand transparency and low-carbon strategies. Banks without such disclosures risk losing capital access or face higher borrowing costs.
Pressure from Funders - Blended finance, concessional capital, and ESG-linked mandates often require measurable climate data. Reporting to CDP, PCAF, or using PCAF data quality scores can improve credibility and access to these funds.

4. Roadmap to Net-Zero

Align with Global Standards for Net-Zero Goals - Carbon accounting enables alignment with frameworks like TCFD, PCAF, and the NZBA, while helping build a clear roadmap for transitioning to climate-aligned portfolios.
Benchmarking - Allows institutions to track and compare their climate action performance against industry peers or internal net-zero goals.

5. Building Climate Intelligence

Portfolio Emissions Visibility - Emissions data enables banks to map carbon hotspots across asset classes and geographies and set reduction targets.
Risk & Outlier Detection - Carbon footprint analysis highlights exposure to climate transition risks, like borrowers at risk of obsolescence or sectors prone to regulatory disruption, enabling earlier warning signs and risk mitigation.
Better Climate Reporting - Strengthen reporting across investment asset classes and lending sectors and assess climate risks in loans, investments, and insurance portfolios, supporting better NPA forecasting, loan restructuring strategies, and strategic portfolio reallocation.