The largest and most scrutinised part of a financial institution's carbon footprint is not its offices or its data centres. It is the emissions of everyone it lends to and invests in. Here is what financed emissions are, why they now sit on the risk and regulatory agenda, and what to do about them in 2026.
A bank's own operations, its buildings, business travel and electricity, are a rounding error next to the carbon tied up in its loan book and investment portfolio. According to CDP, the environmental-disclosure non-profit, the portfolio emissions of global financial institutions are on average more than 700 times larger than their own direct emissions. That figure comes from CDP's 2021 analysis of 332 financial institutions representing about US$109 trillion in assets, and it remains the most widely cited benchmark for the scale of the problem.
Those portfolio emissions have a name: financed emissions. They are the greenhouse gas emissions of the companies, projects and assets that a financial institution funds, attributed back to the institution in proportion to its share of the financing. In the standard carbon-accounting language, financed emissions are Scope 3, Category 15 (investments) for financial firms. Scope 3 simply means indirect emissions in an organisation's value chain, as opposed to Scope 1 (direct emissions the firm produces) and Scope 2 (emissions from the energy it buys).
For most of the last decade, financed emissions were a voluntary, reputational topic. In 2025 that changed on two fronts at once. The voluntary climate coalitions unravelled, and mandatory disclosure hardened and spread. This guide explains both shifts, the method regulators and auditors now expect, and a practical sequence for financial institutions that need to catch up.
Why financed emissions matter now
Two things happened in 2025, and they pull in opposite directions. Understanding both is the key to setting the right strategy.
The voluntary pledge era retreated. The Net-Zero Banking Alliance, the UN-convened group in which banks committed to align lending with net zero, voted to cease operations on 3 October 2025 and move to a guidance-only model. It followed a wave of departures: the six largest US banks left between December 2024 and January 2025, Canada's six largest banks left by the end of that January, and HSBC, Barclays and UBS exited over the following months. The Net Zero Asset Managers initiative had already suspended its activities earlier in 2025. The headline reads like a collective step back from climate commitments.
Mandatory disclosure moved forward. While the alliances shrank, the rules grew. The International Sustainability Standards Board (ISSB), whose IFRS S1 and S2 standards absorbed the older TCFD climate-disclosure recommendations, had been adopted by 21 jurisdictions on a voluntary or mandatory basis as of the start of 2026, with 16 more jurisdictions planning to follow. In Singapore, all listed issuers must report Scope 1 and Scope 2 emissions from financial year 2025, with the largest index constituents adding ISSB-aligned climate disclosures and Scope 3. The obligation to measure did not leave with the pledges.
For a financial institution, the practical conclusion is straightforward. Whether or not your firm belongs to a climate alliance, you increasingly have to measure, disclose and manage the emissions you finance, because your regulators, your auditors, your large clients and your own risk function now require it. The politics changed. The measurement obligation did not.
There is also a risk-and-value argument that has nothing to do with sentiment. Financed emissions are a proxy for transition risk, the risk that carbon-intensive borrowers lose value as carbon prices, regulations and customer preferences shift. A lender that cannot see the emissions in its book cannot price that risk, cannot stress-test it, and cannot spot the concentration before it becomes a loss. Measuring financed emissions is, at its core, portfolio risk management.
What financed emissions actually are
Think of a bank's carbon footprint as an iceberg. Scope 1 and Scope 2, the parts above the water, are the emissions the bank creates by running itself. Financed emissions are the vast bulk below the surface: the steel mill it lent to, the airline whose bonds it holds, the mortgage on an energy-leaky building, the shares in an oil producer sitting in a managed fund.
The reason they belong on the bank's ledger at all is the principle of attribution. If you provide a share of a company's total financing, you are treated as responsible for that same share of the company's emissions. Fund 5% of a company's total capital, and 5% of its emissions are attributed to you.
This is where a common standard becomes essential, because without one, no two institutions would count the same loan the same way.
PCAF: the common method for measuring financed emissions
The Partnership for Carbon Accounting Financials (PCAF) is the industry standard for measuring and disclosing financed emissions. It is a global, financial-sector initiative that publishes the Global GHG Accounting and Reporting Standard for the Financial Industry, built to be consistent with the GHG Protocol that underpins corporate carbon accounting everywhere. As of 2026, PCAF reports more than 780 financial-institution signatories worldwide. XcelGreen's financial-services platform is built on this methodology.
PCAF works through a simple idea applied carefully across asset types.
The core formula is attribution. For each borrower or investee, the financial institution multiplies that party's emissions by an attribution factor, defined as the institution's outstanding loan or investment divided by the borrower or investee's total equity and debt. Sum that across the portfolio and you have your financed emissions.
It covers the main asset classes. PCAF provides methods for listed equity and corporate bonds, business loans and unlisted equity, project finance, commercial real estate, mortgages, motor-vehicle loans, sovereign debt and more. That breadth matters, because a universal bank, an asset manager and an insurer each hold a different mix.
It grades your data honestly. PCAF requires a data-quality score from 1 to 5, where 1 means verified, reported emissions and 5 means highly estimated figures based on sector or regional averages. Institutions disclose a weighted average score alongside the number. This is one of PCAF's most useful features for executives: it lets you publish an imperfect but improving number transparently, rather than waiting for perfect data that never arrives.
| PCAF data quality | What it means | Typical basis |
|---|---|---|
| Score 1 | Highest quality | Verified, reported emissions from the borrower or investee |
| Score 2 to 3 | Moderate quality | Reported energy or physical-activity data, converted with emission factors |
| Score 4 to 5 | Lowest quality | Estimates from economic activity, sector or regional averages |
The honest starting point for most institutions is a portfolio dominated by scores of 4 and 5. That is normal. The goal is a credible baseline now and a plan to improve data quality over time, not a flawless first number.
The 2026 regulatory reality: what applies to whom
Disclosure rules differ by jurisdiction, and 2025 brought important changes. The table below summarises the position most relevant to XcelGreen's markets as of September 2026. Always confirm the current text with the regulator, as timelines continue to move.
| Framework / jurisdiction | Who it affects | What changed and current status |
|---|---|---|
| ISSB (IFRS S1 & S2) | Global baseline for climate and sustainability disclosure; absorbed TCFD | Adopted in 21 jurisdictions, with 16 more planning to adopt, as of the start of 2026 |
| Singapore (ACRA / SGX) | Listed issuers, then large non-listed companies | All listed issuers report Scope 1 and 2 from FY2025; index-constituent issuers add ISSB-aligned disclosures from FY2025 and Scope 3 from FY2026; large non-listed companies (revenue at least S$1bn and assets at least S$500m) from FY2030 |
| EU CSRD (post-Omnibus) | Large EU companies and some non-EU groups | The Omnibus I package, approved by the European Parliament on 16 December 2025, narrowed scope to companies with more than 1,000 employees and over EUR 450m turnover, removed sector-specific ESRS, and postponed the limited-assurance deadline to 1 July 2027 |
| Singapore-Asia Taxonomy | Sustainable- and transition-finance labelling | Launched by MAS on 3 December 2023 as the world's first multi-sector transition taxonomy, covering eight sectors with a green / amber / ineligible classification for transition activities |
The pattern is clear. The centre of gravity is the ISSB baseline, adopted market by market, with Singapore among the front-runners in Asia. The EU tightened its thresholds so that fewer, larger firms report, but it did not abandon disclosure. And transition finance, funding the credible decarbonisation of high-emitting activities rather than only financing what is already green, now has an official taxonomy in Singapore to define it.
From measurement to decarbonization: the strategic shift
Measuring financed emissions is the entry ticket, not the destination. The harder, more valuable work is using the number to change the portfolio. This is where financial institutions separate into two groups.
The first group treats financed emissions as a reporting chore: calculate a number once a year, publish it, move on. The second treats it as portfolio intelligence: they see which sectors and clients drive the footprint, where transition risk concentrates, and where the biggest, cheapest decarbonisation opportunities sit. The second group can set credible targets, engage the highest-impact clients, and build green and transition-finance products that grow revenue while cutting the portfolio's carbon intensity.
Three capabilities separate the two groups:
- A trustworthy baseline. You cannot set a target against a number you do not believe. The baseline must be built on the PCAF method, with a transparent data-quality score and an audit trail an assurance provider can follow.
- Portfolio-level risk analysis. Financed emissions should feed the same risk machinery as credit and market risk: concentration analysis, scenario testing against carbon-price and policy pathways, and early-warning signals on carbon-exposed counterparties.
- A financing strategy. The output should be decisions: decarbonisation targets by portfolio, client-engagement priorities, and green or transition products aligned to a recognised taxonomy such as the Singapore-Asia Taxonomy.
A practical framework: five steps to financed-emissions readiness
For an institution starting or resetting this work, the sequence below is a reliable order of operations. It moves from data to disclosure to decisions.
- Scope and baseline. Decide which asset classes and portfolios to measure first (usually the largest and most carbon-exposed). Build the initial PCAF-based baseline, accepting low data-quality scores at the start.
- Fix the data pipeline. The core problem is data: borrower emissions, financial exposures and emission factors, pulled from many systems. Automate the collection and calculation so the number can be refreshed and defended, not rebuilt by hand each year.
- Disclose to the right framework. Map the disclosure to the standards that apply to you, ISSB/IFRS S2, your local regime such as Singapore's ACRA and SGX rules, and CSRD if you have EU reach, and keep an evidence trail ready for assurance.
- Turn the number into risk insight. Run concentration and scenario analysis on the financed-emissions data. Identify the counterparties and sectors that drive both emissions and transition risk.
- Set targets and finance the transition. Establish portfolio decarbonisation targets, prioritise client engagement by impact, and build green and transition-finance products against a credible taxonomy.
Questions executives should ask their teams
- What share of our financed emissions is currently measured, and what is our weighted PCAF data-quality score?
- Which ten counterparties or sectors drive the largest share of our financed emissions?
- Could our financed-emissions number survive limited assurance today? If not, what is missing?
- Which disclosure regimes will legally require this of us, and by which financial year?
- Are we treating financed emissions as a reporting output or as a risk-and-strategy input?
Common mistakes to avoid
- Waiting for perfect data. PCAF is designed for imperfect data. A transparent estimate now beats a perfect number in three years.
- Treating it as a sustainability-team silo. Financed emissions belong to risk, finance and the business lines, not only to the ESG function.
- Confusing pledges with obligations. An alliance exit does not remove a regulatory disclosure duty. Track the rules, not the coalitions.
- Measuring without acting. A number that never changes a lending or investment decision is a cost with no return.
How XcelGreen supports financial institutions
XcelGreen is an AI-powered ESG intelligence platform, founded in Singapore and backed by the transformation firm MASSIVUE, built for the sectors where sustainability data is hardest to wrangle, including financial services. For banks, asset managers and insurers, it brings the measurement, disclosure and strategy steps above onto one platform.
Its ESG Reporting & Carbon solution calculates financed emissions using the PCAF methodology, supports Scope 1, 2 and 3 accounting aligned to the GHG Protocol, and drafts framework-ready reports for standards including ISSB, TCFD and ESRS. Its ESG Intelligence solution navigates 50-plus global frameworks and jurisdiction-specific rules across Singapore, the UAE, Malaysia and Indonesia, and applies structured, Sustainalytics-aligned risk scoring to identify where climate and ESG risk concentrates. Its ESG Strategy solution helps translate the numbers into portfolio decarbonisation targets and green-finance roadmaps. The full picture for the sector sits on the financial-services solutions page.
For the regulatory context behind this article, XcelGreen's own guides to mandatory climate reporting across Asia and the TCFD-to-ISSB transition go deeper on the disclosure rules referenced above.
Frequently asked questions
What are financed emissions?
Financed emissions are the greenhouse gas emissions of the companies, projects and assets that a financial institution lends to or invests in, attributed to the institution in proportion to its share of the financing. In carbon-accounting terms they are Scope 3, Category 15 (investments) for financial firms, and they are typically far larger than the institution's own operational emissions.
How much larger are financed emissions than a bank's own footprint?
According to CDP's 2021 study of 332 financial institutions, portfolio emissions are on average more than 700 times larger than the institutions' own direct emissions. It remains the most cited benchmark, though the exact multiple varies widely by institution and business mix.
How do banks measure financed emissions?
Most use the PCAF standard. For each borrower or investee, the institution multiplies that party's emissions by an attribution factor, its outstanding loan or investment divided by the borrower's total equity and debt, then sums across the portfolio. PCAF also requires a data-quality score from 1 (verified data) to 5 (estimated data) so the number's reliability is transparent.
What is PCAF?
PCAF, the Partnership for Carbon Accounting Financials, is the global standard-setter for measuring and disclosing financed emissions. Its Global GHG Accounting and Reporting Standard for the Financial Industry is consistent with the GHG Protocol, and it reports more than 780 financial-institution signatories as of 2026.
Is climate reporting mandatory for financial institutions in Singapore?
Yes. All Singapore-listed issuers must report Scope 1 and 2 emissions from financial year 2025, with index-constituent issuers adding ISSB-aligned climate disclosures from FY2025 and Scope 3 from FY2026. Large non-listed companies meeting the size thresholds follow from FY2030. Confirm the current requirements with ACRA and SGX, as timelines evolve.
Did the collapse of the Net-Zero Banking Alliance end climate obligations for banks?
No. The Net-Zero Banking Alliance was a voluntary coalition and voted to cease operations in October 2025, but voluntary pledges are separate from mandatory disclosure. Rules such as the ISSB standards, Singapore's climate-reporting requirements and the EU's CSRD continue to require measurement and disclosure regardless of alliance membership.
What is the difference between measuring and managing financed emissions?
Measuring produces a number for disclosure. Managing uses that number to reduce risk and reallocate capital, by setting decarbonisation targets, engaging the highest-emitting clients, and building green and transition-finance products. Regulators increasingly expect the second, not just the first.
Where should a financial institution start?
Start with the largest and most carbon-exposed portfolios, build a PCAF-based baseline even with low-quality data, automate the data pipeline so the number is repeatable and auditable, then use it for risk analysis and target-setting.
The bottom line
The retreat of the voluntary climate alliances made 2025 look like a step back. For anyone responsible for risk, capital or disclosure at a financial institution, it was the opposite. The soft, reputational version of climate commitment faded, and a harder, measured, regulated version took its place. Financed emissions are now a number your regulators expect, your auditors will test, and your risk function needs. The institutions that build the capability to measure it well, and act on what it shows, will manage transition risk and win transition-finance business. The ones that wait will do both late.
Ready to see your portfolio's financed emissions clearly? XcelGreen's financial-services ESG platform calculates PCAF-aligned financed emissions, maps your obligations across ISSB, Singapore and EU regimes, and turns the result into a decarbonisation roadmap. Book a financial-services demo to see it against your own portfolio.