The Partnership for Carbon Accounting Financials (PCAF) has proposed a new approach to account for green bond emissions that effectively treats green bonds as if they were debt of a distinct green entity, separate from the rest of the issuer. This is based on a theoretical construct, rather than a legal segregation of activities or funding sources. This position paper explains why we believe the proposal may ultimately run counter to PCAF’s mission of improving transparency and comparability of financed emissions reporting.
The proposal permits investors considerable freedom on how they set a number of critical assumptions and parameters, which will sometimes result in meaningfully different emissions being attributed to the same position by different investors. Additionally, varying choices on whether and when to apply this guidance will result in double counting of green projects’ emissions savings.
Because the proposal assigns lower emissions to green bonds based on an artificial segregation of certain activities, rather than legal or physical boundaries, it ultimately relies on subjective choices. Most notably, it promotes green bonds over other financing instruments, including equity and other forms of debt. More work is needed to empirically confirm that such promotion is warranted, because this is not a neutral proposition—favourable treatment of green bonds comes at the expense of other classes of investors, whose emissions may even rise to balance the green bond adjustment.
Several more technical points of the proposal stemming from its theoretical basis could also create challenges in practice. For instance, investors in non-green debt often still provide funding for the operation of green bonds’ projects, as well as other financial and administrative backing. However, they may not receive credit for this under the proposal.
The additional reporting burden on issuers required under the proposal is substantial, and risks diverting limited resources away from more holistic ESG reporting. This also favours larger issuers, to the detriment of otherwise ambitious issuers with fewer resources to devote to reporting, or that simply do less to publicise their ESG initiatives.
Higher emissions are not necessarily a problem that must be “fixed.” Transition products are often overweight more intensive sectors, as these are usually the ones where transition is most material. Rather than consider higher emissions as a marker of “good” or “bad,” they can instead be seen as a marker of materiality.
As a more effective means of driving real world decarbonisation, we suggest a focus on the overall impact that individual companies have on the climate, and a rigorous assessment of their direction of travel, rather than on portfolio-level financed emissions. Specifically, we recommend a thorough “Temperature Alignment” assessment of each issuer, looking at the ambition and credibility of its emissions reduction strategy, with a focus on issuers for whom climate impacts are most material, which again, will typically be those that are more emissions intensive. If an investor feels an issuer’s green bond will be effective at reducing its emissions, that could still be taken into account in such an assessment. However, other factors should be considered as well.
This website is intended for $role located in $region. Please set your preferences.
*Required Fields
Sorry based on your current selections, you cannot continue. Please update your selections or visit pgim.com/multi-asset-solutions for more information.
This website uses cookies
PGIM appreciates your trust and respects your privacy. We use cookies to improve your experience. You can manage your cookie settings and learn more about how we protect your information at the PGIM Privacy Center .
PGIM appreciates your trust and respects your privacy. We use cookies to improve your experience. You can manage your cookie settings and learn more about how we protect your information at the PGIM Privacy Center .
Which cookies would you like to accept?
This field is required.
By continuing on to PGIM.com you are agreeing to the following:
(ex-Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM))
If you do not agree with the terms and conditions of this disclaimer or the website, do not utilise the website.
Within the UAE, this website is only accessible in the UAE, excluding the distinct financial services jurisdictions of the financial free zones of the UAE, namely the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM). This website is only accessible to a limited number of exempt investors who fall under a of the category of “Professional Investor” as defined within SCA Chairman Decision No. (13/RM) of 2021 on the Rulebook ofFinancial Activities and Mechanisms for Adjusting Positions.
All investments involve risk, including the possible loss of capital.
This website is for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation in respect of any products or services to any persons who are prohibited from receiving such information under the laws applicable to their place of citizenship, domicile or residence.
PGIM is the principal asset management business of Prudential Financial, Inc. (PFI), and a trading name of PGIM, Inc. and its global subsidiaries.
PFI is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom.
PGIM, the PGIM logo and Rock design are service marks of PFI and its related entities, registered in many jurisdictions worldwide.
The information contained in this website does not constitute and should not be construed as an offer of, invitation or proposal to make an offer for, recommendation to apply for or an opinion or guidance on a financial product, service and/or strategy. Whilst great care has been taken to ensure that the information contained in this website is accurate, no responsibility can be accepted for any errors, mistakes or omissions or for any action taken in reliance thereon. You may only reproduce, circulate and use this website (or any part of it) with the consent of PGIM.
The information contained in this website is for information purposes only. It is not intended for and should not be distributed to, or relied upon by, members of the public.
The information contained in this website may contain statements that are not purely historical in nature but are “forward-looking statements”. These include, amongst other things, projections, forecasts or estimates of income. These forward-looking statements are based upon certain assumptions, some of which are described in other relevant documents or materials. If you do not understand the contents of these materials, you should consult an authorisedfinancial adviser.