- 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.
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