The carbon footprint of investment portfolios has become a central metric in tracking net zero ambitions of portfolios – particularly in the assessment of green bonds.
Increasingly stringent regulations, such as fund labelling requirements like Towards Sustainability represent a move towards prohibiting the use of ‘zero emissions’ as a default footprint for green bonds.
However, using an issuer-level carbon footprint to evaluate these bonds can render them ineffective as a sustainable investment tool, especially for firms in high-emission sectors like utilities that issue green bonds to fund their decarbonisation efforts.
In practice, issuers most commonly report the emissions that were avoided through the use of the funding obtained by the issuance of their green bonds. They rarely disclose the absolute carbon footprint of projects funded by green bonds.
As a result, investors frequently rely on issuer-level data or basic estimation methods, which can lead to inconsistent or even misleading assessments of a bond’s climate impact. This underscores the need for a standardised and robust methodology to estimate the carbon footprint of green bonds.
A more reliable framework would provide multiple benefits.
For investors, it would enhance confidence and accuracy in tracking progress toward decarbonisation and net-zero goals.
For issuers, such a methodology would facilitate alignment with increasingly rigorous sustainability disclosure standards, such as those under the EU’s Sustainable Finance Disclosure Regulation (SFDR), which includes metrics related to carbon intensity and greenhouse gas emissions.
Overall, the development of a transparent, consistent methodology for assessing the carbon footprint of green bonds would improve comparability across investments and enhance both issuer-level and security-level ESG analysis.
Although a market standard has yet to be established, the Partnership for Carbon Accounting Financials (PCAF) has initiated efforts to fill this gap by seeking industry input on a proposed methodology. The consultation has now been completed, and the results are being reviewed.
In our new research paper “The current state of accounting for companies’ and sovereigns’ greenhouse gas emissions” we use specific case studies to demonstrate the varying implications of different carbon accounting approaches. We conclude that using absolute emissions provides more transparency and comparability than relying on avoided emissions.
We advocate for issuers to report project-level carbon footprints using recognised standards and suggest that the most effective route to industrywide adoption would be through updates to the International Capital Market Association (ICMA) Green Bond Principles – specifically, the elevation of absolute annual project emissions to a core metric in the Green Bond Harmonized Framework for Impact Reporting
Here is our new research paper “The current state of accounting for companies’ and sovereigns’ greenhouse gas emissions”.
