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Many financial institutions are now calculating and disclosing their financed emissions, a class of metrics enabling these institutions to calculate the greenhouse gas (GHG) emissions associated with investment and lending activities. These institutions have widely adopted the metric to estimate exposure to climate-related financial risk associated with GHG-emitting activities and to provide shareholders and investors a picture of how their financial activity impacts global climate change. Financed emissions metrics, despite widespread adoption, face two key methodological challenges: lack of comparability of outputs within and between portfolios, and vulnerability of calculations to portfolio volatility. Markets are naturally volatile, but the economic transformation caused by the transition to net-zero GHGs is also likely to create economic volatility, requiring metrics to anticipate this likelihood and take it into account. The paper demonstrates the impact of volatility on the financed emissions of a modeled portfolio comprising five high-emissions industries. The paper concludes that using market value metrics, like enterprise value including cash, to calculate financed emissions exacerbates the effect of volatility on the metric. Using book value metrics to calculate financed emissions across the whole portfolio may potentially reduce – but not eliminate – the impact of volatility while maintaining comparability.


Banking and Finance Law | Environmental Law | Law | Securities Law