Financed emissions: a hidden risk that needs to be measured

Helping institutional investors know exactly what’s in their portfolios

Financed emissions: a hidden risk that needs to be measured
Sharlene Key, Director of ESG Product Management, Sphera

Focus on ESG (environment, social, and governance) metrics continues to grow and investors can measure financed emissions to deliver value by managing applicable climate-related investment risks and opportunities at scale.

“Since 2018, ESG trends have been skyrocketing across the board for various financial institutions,” says Sharlene Key, director of ESG product management at Sphera. “Climate change and different disasters going on – everything from fires to floods – have heavily impacted the financial industry, insurance especially, but also other investments.”

She says ESG metrics are seen as more of a risk management metric, “something that can also be used to indicate whether [a fund or investment] is a good investment or a not so good investment. ESG helps manage risk specifically because of transparency and that is the basis of carbon accounting and GHG (greenhouse gas) accounting.”

Sphera recently launched its SpheraCloud Corporate Sustainability – Portfolio Management software solution, a tool to help organizations reliably measure and manage their portfolio carbon footprint, assess climate-related risks and opportunities, integrate a climate strategy into their organization, as appropriate, and meet ESG reporting requirements.

Key was part of the team that developed the most recent upgrades to Sphera’s platform. “We took on the initiative to specifically expand our software out to the financial industry and incorporate various accounting and reporting standards that are relevant for the financial industry,” she says. “Sphera has been a leader in the ESG space for many years, and the software continues to win a lot of different awards, especially in various industry spaces like oil and gas and automotive where there is much more emissions management and ESG management traditionally.”

The platform can now “help institutional investors, as well as investors of other financial institutions like banks, group their portfolios, measure their financed emissions, and get a clear idea of what is actually in those portfolios to help them make decisions to either decarbonize those portfolios or figure out some kind of transition plan.”

Sphera worked with Blackstone to engage expertise in developing a solution for the financial services industry. Financial institutions were seeking to report financed emissions which stem from daily financial service activity (i.e., through investments, loans, and services), which can be substantially higher than its direct emissions. Key says capturing and analyzing financed emissions becomes especially complex for financial entities that have a multitude of loans, investments, and debt holdings.

The modular software on Sphera's software as a service (SaaS) platform allows financial institutions to collect, calculate, report, and manage financed emissions utilizing AI and advanced analytics. Features include automated data collection, a robust calculation engine, integrated emissions factor libraries, portfolio performance management, and audit-proof reporting. The software leverages deep industry knowledge and industry standards to attribute emissions to specific financial assets, enabling financial institutions to quickly assess the emissions footprint of their portfolio's investment and lending activities, improve data quality, and act towards their decarbonization strategy.

The platform was designed so financial institutions can accurately assess, calculate, and report on their financed emissions using the Partnership for Carbon Accounting Financials (PCAF) and Greenhouse Gas (GHG) Protocol standards.