Accounting for Investments under the GHG Protocol

Summary: This is an extract from Chapter 5.

Category 15: Investments

This category includes scope 3 emissions associated with the reporting company’s investments in the reporting year, not already included in scope 1 or scope 2. This category is applicable to investors (i.e., companies that make an investment with the objective of making a profit) and companies that provide financial services.

Investments are categorized as a downstream scope 3 category because the provision of capital or financing is a service provided by the reporting company.

Category 15 is designed primarily for private financial institutions (e.g., commercial banks), but is also relevant to public financial institutions (e.g., multilateral development banks, export credit agencies, etc.) and other entities with investments not included in scope 1 and scope 2.

Investments may be included in a company’s scope 1 or scope 2 inventory depending on how the company defines its organizational boundaries. For example, companies that use the equity share approach include emissions from equity investments in scope 1 and scope

Companies that use a control approach account only for those equity investments that are under the

company’s control in scope 1 and scope 2. Investments not included in the company’s scope 1 or scope 2 emissions are included in scope 3, in this category. A reporting company’s scope 3 emissions from investments are the scope 1 and scope 2 emissions of investees.

For purposes of GHG accounting, this standard divides financial investments into four types:

• Equity investments
• Debt investments
• Project finance
• Managed investments and client services

Table 5.9 and table 5.10 provide GHG accounting guidance for each type of financial investment. Table

5.9 provides the types of investments included in the minimum boundary of this category. Table 5.10 identifies types of investments that companies may optionally report, in addition to those provided in table 5.9.

Emissions from investments should be allocated to the reporting company based on the reporting company’s proportional share of investment in the investee.

Because investment portfolios are dynamic and can change frequently throughout the reporting year, companies should identify investments by choosing a fixed point in time, such as December 31 of the reporting year, or using a representative average over the course of the reporting year.

Table 5.9

This table presents the different types of financial investments/services, their descriptions, and the required GHG accounting approach. Let me know if further modifications are needed!

Additional guidance on key concepts italicized in table 5.9 follows.

• Proportional emissions from equity investments should be allocated to the investor based on the investor’s proportional share of equity in the investee. Proportional emissions from project finance and debt investments with known use of proceeds should be allocated to the investor based on the investor’s proportional share of total project costs (total equity plus debt). Companies may separately report additional metrics, such as total emissions of the investee, the investor’s proportional share of capital investment in the investee, etc.
• Scope 1 and scope 2 emissions include the direct (scope 1) emissions of the investee or project, as well as the indirect scope 2 emissions from the generation of electricity consumed by the investee or project. Where relevant, companies should also account for the scope 3 emissions of the investee or project. For example, if a financial institution provides equity or debt financing to a light bulb manufacturer, the financial institution is required to account for the scope 1 and scope 2 emissions of the light bulb manufacturer (i.e., direct emissions during manufacturing and indirect emissions from electricity consumed during manufacturing). The financial institution should account for the scope 3 emissions of the light bulb producer (e.g., scope 3 emissions from consumer use of light bulbs sold by the manufacturer) when scope 3 emissions are significant compared to other source of emissions or otherwise relevant.
• Relevant projects include those in GHG-intensive sectors (e.g., power generation), projects exceeding a specified emissions threshold (developed by the company or industry sector), or projects that meet other criteria developed by the company or industry sector. Companies should account for emissions from the GHG-emitting project financed by the reporting company, regardless of any financial intermediaries involved in the transaction.
• Total projected lifetime emissions are reported in the initial year the project is financed, not in subsequent years. Where there is uncertainty around a project’s anticipated lifetime, companies may report a range of likely values (e.g., for a coal-fired power plant, a company may report a range over a 30- to 60-year time period). Companies should report the assumptions used to estimate total anticipated lifetime emissions. If project financing occurs only once every few years, emissions from project finance may fluctuate significantly from year to year. Companies should provide appropriate context in the public report (e.g., by highlighting exceptional or non-recurring project financing). See section 5.4 for more information on the time boundary of scope 3 categories.

Table 5.9