Analysis
Comparing Leading Methodologies and a Scalable Approach for Investors
Mar 13, 2025 @ London
As the green bond market matures, asset managers need more precise methodologies to assess their financed emissions at the security level, with PCAF's new Use of Proceeds methodology leading industry standardisation efforts.
As the green bond market matures, asset managers need more precise methodologies to assess their financed emissions at the security level. Historically, in investor reporting green bonds have been accounted for using issuer-wide emissions, failing to capture project-level financing.
To address this, PCAF has proposed a new Use of Proceeds (UoP) methodology, which recently finished consultation at the end of February 2025. Other institutions—including MSCI, Insight Investment, and AllianzGI—have already developed alternative methodologies.
ClimateAligned has a scalable, AI-powered data-driven approach that can incorporate the new industry standard of PCAF financed emissions methodology. It already delivers high-resolution avoided emissions data which estimates the positive climate impacts of green bond use of proceeds.
PCAF's December 2024 consultation presents the first structured methodology to integrate financed emissions reporting into net-zero strategies.
| Feature | PCAF Proposal |
|---|---|
| Security-Level Attribution | Financing emissions are measured at the bond level, not just the issuer level. Applies to all Use of Proceeds structures, including green bonds. |
| Use of Proceeds Tracking | Allocates financed emissions based on specific projects financed, rather than issuer-wide data as has been done historically. |
| Scope 3 Integration | Goal is to make green bond investors' Scope 3, Category 15 emissions more accurate. |
| Double Attribution Considered | Accounts for shared financing, avoiding double-counting. |
| Data Dependency | Encourages issuers to disclose project-level emissions, but allows estimates when unavailable. |
Key Strength: Ensures investors can differentiate green bond emissions from general corporate financing.
Key Limitation: Requires high-quality project emissions data, which remains inconsistent across issuers.
MSCI builds on PCAF's framework but applies a portfolio-wide emissions allocation approach.
| Feature | MSCI Methodology |
|---|---|
| Issuer-Wide + Security-Level Blend | Allocates financed emissions based on revenue categories, rather than specific assets. |
| Sector-Based Emissions Factors | Uses predefined sectoral emissions intensities rather than real project data. |
| Portfolio-Wide Comparison | Allows investors to compare green and non-green bonds from the same issuer. |
| Avoided Emissions Integration | Considers both financed and avoided emissions. |
Key Strength: Useful for broad portfolio comparisons across asset classes.
Key Limitation: Less precise than PCAF, as it relies on sector averages instead of real project data.
Insight Investment has developed a structured methodology for green bond carbon footprinting that builds on the PCAF standard while accounting for the lack of reported data in post-issuance reporting.
| Feature | Insight Investment Methodology |
|---|---|
| Allocation Definition | First defines allocation of proceeds based on reported post-issuance data or estimated from previous allocations |
| Carbon Emission Factors | Applies appropriate carbon emission factors from established databases like Exiobase |
| Issuer Readjustment | Accounts for the need to adjust the issuer's overall emissions profile to avoid undercounting emissions |
Key Strength: Provides a practical methodology that can be applied even with limited issuer disclosure.
Key Limitation: Faces data gaps with certain project types, such as green buildings, which aren't covered by available emission factor databases.
AllianzGI focuses on avoided emissions as a net-zero tool, rather than a direct financed emissions measure.
| Feature | AllianzGI Proposal |
|---|---|
| Net-Zero Integration | Treats avoided emissions as a key factor in assessing decarbonisation progress. |
| Project-Based Analysis | Encourages issuers to report project-specific avoided emissions. |
Key Strength: Provides a net-zero framework for assessing green bond impact.
Key Limitation: Does not fully address financed emissions reporting gaps.
ClimateAligned already provides:
| Capability | Today | Future (Post-PCAF Finalisation) |
|---|---|---|
| Avoided Emissions Calculation | ✅ Location-specific, asset-level allocations and their avoided emissions. | ✅ Location-specific, asset-level allocations and their avoided emissions |
| Financed Emissions Integration | ❌ Not currently included. | ✅ Fully integrated into financed emissions calculations. |
| Security-Level Data Extraction | ✅ Automated AI-based extractions. | ✅ Scalable for new disclosure requirements. |
The evolution of green bond carbon footprinting methodologies demonstrates both the progress being made and the challenges that remain. Insight Investment's research has highlighted how different methodologies produce significantly different carbon footprint estimates for the same green bonds—in some cases showing over 90% reductions compared to issuer-level emissions, while in other cases showing much smaller differences.
This variability underscores why standardisation is so critical. As Insight notes in their recent analysis, even imperfect methodologies more accurately reflect the reality of green bonds' carbon footprints than simply applying issuer-level emissions to all securities. Their case studies across utility companies, real estate, and banking sectors demonstrate that sector-specific considerations are essential for accurate carbon accounting.
For investors seeking to align with emerging best practices in financed emissions reporting, several key considerations should guide your approach:
As PCAF finalises its methodology and industry standards evolve, having scalable, AI-powered data solutions will become increasingly valuable. Investors who can efficiently extract, process, and report security-level emissions data will be better positioned to meet regulatory expectations and stakeholder demands for climate transparency.
The integration of both financed and avoided emissions data into investment strategies will soon become standard practice for sustainable fixed income investors. With the right data infrastructure in place, portfolio managers can make more informed allocation decisions that accurately reflect their climate commitments while maintaining investment performance.
ClimateAligned's AI-powered technology extracts and processes green bond data at scale, providing the granularity investors need to implement emerging industry standards for financed emissions accounting.