Reporting Financed Emissions under IFRS S2
If you are a risk manager or sustainability advisor at a financial institution, you might already be familiar with the term ‘Financed Emissions’. Financed emissions are greenhouse gas (GHG) emissions attributed to financial institutions through their lending and investment activities (IBM). In other words, they are the Scope 3 (value-chain) emissions that banks, asset managers, or insurance companies finance via loans, bonds, equity investments, or underwriting. These emissions gained prominence because of their sheer scale and risk implications. For many banks, financed emissions dwarf operational emissions (Scope 1 and 2). In fact, it was found that emissions from financing activities were on average 750 times greater than banks’ direct emissions (IBM). This highlights that a bank’s climate impact and exposure lie primarily in its loan and investment portfolio.
High financed emissions indicate heavy financing of carbon-intensive assets, exposing the institution to potential credit risks, stranded assets, and regulatory costs as the world transitions to a low-carbon economy. It is for this very reason that measuring financed emissions is crucial for banks. Understanding which investments contribute to emissions enables financial institutions to develop transition plans and set targets, such as net-zero by 2050, and redirect capital toward greener projects. As noted by the Science-Based Target initiative (SBTi), financial institutions can “redirect capital to companies contributing to the low-carbon transition, and away from companies that contribute to climate change,” helping build a net-zero economy (IBM).
Relevance to IFRS S1 and S2
In 2023, the International Sustainability Standards Board (ISSB) issued IFRS S1 (General Requirements for Sustainability-related Financial Disclosures) and IFRS S2 (climate-related disclosures). These standards, effective for reporting periods beginning 2024, establish a common baseline for how companies report sustainability and climate-related financial information. Jurisdictions around the world have stated their intention to adopt the standards or align reporting frameworks with them. As of March 31, 2025, 15 jurisdictions have adopted the standards on a voluntary or mandatory basis with reporting starting as of 1st January, 2024 or in 2025. Another 21 jurisdictions are planning to adopt them in the future. With these rapid developments, companies need to be ready for climate-related disclosures as that is one of the key requirements of the standard.
IFRS S2 requires granular disclosure of climate-related risks and opportunities, including physical risks (like extreme weather) and transition risks (policy or market shifts). Companies must report on climate governance, strategy, risk management, and specific metrics & targets. Notably, IFRS S2 mandates GHG emissions disclosure including Scope 1, 2, and relevant Scope 3 [IFRS S2 (Para. 29aii)].
Banks or insurers are expected to provide information on their financed emissions as part of Scope 3 (Progress on Corporate Climate-related Disclosures—2024 Report). This means if a company engages in commercial banking, asset management or insurance, it should disclose the GHG emissions of its lending/investment portfolios alongside its own emissions. The ISSB does not require Scope 3 emission disclosures, including financed emissions, during the first year of reporting. Nonetheless, IFRS S2 has made financed emissions a mainstream disclosure metric for financial institutions, and early assessments will be beneficial for reporting in subsequent years.
Standard Methodology to Measure Financed Emissions
Accurately quantifying financed emissions can be complex. The Partnership for Carbon Accounting Financials (PCAF), launched in 2019, plays a key role in helping financial institutions measure and disclose these emissions consistently. PCAF is a global industry-led initiative that has developed the Global GHG Accounting and Reporting Standard for the Financial Industry to calculate emissions for loans and investments across seven asset classes – listed equities, corporate bonds, business loans, project finance, real estate, mortgages, motor vehicle loans, and even sovereign debt (The Global GHG Accounting and Reporting Standard for the Financial Industry). The standard is built on the GHG Protocol Category 15 (Investments) guidance, meaning it can be used for calculating and disclosing financed emissions under IFRS S2 [IFRS S2 (Paragraph 29avi (2))]. It ensures all institutions follow the same approach, improving comparability.
Many banks and investors worldwide now use PCAF’s methodology to report their financed emissions (PCAF Signatories). Using a common standard allows aggregation and benchmarking; in fact, as of recent years, more than 550 financial institutions have become PCAF signatories, committing to measure and disclose financed emissions in a transparent way. Currently, no Pakistani FI has committed to measuring and disclosing financed emissions. However, banks have started implementing PCAF standard for measuring financed emissions internally. By measuring financed emissions, banks gain insight into which parts of their portfolio drive their carbon footprint. This enables informed strategic decisions – such as engaging clients on transition plans, adjusting lending criteria, or developing green financial products – to manage climate risks and align with net-zero goals.
Need for Early Action by Banks and FIs in Pakistan
The push for climate-related disclosures and financed emissions accounting is highly relevant for Pakistani banks and FIs, even if such practices are nascent locally. First and foremost, Pakistan is highly exposed to climate risks. Pakistan’s economy faces significant climate change impacts – for instance, the catastrophic 2022 floods caused an estimated $30 billion in damages (SBP). Banks operating in Pakistan are indirectly exposed to these physical risks through their clients. At the same time, global efforts to decarbonize could impact Pakistan’s key industries, such as agriculture, textile, and manufacturing, creating transition risks. By quantifying own emissions, FIs can gauge which parts of their loan book are most carbon-intensive and potentially vulnerable to climate policies or shifting market preferences.
In a progressive move, Pakistan is aligning with international reporting standards. The Securities and Exchange Commission of Pakistan (SECP) has mandated the ISSB sustainability disclosure standards (IFRS S1 & S2) with a phased approach for large companies. This means that Pakistani banks and listed companies will be required to report climate-related disclosures, including financed emissions metrics, starting FY 2025, in accordance with the ISSB. Although, relief is provided exempting Scope 3 emission disclosures in the first year, early reporters will have an easier time disclosing financed emissions in the next year.
We see that overall regulatory and policy support for green finance and sustainable activities has increased. The State Bank of Pakistan (SBP) is increasingly promoting sustainable finance agenda through the Environmental and Social Risk Management (ESRM) Manual, Green Banking Guidelines (GBG) and the Green Taxonomy. The GBG and ESRM manual were issued to help banks integrate environmental risk management into their operations (SBP). The Green Taxonomy (draft) is also being finalized to channel finance to sustainable projects. While not explicitly requiring financed emission disclosure yet, these initiatives show the general trend – regulators and investors want banks to consider environmental impact and climate risk.
In conclusion, financed emissions disclosure is emerging as a crucial practice for financial institutions for the global market to decarbonize and meet the Paris Goals. The introduction of IFRS S1 and S2 standards has formalized the expectation that banks and others quantify and report these emissions. Frameworks like PCAF provide the means to do so robustly. By understanding their financed emissions and acting early, Pakistani banks and FIs can not only ensure compliance with evolving standards, but also strengthen their risk management and seize opportunities in the green finance revolution.
Author: Rohma Arshad – Sustainability Lead at Resources Future
6th May, 2025
