WEBVTT 00:00:05.000 --> 00:00:30.000 (Welcome message - subtitles will start at 0:30) 00:00:30.000 --> 00:00:41.000 I think let's start. We have a good number. So welcome to PCAF's technical webinar on avoided emissions, forward looking metrics, and use of proceeds accounting. 00:00:41.000 --> 00:00:47.000 This is one of the four technical webinars that we are doing over these next few weeks. 00:00:47.000 --> 00:00:53.000 Really going deep into the methods and the guidance that we published as part of the public consultation. 00:00:53.000 --> 00:01:01.000 And having time for Q&As to really try to prepare your responses to the public consultation. 00:01:01.000 --> 00:01:09.000 So very quickly, we'll just start with an introduction We're going to start with use of proceeds accounting. 00:01:09.000 --> 00:01:19.000 Followed by the Q&A on that method And then we're going to go in the second half of the session on avoided emissions and forward-looking metrics, and we'll have another time for Q&A. 00:01:19.000 --> 00:01:25.000 So very quickly, just some housekeeping before I hand over to our speakers. 00:01:25.000 --> 00:01:29.000 The purpose of the session is to deep dive on these methodologies. 00:01:29.000 --> 00:01:35.000 And the question should be also try to be tailored a bit to understanding the method and questions you have. 00:01:35.000 --> 00:01:40.000 So really try to avoid making questions or giving your feedback. 00:01:40.000 --> 00:01:44.000 And save the feedback on the methods for the survey that we have. 00:01:44.000 --> 00:01:58.000 Attendees are also only in listen modes only. And we encourage questions to be submitted via the Q&A function that you'll find at the bottom and you can submit your questions As we're going through the presentation and we'll address them at the Q&A section. 00:01:58.000 --> 00:02:06.000 And if you have any technical difficulties. Please write this in the chat and we'll be in touch with you to fix those. 00:02:06.000 --> 00:02:27.000 Then finally, it is being recorded. So if a colleague couldn't join or if you want to watch back the recording on the method know that we will add it to the PGAF website afterwards. And yeah, if there's any questions, comments, feel free to always reach us at info at carbonaccountingfinancials.com. 00:02:27.000 --> 00:02:34.000 So very quickly introducing our speakers. We have Sam from FMO today and Samuel from PIMCO. 00:02:34.000 --> 00:02:44.000 And these are the two cultures we have of this transition in green finance working group, which is the working group that worked on developing these methods that we're going to be speaking about today. 00:02:44.000 --> 00:02:52.000 Sam will walk us through the use of proceeds accounting method And Samuel will walk us through the avoided emissions and forward-looking metrics as well. 00:02:52.000 --> 00:02:59.000 And then we also have with us Kasper, who is PCAP's technical director And you will give us a short introduction. 00:02:59.000 --> 00:03:07.000 On what we're speaking about today and its importance. So I want to kick it off right away and hand it over to Casper. 00:03:07.000 --> 00:03:13.000 Thank you, Madelena. Thanks, everyone, for participating in this webinar. We see a lot of people on the line. 00:03:13.000 --> 00:03:19.000 Really excited to see all of the interest in enthusiasm into our methodology. 00:03:19.000 --> 00:03:43.000 Let's start. So just as a refresher or reminder, I think this is not a surprise to many of you, but BCF historically is really focused on inventory accounting which is complementing the greenhouse gas protocol scope three standards with more specific guidance on scope three category 15, specifically all the emissions related to financial activities. 00:03:43.000 --> 00:03:57.000 Of the financial sector. And inventory accounting is typically on an annual basis and and based on activities that your financial institutions has in a specific reporting year. 00:03:57.000 --> 00:04:15.000 The methods that we're discussing today are twofold. One is the use of procedure methodology that's actually providing more specific guidance to report these inventory emissions for specific use of proceeds instruments filling a gap in the methodologies that we had to date. 00:04:15.000 --> 00:04:24.000 But also some methodologies and guidance in this case on avoided emissions and expected emission reductions, which are actually outside of this inventory. 00:04:24.000 --> 00:04:33.000 And also reported separately but also separately We wanted to develop some guidelines and guardrails based on a lot of industry demands. 00:04:33.000 --> 00:04:56.000 So if we move forward I've just created this simple slide trying to differentiate a little bit between what is happening within the inventory PICA's key focus, scope three category 15 And if emissions would go up or ideally reduce over time, this would be called reductions within the own inventory. This is already all captured. 00:04:56.000 --> 00:05:10.000 Then you have carbon removals, which can actually occur both within the value chain of an individual company that you're investing in or within your own value chain, but also outside of the value chain. And this is also something that is 00:05:10.000 --> 00:05:20.000 Typically already captured by carbon accounting through the greenhouse gas protocol and then SPCAF provides rules for how to attribute those emissions also under PCA. 00:05:20.000 --> 00:05:29.000 An area that is less explored both globally in standard setting for companies, but also for the financial sector is a topic of avoided emissions. 00:05:29.000 --> 00:05:49.000 Specifically for the financial sector, there's a lot of interest because they're can be financed provided to assets to initiative to product projects that both have emissions and might even increase your finance emissions in the short term but could also have a wider and positive impact on the wider economy. 00:05:49.000 --> 00:06:05.000 There. Is a lot to say about this and PCAF can't go into the details of individual sectoral guidelines but we did feel that based on all of the interest there is in the market attraction around this topic. It made sense. 00:06:05.000 --> 00:06:20.000 To provide some additional guidance on overall financial sector level on how to potentially report these avoided emissions, address them separately in the inventory and provide some guardrails. So in the second half of this session, we'll address this. 00:06:20.000 --> 00:06:24.000 Another topic is another topic the expected emission reductions. 00:06:24.000 --> 00:06:39.000 Which is even beyond the current reporting years are not even always related to activities within this reporting year but related to investments that you might make today that might result in changes in the future. 00:06:39.000 --> 00:06:54.000 And that's also covered in the second half. So if we then move one more slide, final introductory slides is what are we currently covering? So we're focusing mostly for these topics on part a finance emission standard. 00:06:54.000 --> 00:07:13.000 Currently, this standard enables leveraging specific emissions data for project finance only that's the the key method for companies at least where you could use actual project data. But we realized there's other types of investments like green bonds. 00:07:13.000 --> 00:07:34.000 Where you know where the money is flowing and there's clear use of procedure you would ideally not use the general company emissions attributed over equity and depth, but a more specific calculation. So this is where The use of proceeds methodology comes in hand and why we have developed this to actually show the specific emissions of those investments. 00:07:34.000 --> 00:07:51.000 Secondly, part a second currently only covered avoided emissions related to renewable projects and actually it included it as part of our PCAF Part A standards. Since this is actually not an inventory metric we decided to take it out of the standard, put it into separate guidance 00:07:51.000 --> 00:08:09.000 And actually extend it to also cover other avoid automations beyond just renewable energy and provides further guidance there. And then finally, as mentioned, forward-looking metrics is for now providing some proposed high-level reporting options to report this evolving metric that is 00:08:09.000 --> 00:08:18.000 Like they're discussed a lot in the market And not going into the details, but now first having consultation with all of our external stakeholders, including yourself. 00:08:18.000 --> 00:08:34.000 On different options and we would like to receive your your input which of these options you would feel appropriate or if you have any other IDs. So with that introduction, hopefully I provided a little bit of a context. What we're doing today. So first user proceeds part of part a 00:08:34.000 --> 00:08:43.000 Finance emissions and then in the second half of the session topics that are more outside of the inventory, but still very relevant for the industry. 00:08:43.000 --> 00:08:48.000 With that, I hand it over to Sam. 00:08:48.000 --> 00:08:54.000 Things elsewhere and very excited to be presenting the use of proceeds accounting method here today. 00:08:54.000 --> 00:09:06.000 Let's move to the next slide. Yeah, I'm very excited to be presenting this method because it gives financial institutions more possibilities to account for the specific assets being financed. 00:09:06.000 --> 00:09:18.000 And the main change proposed to Part A is the addition of a cross-cutting method titled user proceed structures. And there are two smaller additions on accounting for projects without a separate balance sheet. 00:09:18.000 --> 00:09:33.000 And accounting for finance scope three category 15 emissions. These changes aim to further implement the follow the money approach which allows financial institutions to better understand and account their climate impact in the real economy. 00:09:33.000 --> 00:09:41.000 Next slide, please. So let's dive into the user perceived structures method. 00:09:41.000 --> 00:09:50.000 So the term use of perceived structures is a newly introduced abstract greenhouse gas accounting concept. 00:09:50.000 --> 00:09:55.000 It is essentially a pool of money that is invested into underlying assets. 00:09:55.000 --> 00:10:03.000 And because of its abstract nature, it encompasses a large range of structures, including equity funds. 00:10:03.000 --> 00:10:12.000 Debt funds, special purpose vehicles, as well as labeled bonds and labeled loans, such as green bonds and green loans. 00:10:12.000 --> 00:10:21.000 Because it's such an abstract concept, we also had to use general terms for the entities involved in the structure. 00:10:21.000 --> 00:10:27.000 So we refer to the entity investing into the structure as the investor. 00:10:27.000 --> 00:10:34.000 And we refer to the party that creates or manages the structure as an issuer. 00:10:34.000 --> 00:10:47.000 However, it's good to know that in other contexts you might be more familiar with the terms asset manager or fund manager, customer or borrower, depending on the the type of use of proceed structure. 00:10:47.000 --> 00:11:04.000 Next slide, please. So also because of this abstract nature of the method, the method provides further guidance on different types of structures and how to approach the accounting treatment. 00:11:04.000 --> 00:11:18.000 So the first question is a very fundamental one. Whether something can be qualified as a user perceived structure. And for this, the proceeds of the structure need to be allocated to specific assets. 00:11:18.000 --> 00:11:22.000 This is, for example, not the case for general working capital. 00:11:22.000 --> 00:11:38.000 Or for equity, general equity to our corporates. In these cases, usually the money is not earmarked for specific assets and therefore cannot be accounted using this method. 00:11:38.000 --> 00:11:44.000 Specific type of use of receipts structure, sorry, can we go back to the previous slide? 00:11:44.000 --> 00:11:49.000 A specific kind of use of procedure is the one covered under question two. 00:11:49.000 --> 00:12:00.000 This is a holding company, for example, that has control over the underlying assets. So you can imagine a top level holding company in a group structure. 00:12:00.000 --> 00:12:11.000 And in these cases, this company has control over all the underlying companies Which means that both on the financial side and emission side, everything is consolidated. 00:12:11.000 --> 00:12:17.000 This means that such a structure is essentially one large corporate and should be accounted as such. 00:12:17.000 --> 00:12:26.000 Another special case is a structure that is debt-based with one fully allocated asset. An example of that is a mortgage. 00:12:26.000 --> 00:12:40.000 Well, technically, this method is applicable to this type of structure, it is usually more convenient to simply immediately use the applicable asset class methodology. So for mortgages, the mortgage asset class. 00:12:40.000 --> 00:12:48.000 And then when we move to questions four and five, these are the type of structures that can be accounted using this method. 00:12:48.000 --> 00:12:53.000 And the method distinguishes two main types of use of perceived structures. 00:12:53.000 --> 00:13:06.000 So-called separate and integrated use of perceived structures. Sanford used structures are those where the underlying assets are not part of the issuer's balance sheet and they shall be accounted for using this method. 00:13:06.000 --> 00:13:12.000 Integrated user proceed structures are those where the underlying assets are a part of the issue's balance sheet. 00:13:12.000 --> 00:13:23.000 And there are some more complexities regarding these type of structures that I will get to in later slides. Next slide, please. 00:13:23.000 --> 00:13:28.000 So the basic equation to calculate finance emissions is shown at the top here. 00:13:28.000 --> 00:13:38.000 And we have a so-called double attribution where the first part captures the attribution share of the investor in the user proceed structure. 00:13:38.000 --> 00:13:44.000 And the second part captures the attribution factor of the user perceived structure in the underlying assets. 00:13:44.000 --> 00:13:50.000 And the accounting approach for the underlying asset is based on the type of asset. 00:13:50.000 --> 00:13:57.000 So in principle, the assets underlying a user proceed structure can belong to any other asset class. 00:13:57.000 --> 00:14:09.000 And for example, if an underlying asset is a project, then the project finance methodology is applicable. And this methodology will then also determine which emission scope should be covered. 00:14:09.000 --> 00:14:15.000 How the attribution factors should be calculated, and also how emissions can be estimated. 00:14:15.000 --> 00:14:28.000 In certain cases, the user proceeds structures and the user proceeds structure might the emissions for the user perceived structure might be reported by the issuer. 00:14:28.000 --> 00:14:35.000 This can be, for example, if a fund manager reports to finance submissions for an equity fund and manages. 00:14:35.000 --> 00:14:52.000 If there are sufficient evidence that these have been attributed and reported in line with this method, an investor can simply then use these reported finance emissions and only needs to multiply with the attribution share in the structure as a whole. 00:14:52.000 --> 00:15:00.000 However, we do recognize that for many user receipt structures, these first two equations might be challenging to implement. 00:15:00.000 --> 00:15:05.000 Either the use of perceived structure, the final submissions for it might not be reported. 00:15:05.000 --> 00:15:13.000 Or investor does not have access to the underlying asset data to be able to implement the first formula. 00:15:13.000 --> 00:15:21.000 Therefore, the method also proposes another formula. The third one based on a data quality score five. 00:15:21.000 --> 00:15:26.000 And this means that we use the allocation percentage for different sectors. 00:15:26.000 --> 00:15:35.000 So for example, for inequity funds, again, if an equity fund invests 50% in the manufacturing sector and 50% in the agriculture sector. 00:15:35.000 --> 00:15:42.000 You use these percentages and multiply both with the appropriate emission factor. 00:15:42.000 --> 00:15:56.000 Then finally. For the allocation percentage of the USPC structure What I want to highlight here is the sentence at the bottom Finance emissions are only calculated once funds have been allocated on the user receipt structure. 00:15:56.000 --> 00:16:05.000 So for example, taking the example of an equity fund again, if an equity fund starts up and there's no investments being made, the finance emissions will be zero. 00:16:05.000 --> 00:16:18.000 And that is in the last equation that can be seen because allocation percentage will be zero, none of the funds of the equity fund have been allocated In the first equation that can be seen because there are simply no underlying assets 00:16:18.000 --> 00:16:24.000 Sort of attribution factor for the underlying assets will be. Zero as well. 00:16:24.000 --> 00:16:34.000 Next slide, please. Another important point that the methodology provides guidance on is on the assessment boundary. 00:16:34.000 --> 00:16:40.000 So investors shall draw the assessment boundary around the underlying assets. 00:16:40.000 --> 00:16:47.000 So again, for the equity fund example, if we have an equity fund invested in a manufacturing company. 00:16:47.000 --> 00:16:59.000 The Scope 1 emissions of the manufacturing company will be reported by the investor in the equity fund under its financed scope one emissions. 00:16:59.000 --> 00:17:06.000 Next slide, please. 00:17:06.000 --> 00:17:16.000 So moving from the general guidance into some of the more specific topics, especially related to integrated user perceived structures. 00:17:16.000 --> 00:17:30.000 So one topic is the topic of scope shifting. And this is illustrated by an example here on the left. So we have a investor that invests into an issuer that's also a finesse institution. 00:17:30.000 --> 00:17:35.000 So we see in the first table at the issuer, the corporate inventory of the issuer includes not only scope. 00:17:35.000 --> 00:17:45.000 One and two, but also scope three and finance emissions. The investor invests both a general purpose loan as well as a green loan. 00:17:45.000 --> 00:17:54.000 And the green loan can be qualified as an integrated user proceed structure for which the data is shown in the first table. 00:17:54.000 --> 00:18:18.000 Now to account for the general purpose loan. The investor will draw the assessment boundary around the issuer and For this also, the new paragraph on accounting for finance scope three category 15 emissions clarifies that the investor should also include the finance submission of the issuer into its reporting. 00:18:18.000 --> 00:18:26.000 This is illustrated in the second table. So for the finance submissions, the general purpose loan, you see that for the final scrub three emissions. 00:18:26.000 --> 00:18:32.000 All the scope three categories of the issuer are added together. 00:18:32.000 --> 00:18:38.000 For use of proceeds structure. However, the assessment boundary is around the underlying assets. 00:18:38.000 --> 00:18:46.000 So using this method, the green loan is accounted as shown in the table. 00:18:46.000 --> 00:18:50.000 And what is interesting here is this topic of scope shifting. 00:18:50.000 --> 00:19:01.000 For the general purpose loan, the scope one and two emissions are quite small because they're related to the financial institutions operational missions like office buildings. But that scope three is quite large. 00:19:01.000 --> 00:19:12.000 For the green loan, the total emissions are smaller than the general purpose loan because 500 plus 200 plus 1800 is 2,500, smaller than the total emissions from general purpose loan. 00:19:12.000 --> 00:19:24.000 But you do see that these emissions get shifted because the assessment boundaries around underlying assets. So therefore the scope one emissions for the green loan are actually higher than for the general purpose loan. 00:19:24.000 --> 00:19:29.000 Next slide, please. 00:19:29.000 --> 00:19:37.000 Another topic. To highlight for integrated use of procedures structures is the topic of under and over allocation. 00:19:37.000 --> 00:19:48.000 And again, this is illustrated by an example. So we have here a communication service corporate that has issued a user proceeds transition bond. 00:19:48.000 --> 00:19:56.000 And we have assumed that the total debt and equity of the issuer is provided by 400 investors. 00:19:56.000 --> 00:20:03.000 There are three investors in the use of proceeds transition bonds and 397 in the overall corporates. 00:20:03.000 --> 00:20:10.000 Now, in the second table here on the left, you see that if the user precedes transition bonds investors use this method. 00:20:10.000 --> 00:20:17.000 They will simply account for the total emissions of the transition bond, which is 1,000. 00:20:17.000 --> 00:20:22.000 However, if the non-user proceeds investors use the general corporate level data. 00:20:22.000 --> 00:20:41.000 On debt and equity in emissions, essentially what they are doing is also taking part of the emissions of the transition bolt into account. And what this leads to is a under allocation. So if you add the emissions that the non-user precedes investors have accounted for with the use of proceeds transition bond investors. 00:20:41.000 --> 00:20:47.000 You see that this total does not add up to the total emissions of the corporate. 00:20:47.000 --> 00:21:00.000 In order to correct for this, a non-user proceeds investors should exclude the total debt and the emissions of the use of any use of receipts bonds. 00:21:00.000 --> 00:21:15.000 So this is done in the third table. And if we use the information from the third table where where this is excluded, you see that for non-usual proceeds investors, they get to a different amount in the total finance emissions 00:21:15.000 --> 00:21:35.000 Will add up. So this procedure is then elaborated on the right in the formula where the user precedes debt and use of precedes emissions should be subtracted by the non-use of proceed investors for their calculation. 00:21:35.000 --> 00:21:40.000 Next slide, please. 00:21:40.000 --> 00:21:49.000 Another topic that the guidance also provides further clarification on is on the accounting for projects without a separate balance sheet. 00:21:49.000 --> 00:21:56.000 And it introduces the requirement that the emissions of the project can be defined independently. 00:21:56.000 --> 00:22:07.000 This topic is especially important for energy efficiency projects. So, for example, if there's an energy efficiency project in a manufacturing plant to install a new boiler. 00:22:07.000 --> 00:22:26.000 The fuel use of the boiler and the fuel use of the boiler can be measured, then the investor in this energy efficiency project can calculate its finance emissions using the emissions of the boiler multiplied with this attribution factor shown in the slides. 00:22:26.000 --> 00:22:42.000 And here, the total debt is frozen at origination and this is allowed because it's allowed usually in these cases, the total debt is not available given that such an investment does not have a separate balance sheet. 00:22:42.000 --> 00:22:52.000 Conversely though if an investor invests in an energy efficiency project where the emissions cannot be defined independently. So for example. 00:22:52.000 --> 00:23:00.000 Insulation for a manufacturing plant. In this case, the emissions of the insulation cannot be defined independently of the manufacturing plant. 00:23:00.000 --> 00:23:12.000 And in those cases, therefore. Guidance cannot be applied and the investor should use the total emissions of the manufacturing plant to calculate It's financed emissions. 00:23:12.000 --> 00:23:24.000 Next slide, please. Finally, I want to highlight a very important point that was also a topic of many discussions in our working group. 00:23:24.000 --> 00:23:44.000 The accounting for integrated user receipt structures and the adjustment for under and over allocation that I just outlined are recommended but not required. So they are a shoot but not a shell This means that investors may calculate or finance emissions also on the 00:23:44.000 --> 00:23:50.000 Issuers total debt in equity or their issuers unadjusted total debt in equity and emissions. 00:23:50.000 --> 00:24:11.000 And there might be reasons to do this. The first is that it might be theoretically simply impossible to follow the money. And the example I just gave is is for example an energy efficiency investment in insulation. In those case. 00:24:11.000 --> 00:24:26.000 The integrated user per seat structure emissions will have to fall back on the issuer, total level emissions because the emissions of the insulation investment cannot be defined independently. 00:24:26.000 --> 00:24:47.000 Another reason is that it's practically not feasible. So currently in the market, we have seen many examples where there's no sufficient data available to make the calculations. So then also investors may fall back on the total emissions and debt and equity of 00:24:47.000 --> 00:24:53.000 To issuer. And in certain cases, an investor might also argue it's not material. 00:24:53.000 --> 00:25:03.000 More exceptional, but it can be that the calculated emissions I'm not expected to materially differ from an adjusted or issuer level estimates. 00:25:03.000 --> 00:25:15.000 And also in this case, then for practical reasons, the investor might choose to simply accounts for the issuer based on the issuer totals. 00:25:15.000 --> 00:25:25.000 And with this, I think we went through the methods and going through yeah happy to hear, of course, any questions you have on this. 00:25:25.000 --> 00:25:39.000 Yes, thank you, Sam. It's been a lot for information so we already got the question whether or not we would share the slides. Well, we're actually going to share the full recording publicly, so you'll find that later. 00:25:39.000 --> 00:25:47.000 On our website. So that's one And other questions are now rolling in. 00:25:47.000 --> 00:25:57.000 So this is for you the question is here have trouble understanding the difference that you would do between the finance emissions and the actual voided emissions. 00:25:57.000 --> 00:26:15.000 For example, if I take a real estate, I'm the investor not asset manager, no control say that this asset has PV panels with auto consumption and re-injection to the grid, quite specific which reports all emissions of this asset, including PV panels in scope three category 15 00:26:15.000 --> 00:26:21.000 Or re-injection emissions in scope four. Well, scope four isn't a thing, but avoided emissions. 00:26:21.000 --> 00:26:28.000 And the rest in reporting scope recovery 15. Do you want to address this first or should I take a step, some? 00:26:28.000 --> 00:26:34.000 Yeah, go ahead. And of course, we also have the section on void emissions still coming, right? So maybe we can also take it. 00:26:34.000 --> 00:26:35.000 Take it afterwards. 00:26:35.000 --> 00:26:57.000 Yeah. But in principle, this section, you report all of the actual missions that occur in the reporting year of this project under scope three category 15. So only potential voided emissions if those would pass the safeguards and the guardrails that are set. 00:26:57.000 --> 00:27:22.000 So potentially replacing fossil energy if that could be argued those would be reported separately as avoided emissions. But the actual project emissions which were probably going to be lower than the alternative, for example, the emissions of of of the whole utility that you might be investing in if this is an investment through a utility and into a specific solar project. 00:27:22.000 --> 00:27:35.000 If it does, emissions would be reported here under there. Use of proceeds scope three category 15. 00:27:35.000 --> 00:27:42.000 So then there's a second question. Have you already read it or should I read it out loud? 00:27:42.000 --> 00:27:46.000 Which is on the the investment in green bonds. 00:27:46.000 --> 00:27:58.000 Yeah, I think indeed. I think this is a common feedback we've heard and uh The question is that it's hard to find the real missions or avoided emissions for green bombs. 00:27:58.000 --> 00:28:04.000 And I think, indeed, I think this is a challenge that we've also recognized. 00:28:04.000 --> 00:28:13.000 I think one way we've tried to accommodate this is with the formula that I highlighted before with the data quality score five. 00:28:13.000 --> 00:28:27.000 So especially for the absolute emissions to still be able to to make certain use of more use of proceed specific estimate based on sectors And I think otherwise. 00:28:27.000 --> 00:28:41.000 What we hope is that given that this methodology is now out there investors can take this to issuers and ask issuers to start reporting finance emissions in line with this methodology. 00:28:41.000 --> 00:28:48.000 So that hopefully better data will become available to investors in the near future. 00:28:48.000 --> 00:29:01.000 Correct. So it's a bit of the chicken and egg. What we have heard from the market that often This information is available, especially for avoided emissions calculations that are typically done for green bonds you also need the actual project emissions otherwise you couldn't 00:29:01.000 --> 00:29:17.000 Couldn't actually claim a voided submission. So typically the information is available, sometimes even provided. So we provided some feedback to the initiatives that around green bones to maybe make this even a requirement. But we hope that with this method out there and the interest of the financial sector to report 00:29:17.000 --> 00:29:21.000 More specific emissions, there will be more traction around this number. 00:29:21.000 --> 00:29:35.000 And as Sam said there for some for the use of proceeds so specifics actual scope three, category 15 emissions, it's also appropriate or can be allowed to use a lower data quality estimate to start with. 00:29:35.000 --> 00:29:48.000 To jump a bit ahead of the voided emissions calculations for avoided emissions we do expect at least physical data to be used to estimate avoided emissions and to claim them credibly. 00:29:48.000 --> 00:29:54.000 So I'm not economic data. 00:29:54.000 --> 00:30:02.000 So the next question, I think this is now addressed. So maybe also in view of time, please keep on rolling your questions in. 00:30:02.000 --> 00:30:14.000 Since we have more time at the end, but we're nicely halfway So actually, Samuel, I would like to pass the mic over to you to walk us through the avoided dimensions and expect dimension reductions. 00:30:14.000 --> 00:30:19.000 Methods and guidance. 00:30:19.000 --> 00:30:36.000 Thank you, Caspar. So please to elaborate on the other draft guidance on avoided emissions and forward-looking emissions calculation, which are both at a relatively early stage in terms of standardization and market adoption. 00:30:36.000 --> 00:30:49.000 Just to give you some very brief context on the topic of avoided emissions and how it differs from traditional greenhouse gas emissions accounting as it relates to emissions generated. 00:30:49.000 --> 00:31:19.000 So essentially, the concept of avoided emissions got developed to complement the disclosure on emissions generated With a particular focus on climate mitigation solutions. So very much to illustrate the potential positive impact that some of these climate friendly investments may have, such as renewable energy and the fact that based on the traditional carbon accounting with a focus on scope one and three 00:31:20.000 --> 00:31:45.000 We may not necessarily give justice to the benefits that these projects may have and subsequently the fact that certain investors have dedicated involuntarily themed investment funds that are focused on these solutions and would like to be in a position to be able to measure and report these metrics. The most important point to stress on this page is the fundamental difference between scope three 00:31:45.000 --> 00:32:05.000 Emissions and a budget emissions which is also the rationale for the recommendation previously mentioned to discuss separately emissions from the SCOP3 emissions. And in terms of key differences that are laid out on this page, the first one is related to the perimeter 00:32:05.000 --> 00:32:30.000 Of these emissions. So in the context of scope three, we are still dealing with companies emissions across their value chain while in the context of avoided emissions, one is taking a more holistic perspective where there is an estimate or calculation of how a particular scenario where a company is bringing a product or service to the market 00:32:30.000 --> 00:33:00.000 May essentially create certain greenhouse gas emissions and comparing these greenhouse gas emissions with a baseline or scenario where these emissions are not taking place with a typical sort of case in point being renewable energy generation where there is a comparison for instance with the emissions factors of the grid without taking into account this additional sort of renewable source of electricity generation. So very much a sort of society point of view. 00:33:02.000 --> 00:33:18.000 And important to note as well that in terms of historical emissions for scope three We are very much focused on the comparison of issues, emissions year on year or one year compared to the others. 00:33:18.000 --> 00:33:29.000 Years instead of in the context of avoiding the emission, this concept of scenario which is inherently a more dynamic way of looking at it. 00:33:29.000 --> 00:33:34.000 If we move on to the next page 00:33:34.000 --> 00:33:43.000 Importantly, the guidance on avoided emissions that has been developed as part of the draft is not starting from scratch. 00:33:43.000 --> 00:34:10.000 Being within PICA for or more broadly there was already some guidance specifically on renewable energy funding in the past but the goal here is to broaden the applicability of this guidance and make it useful and applicable to all asset classes and types of instruments and also leverage obviously the use of proceeds guidance that Sam has just 00:34:10.000 --> 00:34:26.000 Present it as well as some external industry developments in the past few years such as For example, a report published by the WBCSD that is specifically elaborating on avoided emissions and what good practices look like for corporates. 00:34:26.000 --> 00:34:51.000 What it means in relation to what you see on this page is that this guidance is essentially applicable to both general corporate instruments, so being equity loans or bones that are used for general corporate purposes and also use of procedure instruments so being green bones or similar types of instruments that Sam has previously 00:34:51.000 --> 00:34:56.000 Developed. The key implication, if you look at the table at the bottom. 00:34:56.000 --> 00:35:19.000 Is that this avoided emissions will be assessed and reported separately for these two types of instruments or perspectives whether that's at company level or project level and obviously that there is a need for consistency if you think about the attribution logic as part of the calculation being equity plus debt for loans 00:35:19.000 --> 00:35:43.000 For price value, including cash for equity or debt or bond portfolios. Well, for the use of proceeds format, we would obviously build on the first part of his presentation today and use the same sort of attribution calculation Moving on to the next page, please. 00:35:43.000 --> 00:36:08.000 Some important considerations linked to avoid emissions. Many of these principles that you see on this page are building on the broader principles that are highlighted throughout the PCAP guidance or the greenhouse gas protocol. But I would like to stress today that they are particularly important to consider in the context of avoided emissions given the relative lack of standardization. 00:36:08.000 --> 00:36:34.000 Amongst market practices as a first point that we make on this page is essentially the importance of the consistency between the time frame of the broader finance generated emissions of the issuer or counterparty and the calculation of the avoided emissions. So essentially, if the company is calculating and reporting 00:36:34.000 --> 00:36:55.000 As part of his greenhouse gas inventory, notably for scope pre these emissions based on the transaction that is taking place. For example, if a company is selling particular renewable energy equipment Then subsequently avoided emissions should be assessed based on the same year of sale 00:36:55.000 --> 00:37:14.000 For consistency purposes. Well, if you look at the next example or the next type of situation easily avoided emissions are essentially, if the absolute emissions, sorry, are reported as part of the greenhouse gas emissions inventory And reported annually then similarly 00:37:14.000 --> 00:37:18.000 There is a focus for our emissions to be assessed annually. 00:37:18.000 --> 00:37:36.000 And taking into account the counterfactual evaluation. So it's the most important point to take away in relation to this is the fact that we are essentially looking in both cases for this avoided emissions to be calculated annually And in both cases, for some consistency of getting the time frame 00:37:36.000 --> 00:37:46.000 With the broader greenhouse gas emissions inventory of the issuer. Then moving on to the next bullet point there. 00:37:46.000 --> 00:38:09.000 The previous slide, please. In terms of data quality. There is a recommendation essentially to take this gradation or prioritization that is similar to emissions induced or generated and essentially prioritizes the emissions that are reported and if not available, then these emissions can be estimated. 00:38:09.000 --> 00:38:32.000 And here's a preference that Gaspar alluded to this as part of the answer previously is to focus on physical activities, which is essentially more reliable We're looking at the corresponding estimation techniques compared to some broader techniques such as the economic intensities which in this case are not recommended 00:38:32.000 --> 00:38:52.000 If we look at the next bullet point, here's a key message you see The robustness of the methodology so being fully aware of certain challenges associated with our demissions The goal here is to have broad rails that will avoid overestimating disabled emissions. 00:38:52.000 --> 00:39:01.000 Which implies in practice being conservative as it relates to the baseline or counterfactual scenario. 00:39:01.000 --> 00:39:21.000 And last but not least, there is also a recommendation in terms of transparency to be as detailed as possible regarding the assumptions that are being made as part of the methodology and to subsequently disclose them as part of the broader reporting. 00:39:21.000 --> 00:39:25.000 If we move on to the next page, please. 00:39:25.000 --> 00:39:48.000 So in terms of attribution. Have previously outlined the fact that these avoided emissions should be essentially addressed separately from the core disclosure on absolute emissions. But importantly, again, the attribution methodology should be the same. 00:39:48.000 --> 00:40:16.000 As it relates to the types of instruments, then this should be reported separately whether that's company or project level And if you look at the bottom of this page on the right hand side For most of you are familiar with PCAF, you will find here our data quality score and with the same sort of principles or types of options that are being mapped mapped to each score. So to keep it simple. 00:40:16.000 --> 00:40:30.000 If visa-visit emissions are reported by the counterparty. And externally verify that we lead to a one. It was our reported and not verified that will lead to a two And if you saw estimated, then it can be either two or three 00:40:30.000 --> 00:40:43.000 Depending on the use of energy consumption as part of the estimates or the counterpartis production which will be essentially a free as part of the physical activity-based emissions calculation. 00:40:43.000 --> 00:40:53.000 Moving on to the next page, please. 00:40:53.000 --> 00:41:14.000 So the key growth raise is, again, a particular important area of focus as part of this avoided emissions disclosure. So we are essentially laying out a number of principles that I recommend it to be followed very closely with a sort of very high bar as a result for the case where all these conditions are gazed 00:41:14.000 --> 00:41:23.000 And the level of sophistication and level of credibility is high enough for this avoided emissions to be deemed useful. 00:41:23.000 --> 00:41:33.000 And subsequently would essentially be robust enough to prevent any overestimate. So that includes the data quality assurance policy. 00:41:33.000 --> 00:41:56.000 In terms of data quality sort of checks and all the corresponding conditions in terms of transparency on the calculation methodology, the conservative counterfactual scenario And the fact that this sort of type of disclosure should very much build on best practices in the first place at issue or counterparty level 00:41:56.000 --> 00:42:17.000 So including building on the most recognized and widely developed methodologies such as the ones from from the wbcsd organize things like double digit emissions is not covered by a standard in the same way as cop one and three Scope 1 to 3 at the moment and also the external assurance is particularly 00:42:17.000 --> 00:42:25.000 Important in this case. And the calculation assumptions as previously highlighted. 00:42:25.000 --> 00:42:35.000 So these are the core characteristics in terms of grad ways. If we move on to the next page. 00:42:35.000 --> 00:42:52.000 Then the next section is going to address the forward-looking metrics disclosure and the corresponding guidance Which, unlike avoided emissions, is very much an unshurtured territory or new area of focus for PCARF. 00:42:52.000 --> 00:43:03.000 And when drafting the guidance, it was very much clear and in the mind of all the recommendations that this is at a very early stage. 00:43:03.000 --> 00:43:25.000 In terms of market adoption. Essentially, this concept of forward-looking emissions sorry was developed over the past few years particularly in the realm of transition finance. So when focusing on high emitting industries that are looking to decarbonize going forward and move towards 00:43:25.000 --> 00:43:51.000 Low sources of energy and that may essentially not yet be curbed by only the backward looking emissions techniques we have in mind, for instance, the transition of high emission industries such as utilities, but also the hard to abate sectors such as cements steel air lines and others. The concept was initially sort of highlighted as part of a 00:43:51.000 --> 00:44:10.000 Gfan's consultation on transition finance uh we have some options essentially laid out and this guidance is building on many of these concepts so what at the sort of core obvious focus is very much the estimations of the emission reduction potential 00:44:10.000 --> 00:44:26.000 Of assets and securities And bearing in mind that it would be in any case a complementary disclosure and an optional disclosure to the traditional sort of absolute emissions. 00:44:26.000 --> 00:44:47.000 Then if we move on to the next page the draft guidance is focused on a couple of metrics and options By no means it's implied that this is exhaustive But those are the one that we felt were particularly compelling to explore and additive to current market practices potentially. 00:44:47.000 --> 00:45:09.000 So the first one is what we call the expected absolute emissions so this is essentially a simple traction between the absolute emissions that are projected going forward and the absolute emissions that have occurred during the base year. 00:45:09.000 --> 00:45:39.000 In order also to be conservative and transparent, it is recommended that the emissions reduction expected absolute emissions are systematically supported by subsequent calculation and reporting of the actual achieved expected emissions reduction so that there is a comparison between what was forecasted in the first place and what actually occurred. 00:45:40.000 --> 00:46:04.000 The concept of interpreted emissions, expected emissions reduction that you see at the bottom is basically to be able to get an absolute unexpected absolute emissions for different years And also to be able to calculate at the bottom what has been the percentage that has been eventually achieved. So if a particular 00:46:04.000 --> 00:46:26.000 Company, for example, steel manufacturer was initially expecting to reduce emissions by 100 tons of of CO2 and eventually only 80 was achieved then there will be the possibility in the disclosure to calculate the fact that only 80% essentially of this 00:46:26.000 --> 00:46:52.000 Expected absolute emissions have taken place. If we move on to the next page The second option that is being envisaged is particularly challenging and particularly new in that it's basically about calculating the expected avoided emission in the future. So the use case or the example that 00:46:52.000 --> 00:47:18.000 We had in mind when walking on this is, for example, a new company that is planning to develop a wind farm or solar park But this essentially project has not yet been developed but there is a consideration of the potential benefits and the importance of calculating the potential benefits and avoided emissions 00:47:18.000 --> 00:47:37.000 On a forward-looking basis. So similarly, there is this concept previously mentioned of the comparison between the expectation and the counterfactual scenario and the ability to be able to calculate these figures both in a normalized sorry fashion as well as on the cumulative 00:47:37.000 --> 00:47:45.000 Fashion. To take another example of market application very quickly, you can think about a sustainability link bond. 00:47:45.000 --> 00:48:07.000 Where an issue is setting a particular sort of greenhouse gas emissions, a reduction target And we like to be in a position to essentially quantify and illustrate what are the potential absolute emissions reduction associated to that and potentially to the extent that this net tilling bond is supported by 00:48:07.000 --> 00:48:15.000 For instance, new renewable energy projects. As a complement have this positive impact to our budget emissions perspective. 00:48:15.000 --> 00:48:20.000 If we move on to the next page Please. 00:48:20.000 --> 00:48:40.000 This is a recap to wrap up of some of the key reporting requirements based on the PCAS language and what's seen essentially as as mandatory. So the forward looking emissions metrics are again optional. 00:48:40.000 --> 00:48:47.000 But if they are optional, then there are a number of key conditions that are needed. 00:48:47.000 --> 00:49:12.000 In order for it to be deemed credible, which includes number one, the fact that this should be reported separately fall obscurity missions, avoided emissions and emissions removal And there should be no attempt in this context to mix them Secondly, that the entity should be very transparent 00:49:12.000 --> 00:49:36.000 Regarding the definitions, the assumptions and methodologies, bearing in mind the importance of not overestimating with emissions and being conservative. So the same principle that was mentioned for our budget emissions In terms of attribution technique, similar to the aboard emission, there should be some consistency in the way they are being attributed so 00:49:36.000 --> 00:49:49.000 If you are calculating the generated emissions for an equity of all portfolio based on EVIC as the denominator, then that should be the same essentially for these forward-looking figures. 00:49:49.000 --> 00:50:11.000 And last but not least, that ZNT that chooses to disclose these figures should be very clear regarding the scope and the coverage with an understanding that given the relative sophistication the need for manual assumptions This would concern, at least initially in many cases a small share 00:50:11.000 --> 00:50:27.000 Of the portfolio. So this is essentially it for the key components of the expected emissions reduction in the future. 00:50:27.000 --> 00:50:47.000 Let me stop here and let me stop here see on on this page what what you see is basically a recap of the guard rails that were previously mentioned for our budget emissions, but being adapted and re-emphasized in relation to expected emissions reductions. 00:50:47.000 --> 00:51:03.000 What's the most unique perhaps in relation to that is a focus on the connection with the transition plan. So that's the last point that you see on this page. Given the connection with transition finance that I mentioned in introduction 00:51:03.000 --> 00:51:33.000 These are likely to be a particular interest in contextualizing is expected emissions reduction and for example be able to connect the particular figures with a broader transition strategy and capital expenditures that will help inform the credibility Although probability assessment of these emissions reductions to occur going forward. 00:51:34.000 --> 00:51:39.000 Thank you, Samuel. So we have still a little bit of time. 00:51:39.000 --> 00:51:42.000 Quite a bit of questions have already been asked through the chat. 00:51:42.000 --> 00:51:48.000 So I think for efficiency reasons, I've tried to address them already, but I'm going to repeat some of them. 00:51:48.000 --> 00:52:07.000 And mention them out loud. Maybe starting with the question on the definition of forward-looking emissions it really depends a bit on the context. But what is maybe helpful to understand is if you think about the regular inventory accounting These are all emissions 00:52:07.000 --> 00:52:15.000 Reported by a reporting company that are related to the activities that that reporting company Thus, in the reporting year. 00:52:15.000 --> 00:52:27.000 That might actually include emissions from the past, for example, when they buy raw materials that have been already produced last year or of the future when they sell in this year a product that actually uses energy over the full lifetime. 00:52:27.000 --> 00:52:36.000 But it does not capture maybe activities that happen next year as a result of an investment. So for example, in the expected emission reduction. 00:52:36.000 --> 00:52:55.000 The forward-looking piece here is that an investment that is made today in a company that is then As part of that committing to reducing its emissions over time, it would actually reduce their inventory due to, for example, a target that's been set or investments that are made over time. 00:52:55.000 --> 00:53:10.000 Would reduce emissions later in the future that are not yet captured in this year's inventory. So that's the forward looking piece that is often missing in inventory accounting, which only looks at activities in a particular year. 00:53:10.000 --> 00:53:22.000 I hope that helped clarify that a little bit, but we can also look through the consultation after consultation if that should be further clarified in the standard. 00:53:22.000 --> 00:53:44.000 Let's see. There was a question about emission reductions versus avoided emissions in the context of a farm that is stopping fertilizer. It's actually an interesting case because it it helps when addressing and answering this it helps actually to clarify the difference. So first of all, when we speak about avoided emissions. 00:53:44.000 --> 00:54:02.000 A speaker remember we're always speaking about financed avoided emissions. So the voided emissions from individual companies is something that actually is not PICAS remit is more for parties like the Greenhouse Gas Protocol or or the World Business Council for Sustainable Development. We look at attributing those emissions to the financial institution. 00:54:02.000 --> 00:54:19.000 But in this particular case, if the loan of investment is actually made to the farmer itself this farmer would just reduce its emission because it's not using using the fertilizer anymore. So the reductions would already show up in the regular inventory 00:54:19.000 --> 00:54:36.000 As a reduction year on year off there. Farming emissions. However, if the loan would be provided to the to a service provider that sells a solution I don't know how, but that actually helps reduce the farmer that helps the pharma to reduce its fertilizer use 00:54:36.000 --> 00:54:53.000 Then this is something that would not be captured in the inventory, your finance mission inventory, because maybe you're actually providing a loan to somebody that produces a product that has emissions associated with it But the result the reduction of the fertilizer use is actually 00:54:53.000 --> 00:55:00.000 Showing up in another value chain, the value chain of the farmer. In that case, it might be appropriate to report avoided emissions. 00:55:00.000 --> 00:55:07.000 Financing for the emissions in this case. So it really depends on the situation. 00:55:07.000 --> 00:55:19.000 Sam. And Samuel also looking at you, if you've spotted already a question in the chat that is new that you think you could address quickly. 00:55:19.000 --> 00:55:36.000 Yeah, I think just briefly, I saw one question coming in about the methodology for multilateral development banks and the similarities to some of the PKF methodologies. And I think especially the option two for the expected emission reductions, so the expected avoided emissions 00:55:36.000 --> 00:55:42.000 Is quite similar to indeed some of the work done under the IFI technical working group on greenhouse gas accounting. 00:55:42.000 --> 00:55:56.000 Which is leveraged by MDBs. And of course, PCAP then adds an attribution factor on top. But I do see many synergies. So I think it would be great indeed to hear feedback also from Users of those methodologies to see 00:55:56.000 --> 00:56:02.000 Whether to what extent the bigger methodology is useful for them and whether refinements are necessary. 00:56:02.000 --> 00:56:12.000 For them to be able to leverage the PKF method. 00:56:12.000 --> 00:56:28.000 I think from my side, I saw one question about the possibility of applying a 20% haircut in the context of green bonds for the use of proceeds calculation. 00:56:28.000 --> 00:56:45.000 So maybe Sam could complement, but the short answer is that This will not be possible given the fact that the focus is very much on the evidence So it is available based on the projects that are being funded. 00:56:45.000 --> 00:57:05.000 So if it turns out that these projects do have when estimating these emissions or we're getting the reported data from issuers, there may well be 20% below shows emissions, but applying a blank calculation to all these projects is not recommended 00:57:05.000 --> 00:57:30.000 Given the diversity of these projects and the emission profiles of real estate green building financed by a REIT will be materially different from a wind farm funded by the utility that this 20% would not essentially be consistent with greenhouse gas accounting principles. 00:57:30.000 --> 00:57:34.000 Yeah, I agree with that statement. I think it has been discussed in the working group. 00:57:34.000 --> 00:57:46.000 Whether there's just more standard approach, but I think it's really relevant that when using a more specific numbers, there's some evidence below the assumptions made. 00:57:46.000 --> 00:57:57.000 Given we're close to the end, we've tried to address most questions already in the chat and we want to spend a few more minutes on allowing you to submit your feedback. So I'm handing back to Madelena. 00:57:57.000 --> 00:58:04.000 But please reach out to us through the info ad mailbox if you have any further questions. 00:58:04.000 --> 00:58:05.000 Lena. 00:58:05.000 --> 00:58:11.000 Yeah, thank you, Casper. Thank you, Sam and Samuel, for the great presentation. And indeed, like Casper said. 00:58:11.000 --> 00:58:17.000 If you still have questions after the session, please send us an email and we'll try to get back to you. 00:58:17.000 --> 00:58:24.000 But obviously we would love to now get your feedback on what we discussed today. 00:58:24.000 --> 00:58:30.000 And I think it's just as important now to hear from the wider financial institutions group and stakeholder groups. 00:58:30.000 --> 00:58:35.000 So the consultation is open until the end of February, until the 28th. 00:58:35.000 --> 00:58:43.000 And you will find all relevant information on the PCAP website. So you will find both documents for Part A and Part C. 00:58:43.000 --> 00:58:56.000 Obviously, today we focused on part a day which you can read and then there's surveys also for part A and for part which you can respond to with your feedback all of those in the PGAF website. 00:58:56.000 --> 00:59:07.000 There's also an offline version of these consultation questions on the website So you can already prepare ahead of time your responses so you don't have to go through the survey and go through all of the questions. 00:59:07.000 --> 00:59:12.000 You'll find in this PDF. All of the questions from the survey. 00:59:12.000 --> 00:59:20.000 And yeah, like I said, the recording will be up on the PCAF website a bit after the session. 00:59:20.000 --> 00:59:25.000 And you can always reach us at info at carbonaccounting Financials. 00:59:25.000 --> 00:59:30.000 Yeah, and with that, I would like to thank all of you for joining us today. 00:59:30.000 --> 00:59:37.000 And I wish you all a pleasant day. Thank you, everyone.