As the pathway to global net-zero targets narrows, financial institutions face increasing emissions reporting requirements.1 Under new regulations, Private Equity firms are being asked to assess and report their GHG emissions inventory, and to increase the specificity and transparency of their disclosures. Determining what data to collect and where to source it can be a challenge.
To aid reporting efforts, the CDP (Carbon Disclosure Project) and PCAF (Partnership for Carbon Accounting Financials) have issued standards for collecting and reporting emissions data.
This primer explains how PE groups can use PCAF and CDP scoring to start reporting and improve on data quality over time.
The Carbon Disclosure Project (CDP) and the Partnership for Carbon Accounting Financials (PCAF) have developed complementary reporting standards that enable financial institutions to disclose and reduce their emissions.
CDP: a leading cross-sector standard-setter, working with governments, organisations and investors to drive environmental disclosure on climate change, water and deforestation.
PCAF: an industry-led initiative working to enable financial institutions to measure and disclose the greenhouse gas (GHG) emissions of their loans and investments.
Since 2022, the two standard-setters have aligned their data quality scores to simplify data disclosure processes for financial institutions.
The data quality scores evaluate âhow well-suited a data set is to enable financial institutions to begin the journey to decarbonisationâ - CDP and PCAF. (2023). The importance of data quality in the journey toward decarbonisation.
Data is scored on two axes: the level of granularity in the reported data and whether it has been verified by an external auditor.
| 1. Reported emissions: Reporting portfolio company emissions, using reports or primary data collected by the portfolio companies themselves using a method aligned with the GHG Protocol. This approach provides the highest level of accuracy and granularity. |
| 2. Physical activity-based emissions: Estimating portfolio company emissions using physical activity data and industry-specific emissions factors. This approach provides the next level of granularity through facility-level assumptions when primary data is unavailable. |
| 3. Economic activity-based emissions: Estimating portfolio company emissions using broader economic averages. This approach provides high-level approximations when primary or physical activity data is unavailable. |
âLimited data is often the main challenge in calculating financed emissions. However,
data limitations should not deter financial institutions from starting their GHG
accounting journeys.â- PCAF Global GHG Standard 2022.
Start with the data you have: Most teams start with low scores because comprehensive datasets take time to build. The Standards encourage using proxy data in a first inventory, to fill gaps and identify the key hotspots to inform the focus of your sustainability strategy.
Make strategic improvements over time: Collecting primary data is expensive and time-consuming. Use an initial inventory, with proxy data sets, to identify the emissions hotspots where you should start collecting primary data.
Set foundations for subsequent reporting: The quality of the data determines the certainty of the calculation - and of subsequent climate action. Recognising this, PCAF and CDP work with other standard-setters to align efforts across the reporting lifecycle. By applying PCAF and CDP scoring methodologies, you create a robust data foundation for sustainability reporting.
1. Determine portfolio coverage: Define emissions inventory boundary based on organisational materiality and data availability.
2. Request company data: Engage portfolio companies to provide available emissions and activity data.
3. Map calculation pathways: Assess current information availability against methodologies. Financed emissions should preferably be calculated using reported emissions disclosed by the investee (Pathway 1). Where this data is unavailable, firms can use activity data (Pathway 2) or economic data (Pathway 3) to calculate estimated emissions.
4. Generate initial inventory: Following appropriate pathways, quantify baseline emissions by consolidating at asset and portfolio levels based on equity share.
5. Verify outputs: Conduct third-party assurance to validate GHG inventory. Disclose through CDP: PCAF recommends using annual disclosure through CDP as best practice frequency.
Despite the clear guidance, reporting on financed emissions is a significant data challenge for private equity firms. Many General Partnerships (GPs) have not yet established robust processes for carbon footprinting data collection.â”
Gardenia can help you to locate and prepare the data you need for emissions reporting. Gardeniaâs automated infrastructure is designed to install advanced sustainability tracking and reporting processes to private PE-backed companies.
Lack of Audited Disclosures
We know that most holdings are private companies without public financial disclosures or sustainability reports detailing GHG emissions. Our process minimises the burden on holdings - asking only critical questions to provide verified emissions, and automating the resource-intensive steps.
Investments in a Range of Industries
GHG standards for different industries can make data collection complex. Our experience collecting data from a wide-range of industries helps to minimise the impact of diversity of holdings and ensure that all standards are met.
Complex Attribution Processes
Dynamic shareholding percentages, fund structures and a complex LP network can make attributing emissions to the PE group challenging. Our platform simplifies attribution and provides real-time insights.
Private Equity companies are no longer restricted from reporting their carbon emissions by poor data quality. PCAF and CDP alignment has provided clarity, but collecting and reporting their GHG inventory is still resource-intensive and complex.
Gardenia can help you quantify your emissions baseline, set a data improvement plan, and develop custom integrations to automate the collection of required data.
Aided by AI-driven automation, our platform provides an end-to-end solution for capturing, analysing and reporting emissions data across global portfolios. We can also assist in visualising carbon reduction pathways, and find decarbonisation strategies for both GPs and your holdings.