Climate accounting – our work in practice
Finnfund assesses the climate effects of every investment before the investment decision as well as annually during the investment period. This assessment includes the absolute emissions of the investment, avoided emissions for energy investments, and carbon removals of the forestry projects.
This article summarizes and explains the process and methods for climate effects accounting of Finnfund investments – step by step.
“Finnfund’s carbon accounting stems from our desire to better understand the climate impacts of all our investments, as mitigation of and adaptation to climate change are among the key objectives of Finnfund.”
– Kenneth Söderling, Impact Analyst
1. Preliminary review
As part of its investment process, Finnfund assesses the climate effects of every potential investment prior to the investment decision.
In addition to assessing the climate effects of every investment, Finnfund also assesses the investment against the framework of the Paris Agreement.
1.a) Emission accounting for every investment
Prior to the investment decision, as part of the due diligence process, Finnfund assesses the scope 1, 2 and 3 upstream climate effects of every potential investment. In other words, Finnfund takes into account the direct and indirect emissions of each company’s own production and purchased services (scope 1 and 2, as well as 3 upstream), but not post-production use (scope 3 downstream) during the expected investment period.
Finnfund’s climate accounting is based on GHG Protocol and Partnership for Carbon Accounting Financials (PCAF).
The climate effects are attributed to Finnfund in proportion of its financing share. In other words, Finnfund accounts its share of investment by dividing investment amount from total balance sheet of the investment company. Only the impacts of the investments currently in the portfolio are included. If, for instance, Finnfund’s financing share in a forestry company that removes carbon from atmosphere declined, Finnfund’s reported carbon removals would decline as well, even if the company would continue removing carbon as before
Finnfund follows the principles of absolute accounting which means that Finnfund does not recognize the carbon credits in its accounting, neither on the emissions side nor on the carbon removal side of the carbon balance. Finnfund has begun to collect data on the carbon credits bought and sold by the investments and will also report this publicly in the future.
Finnfund uses Exiobase model for most of the investments but on investments with high climate effects the accounting is based on primary data. The Exiobase input/output model takes into account emission factors per million euros of revenue of certain sector and country/region.
Some investments which are considered to have a higher climate impact, e.g. large investments (>7.5 M€), investments for high emissions sectors (see annex 1), or investments with land conversion (>100 hectares), are accounted with primary emission or energy data.
The sectors with high climate effects include e.g.
- Air transport
- Basic metals
- Building materials
- Chemicals and chemical products
- Coal mining and peat harvesting
- Coke and refined petroleum products
- Electricity, gas and steam supply
- Electric power generation
- Extraction of crude petroleum and natural gas
- Fabricated metal products
- Fertilizer products
- Data centers
- Glass and glass products
- Meat and dairy production
- Mining of metal ores
- Other chemical products
- Other mining and quarrying
- Plastics products
- Pulp, paper and paperboard
- Rubber and plastic products
- Waste collection, treatment and disposal
1.b) Accounting of avoided emissions for renewable energy and energy efficiency investments
For companies operating in renewable energy sector and/or contributing to increased energy efficiency, Finnfund assesses the avoided emissions prior to the investment decision during the expected investment period.
For avoided emissions, Finnfund follows the International Financial Institutions Technical Working Group (IFI TWG) on greenhouse gas accounting instructions. Finnfund accounts the avoided emissions of the renewable energy projects and energy efficiency projects.
The avoided emissions of grid connected projects are accounted by using the IFI TWG grid emission factors as baseline. For energy efficiency projects, a project specific baseline is used according to IFI TWG instructions. These are also attributed according to the PCAF.
1.c) Accounting of carbon removals for forestry investments
For companies operating in sustainable forestry, Finnfund assess the avoided emissions prior to the investment decision during the expected investment period.
The accounting of carbon removals of afforestation and reforestation activities is based on a methodology and carried out by a tool developed together with fellow development financiers and a consultancy Simosol. The methodology is based on IPCC Guidelines for National Greenhouse Gas Inventories: Volume 4 Agriculture, Forestry and Other Land Use (2006).
Finnfund accounts the carbon stock changes of above- and below ground biomass, dead organic matter, harvested wood products and soil. Soil carbon stock changes are based on IPCC default values.
2. Monitoring and reporting
Finnfund continues to account, monitor and report the climate effects of every investment during the entire investment cycle on an annual basis.
2.a) Monitoring the emissions of every investment
Finnfund assesses annually the scope 1, 2 and 3 upstream climate effects of every investment during the investment lifecycle. The climate effects are assessed with input/output models that have country and sector specific emissions factors.
Models are not accurate for company specific accounting but a good and efficient tool for accounting the whole portfolio. Finnfund wants to have a careful approach: the Exiobase model rather overestimates the emissions than underestimates them, and Finnfund is also looking for other efficient ways to estimate the climate effects. As the model is based on revenue/emission factors, the emissions generated during the construction period are excluded.
Finnfund encourages companies with high emission level to conduct carbon accounting. If a company is not able to carry out the accounting by themselves, Finnfund will account the carbon footprint from the energy use data provided by the company.
2.b) Monitoring the avoided emissions
Finnfund continues to account and monitor the avoided missions of the companies operating in the renewable energy sector and/or contributing to increased energy efficiency.
2.c) Monitoring the carbon removals
Finnfund continues to account and monitor the carbon removals of the companies operating in the forestry sector.
Finnfund accounts the annual changes in various carbon stocks, such as above and below ground biomass, dead organic matter, harvested wood products, and soil organic matter.
The harvested wood product stock is only created by the forestry company and then sold. This stock is initially a scope 3 downstream stock which could be argued to belong someone else GHG inventory.
Finnfund closely follows the development of the GHG protocol instructions of forestry GHG inventory, and we are willing to further develop our approach in the future if necessary.
3. Carbon balance: climate effects of Finnfund’s investment portfolio
Finnfund also accounts the portfolio net climate effect annually and the results are published as part of Finnfund’s Annual Review.
The carbon balance is calculated by deducting the annual carbon removals from annual carbon emissions of the portfolio.
Finnfund does not calculate the avoided emissions as part of the carbon balance. The assessment of avoided emissions is based on a scenario analysis and do not represent an absolute effect hence they are not taken into account in the carbon balance.
Interested to know more about our work in practice?
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Kenneth Söderling, Impact Analyst (on leave)
Kaisa Alavuotunki, Head of Impact, tel. +358 41 522 3693, firstname.lastname@example.org