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PCAF's New Guidance for Accounting GHGe in Real Estate Sector

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Real estate drives approximately 40% of global carbon emissions. A built asset’s overall GHG footprint consists of operational and embodied carbon emissions, and these emissions occur throughout the whole life cycle of the building.

After public consultation, PCAF (Partnership for Carbon Accounting Financials), CRREM (Carbon Risk Real Estate Monitor), and GRESB (Global ESG Benchmark for Real Assets) have collaborated to release the harmonized technical guidance for the financial industry on “Accounting and Reporting of GHG emissions from Real Estate Operations.”

The Partnership for Carbon Accounting Financials (PCAF) is a global, industry-led initiative of financial institutions that work together to develop and implement a harmonized approach to assess and disclose the greenhouse gas (GHG) emissions associated with loans and investments, known as financed emissions. The Carbon Risk Real Estate Monitor (CRREM) initiative has derived decarbonization pathways that translate the ambitions of the Paris Agreement (to limit global warming to 1.5°C by the end of the century) into regionally- and property-type-specific trajectories against which real estate assets and portfolios can benchmark themselves. Mission-driven and investor-led, GRESB is the environmental, social, and governance (ESG) benchmark for real assets.

Embodied carbon emissions can be defined as the total GHG emissions generated to produce, maintain, and dispose of a built asset. The upstream embodied carbon (A1-A5) of existing buildings can generally be regarded as similar to “sunk costs” in economics. That is, carbon that is already locked in the building envelope and carbon that has been released in all upstream activities that led to building construction have already been released and are out of range of incentivized reduction. Therefore, the focus of GHG emission reductions in operation is the in-use phase. According to EN 15978, operational carbon emissions are those caused by the energy consumed by building-integrated technical systems during the operation of the building. Operational carbon emissions include heating, cooling, ventilation, lighting, cooking, IT and equipment, and, in some cases, fugitive emissions.

While the PCAF Standard focuses on reporting emissions related to loans and investments to commercial real estate in scope 3 (category 15), some investments can also occur in scopes 1 and 2, including direct investments and joint ventures. Emissions from real estate can also be reported under scope 3 (category 13), emissions from leased assets, in specific situations.

Scope 3 Category 13: Downstream leased assets: This category includes emissions from the operation of assets that are owned by the reporting company (acting as the lessor) and leased to other entities in the reporting year. This category is applicable to lessors (i.e., companies that receive payments from lessees who have the right to use an asset through a contract with the owner of the asset). If a company (i.e., lessor) is reporting scope 3 emissions from downstream leased assets, these include the scope 1 and scope 2 emissions of lessees:

Options for financial institutions to finance real estate and resulting scope attribution:

For real estate investment trusts (REITs), if the use of proceeds is known, the fund itself should account emissions according to asset-class Commercial Real Estate, and investors to the fund should account for their emissions proportionally according to their share. When the use of proceeds is unknown, then the money invested or loaned to a REIT would be classified under the Listed Equity & Corporate Bonds asset class if publicly traded, or under the Business Loans & Unlisted Equity asset class if they are not publicly traded.

Under the operational control approach, if the asset is leased under a finance or capital lease, all emissions (base-building, shared services, common areas, tenant spaces, etc.) are attributed to the tenant and are to be classified as scope 3 by the lessor. If, however, an operating lease is used, the delineation of emissions scopes will depend on the allocation of “operational control”. The GHG Protocol defines “operational control” as A company having operational control over an operation if the former or one of its subsidiaries has the full authority to introduce and implement its operating policies at the operation.

The whole-building approach is aligned with the GHG Protocol Scope 3 Standard pertaining to the investment-specific method of reporting investments, in which investors should collect:

• Scope1 and scope2 emissions of the investee company

• The investor’s proportional share in the investee

• If significant, companies should also collect scope 3 emissions of the investee company

Any emissions from the building that are categorized as scope 3 are deemed significant and are to be included in the accounting. This is also aligned with the update to the TCFD recommendations that organizations in all sectors “include disclosure of relevant, material categories of scope 3 emissions”.

The portfolio-level GHG intensity shall be calculated based on the formula below:

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