When the Universities Superannuation Scheme (USS) published its climate report this week, it insisted that it “treat[s] the rapid pace of reduction in emissions from the Scheme’s assets with caution”.
The report reveals that USS’s financed emissions – the amount of greenhouse gases emitted for each pound (£) it invests – have continued to fall, but that “lower emissions intensity for the portfolio does not reflect the risk from the climate transition, or physical climate risk”.
Growing suspicion
Suspicion about using financed emissions as a core metric is spreading among the asset owner community.
Claire Curtin, head of sustainability at the Pension Protection Fund (PPF), says that five years ago it was arguably the only thing available to those wanting to understand and communicate their portfolio emissions, but its limitations are becoming clear.
“2025 was the first time that a lot of investors had interim targets to take stock of,” she tells IPE.
“Most of us hit those targets, but emissions are still going up globally, so it’s clearly not the right way to demonstrate contribution to real-world outcomes”.
Fellow UK fund Railpen published its climate report this week, too, stating that its trustees believe “it is important that investors’ emissions reductions targets are driven as far as possible by activities that lead to emissions reductions in the real world, as opposed to changes in portfolio emissions driven by the act of one investor selling investments to another investor”, and that the fund pursues its climate targets on this basis.
Adam Gillett, head of sustainable investment at Railpen, told IPE that financed emissions are also a poor measure of climate risk and investment opportunity, “so we won’t prioritise these as inputs into capital allocation decisions”.
The challenges of financed emissions
“Financed emissions are a useful starting point, but they fall short as a standalone measure of an investor’s climate performance progress,” says David Bokern, vice president of climate risk research at MSCI.
“At their core, financed emissions are driven by two main factors: the attribution weight an investor holds in a given asset, and the emissions of that asset itself.”
That combination drives the disconnect between portfolio decarbonisation and real-world emissions that UK asset owners have flagged, but it can also make financed emissions calculations sensitive to market movements that have nothing at all to do with carbon.
“As asset prices fluctuate, so do financed emissions numbers, even if nothing has changed in the underlying business operations or emissions trajectories of portfolio companies,” explains Bokern.
“A rising stock price that disproportionately increases the financing share of an asset in a carbon-intensive sector will mechanically increase an investor’s financed emissions. A market downturn may reduce them, entirely independent of any decarbonisation effect.”
Curtin says data providers are getting better at providing attribution analysis, which helps asset owners understand the ultimate reasons for shifts in their financed emissions, but there is still work to be done.
Financed emissions approaches have also come under fire for the unreliability of their data.
“The indicator is still to a large degree estimated, so you’re at the whim of estimation models – and even when a company reports a number they’ve often estimated it themselves,” says Jakob Thomӓ, chief executive officer of Theia Finance Labs.
“And that’s just the underlying data. There are a whole bunch of methodological issues after that.”
For example, he says, financed emissions assessments can often penalise investments into companies that deliver green products and services, because their emissions are growing as they scale production. They also encourage shifts away from particular sectors with high-emitting business models.
According to Thomӓ, investors that use financed emissions as the basis for target-setting – rather than just monitoring their portfolios – run the risk of “violating fiduciary duty” because “there is neither an impact nor a risk case” for the approach.
Alternative indicators
Curtin believes sustainable finance specialists “need to give ourselves more permission to change our minds effectively” when it comes to these kinds of technical decisions.
“We’re not always going to get it right the first time around,” she says.
“We need to keep asking ourselves what we’re trying to do, and moving closer to being able to do that. And if the available metrics aren’t working, then it’s time to start shifting to something different.”
PPF and Railpen are both keen to use more forward-looking indicators that have clearer links with real-world change and investment objectives.
“Our strongest emphasis is on transition risk, physical risk, and systemic climate risk, because these are the factors most closely linked to long-term investment outcomes,” says Gillett.
Austria’s Green Finance Alliance – a government-backed consortium of financial institutions – has come up with an alternative approach which Thomӓ describes as “a radically different way to think about emissions accounting for investors”.
As opposed to dividing a company’s emissions by an attribution factor to establish how much each investor should take responsibility for, the Indicators for Portfolio-related Emission Performance (I-PEPs) focus on each asset’s decarbonisation level.
“I-PEPs are ex-post indicators measuring the year-on-year change in emissions performance of assets,” explained Frédéric Ducoulombier, director of climate regulation and policies programme at EDHEC Climate Institute, in a note on the topic published last month.
“As a general rule, [they] are computed by first measuring, for each portfolio position, the year-on-year relative change in the relevant emissions metric and then aggregating these position-level performance measures using the relevant weighting scheme.”
For Bokern, clearer attribution, market-adjustment and forward-looking metrics will all be essential for the future of carbon accounting.
“Financed emissions remain a relevant proxy metric for transition risk management, given the growing regulatory and market price on carbon,” he says.
“But as a measure of climate performance, they’re just one piece of the puzzle.”
