Improving Portfolio Alignment and Financed Emissions Metrics

Blake Goud
5 min readSep 15, 2022


By Dr. Eman Tabet, Research Associate, RFI Foundation

The lack of transparency around financial institutions’ Net Zero targets and disclosures for portfolio alignment leaves a big opportunity for greenwashing. This could be addressed with better guidance on portfolio alignment metrics, as contained in a recent GFANZ report.

  • Financial institutions are being given substantial leeway on how to define their alignment with national Net Zero emissions targets
  • This presents a loophole that could enable greenwashing unless more clarity is required on what makes for a credible Net Zero target or disclosure
  • Portfolio alignment metrics, the subject of a report from GFANZ, are particularly challenging because different metrics are better suited to different circumstances, they often rely on estimates of emissions, and they take different types of transition planning into account

With little standardization of Net Zero metrics, financial institutions are being forced to make their own decisions regarding what methodologies to use in reporting their transition activities. The lack of established guidelines has left many Net Zero targets opaque and unable to be compared, which presents significant greenwashing risk.

In an effort to harmonize portfolio alignment measurements, the Glasgow Financial Alliance for Net Zero (GFANZ) has published a report highlighting various portfolio alignment metrics, the divergence in applications between them, and the various implications for how they are used. The report provides useful guidance for comparing methodologies, which can help financial institutions frame their ‘best practices’ relating to Net Zero disclosures.

The choice of portfolio alignment metric is instrumental, as this is used to assess the institution’s efforts and trajectory towards their Net Zero targets, to decide on what activities to invest/divest in, and as inputs for identifying engagement targets. The report summarizes a framework for helping financial institutions to understand the current landscape of portfolio alignment metrics consisting of 3 overarching steps:

  1. Translating scenario-based carbon budgets into benchmarks
  2. Assessing counterparty-level alignment
  3. Assessing portfolio-level alignment.

The major barrier across all three steps is the methodology for achieving them. The multifaceted nature of not only portfolio alignment metrics and assessment techniques but also the emissions estimates that serve as its inputs are a significant methodological barrier. These challenges make harmonization between different methods nearly impossible, with each institution having varying exposures and uses for its and its counterparties’ different metrics.

Estimating financed emissions and forwards-looking trajectories for emissions sources remains one of the biggest challenges in generating the inputs needed for most portfolio alignment metrics. Financial institutions and other organizations have proposed various methodologies, although a portfolio alignment metric can only be as good as the underlying GHG estimates, the quality and comparability of which still vary widely.

There are two primary methodologies of estimating emissions: the bottom-up approach, and the top-down. The bottom-up approach estimates emissions from all individual sources and aggregates them to obtain the total emissions. Calculating the emissions associated with each physical activity indicator and their associated emissions requires processing a large amount of data.

On the other hand, a top-down approach down-scales emissions data and allocated patterns related to its source. For example, to estimate the emissions produced by a car, a bottom-up approach would collect data on vehicle fleet distribution and characterization, driving patterns, traffic counts and other data. A top-down approach would use data of total country fuel consumption by type, vehicle type composition, and emission factors in fuel, which would be disaggregated and combined to arrive at the relative emissions concentration of different companies. The top-down approach is usually used to fill the gaps in the bottom-up approach created by its lack of data and resource-intensive process for measurement.

A common truth that is shared across all metrics is that they are mostly ‘estimated’, because validated data are not collected by every company in every country, and not all of what is collected is comparable or stored in easily accessible places. Furthermore, since we can’t create a model that fully and accurately reflects the economy as a whole, nor one that fully represents all nuances, the result is that each type of estimate will be better or worse for different purposes. Once that reality is accepted, it becomes crucial to have rigorous assumptions in place and to be transparent about the basis on which they were determined, to clarify and validate the metrics we do use.

There are limitations — and advantages — to all methodologies. To this end, the GFANZ recommends a dashboard approach that merges the perks of the various methods, echoing a similar conclusion from RFI’s research. The top-down approach used might not give granular data, but does give a consistent and comparable outline of the interconnections in financed emissions across emerging markets (where data are relatively scarce).

Extending those results to include forward-looking estimates would enable financial institutions to analyze concentrations of their exposures (direct and indirect) and trajectories with respect to their climate targets. But the challenge goes beyond methodological decisions. While the inconsistency between portfolio alignment practices is expected, as various initiatives and standards are continuously being developed to enhance transparency and impact, harmonizing those efforts into a single standard is a natural step that is bound to take time.

The bigger concern is having those inconsistencies used as loopholes leveraged by financial institutions to disguise the dichotomy between their claims and actions. Disclosure mandates are currently very limited, but it is the duty of financial institutions that commit to Net Zero targets to ensure that the information disclosed can be used by others. Users of Net Zero disclosures rely on them to analyze and deduce a fair comparison between efforts of various institutions and their trajectories without needing to further speculate or investigate how the institution arrived at its alignment conclusions.

Another challenge that financial institutions often find themselves impacted by is the perceived tension between economic growth and environment conservation. Developing the infrastructure for transition from business-as-usual to low-carbon economies such as changing its energy mix and policies, and infrastructure needed for adaptation, takes time to develop. Until that transition is complete, financial institutions, including those that have committed to Net Zero targets, will continue to manage their financing exposures to various types of fossil fuel-related sectors or those dependent on high-emitting activities.

The role of the GFANZ, as the largest assembly of Net Zero-committed financial institutions, is to set the standard or transparency. This is needed for financial institutions as they outline their commitments, estimates, and underlying assumptions they make to enable users of their disclosures to determine whether they include comparable estimates with other sources of data. The data provided by financial institutions to stakeholders, including their investors, provide the foundation for asset owner engagement with financial institutions about their alignment or misalignment with national or voluntary targets.

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Blake Goud

Promoting adoption of responsible finance in Islamic markets & Islamic finance. CEO @RFIFoundation.