As climate metrics become core to portfolio construction, institutional investors are asking
Why are emissions attributed to the debt issuer, rather than the specific project the bond finances?
If capital is raised for a solar farm or international aid, linking those emissions to a corporate or sovereign balance sheet can feel counterintuitive. However, the answer lies in the fundamental nature of financial risk, data scalability, and the ‘follow the money’ principle.
The PCAF ‘data hierarchy’: Asset vs. entity
Under PCAF, there is a distinction between General Purpose and Use of Proceeds (UoP) instruments. While PCAF allows project-level attribution in limited cases, our methodology consistently applies issuer-based attribution, in line with how risk and comparability function in institutional portfolios.
Risk follows the counterparty
Transition risks such as carbon pricing, regulatory shifts, and fiscal stress materialise at the entity level. Even if a bond is labelled ‘Green,’ the investor’s credit risk is tied to the issuer’s balance sheet. If the parent entity's broader business model is threatened by the transition, the bondholder bears that risk. Bondholders hold exposure to the issuer's ability to manage transition, not just the success of a single project.
Data scalability & comparability
Tracing emissions for individual projects is currently unscalable, given that data - even when available - is often estimated or inconsistent. By prioritising issuer-level attribution, FCD ensures comparability and repeatability across regions and asset classes.
Consistency across the capital stack
Whether you hold a company’s equity or its debt, you are exposed to the same underlying emissions. FCD treats these consistently to ensure comparability at a portfolio level. However, FCD differentiates between equity and debt transition risk by accounting for the capital stack and maturity dates of the debt security.
What this means for corporates
For corporate debt, emissions are attributed using Enterprise Value Including Cash (EVIC). If an investor has $200m invested in both debt and equity of a company, the financed emissions are identical for the two holdings.
What this means for Sovereigns
Sovereign bonds are attributed using national territorial inventories relative to a country's economic output. Instead of EVIC, sovereign bonds are attributed using the country’s PPP-adjusted GDP.
As noted by PCAF, extending this methodology to sub-sovereign and municipal counterparties (cities, states, or regions) remains a significant challenge. Unlike national governments, these entities are not directly subject to international GHG inventory standards (like the UNFCCC).
We currently treat this as a subset of sovereign bonds, and attribute emissions to the country of origin.
Precision vs. consistency: The trade-off
There will always be cases where a granular, project-based approach feels appealing. However, for most institutional portfolios, those cases are immaterial at the total portfolio level and often data-constrained, making them difficult to validate.
We favour transparency and scalability over bespoke precision. However, if required or requested, we can override emissions or provide custom modelling for material bond holdings.
