Climate accounting – our work in practice

As part of its investment process, Finnfund assesses the climate effects of every potential investment prior to an investment decision.

In addition to assessing the climate effects of every investment, Finnfund also assesses investments against the framework of the Paris Agreement.

Prior to the investment decision, as part of the due diligence process, Finnfund assesses the scope 1, Scope 2 and upstream Scope 3 climate effects of every potential investment. In other words, Finnfund takes into account the direct and indirect emissions of each company’s production (Scope 1), energy consumption (Scope 2) and purchased services (upstream Scope 3).  Downstream Scope 3 emissions are only considered if Finnfund invests in a high emission intensity sector, which has major scope 3 downstream emissions.

Finnfund’s climate accounting is based on the GHG Protocol, and Partnership for Carbon Accounting Financials (PCAF). Finnfund is a signatory member of PCAF, which it joined in April 2022.

Climate effects are attributed to Finnfund according to the PCAF standard.  Based on these rules, climate effects are reported only for the time period when Finnfund is actually financing an investment. If, for instance, Finnfund’s financing share in a forestry company that removes carbon from the atmosphere decline (a loan is partly repaid, for example), 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 we do not deduct possible carbon offsets from our companies’ accounted emissions. While Finnfund does not recognise compensation or carbon offsets as part of its portfolio emissions or removals, in order to increase reporting transparency, Finnfund collects data on carbon credits sold by its forestry investments, and carbon credits bought by all investments, and discloses this information as part of its annual report.

Finnfund uses primary emissions data or energy intensity data, whenever it available, to assess investments’ emissions. When such data is not available and an investment is not considered to have a high climate effect, Finnfund uses the Joint Impact Model (JIM) to estimate emissions; its input / output model takes into account emission factors per million euros of revenue of certain sectors and countries/regions. In line with Finnfund’s conservative approach to climate accounting, the JIM model over- rather than underestimates an investment’s emissions.

Investments which are considered to have high climate effects, 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 a GHG accounting tool which uses reported primary emission or energy data.

The sectors with high climate effects include e.g.

For companies operating in the renewable energy sector and/or contributing to increased energy efficiency, Finnfund assesses avoided emissions as part of its investment decision process.

For avoided emissions, Finnfund follows the International Financial Institutions Technical Working Group (IFI TWG) on greenhouse gas accounting instructions.

The avoided emissions of grid connected projects are accounted by using the IFI TWG grid emission factors as a baseline. For energy efficiency projects, a project specific baseline is used according to IFI TWG instructions. Avoided emissions are attributed according to the PCAF.

For companies operating in sustainable forestry, Finnfund assess emissions removals as part if its investment decision process. Removals are accounted using the publicly available FRESCOS tool, which Finnfund developed together with fellow development financiers and AFRY, a consultancy. The FRESCOS 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.

Finnfund accounts, monitors, reports and attributes the climate effects of every investment during the entire investment cycle on an annual basis.

When monitoring companies’ emissions, Finnfund uses primary emissions data or energy intensity data, whenever it available. When such data is not available, Finnfund uses the Joint Impact Model (JIM) to estimate emissions.

As the model is based on revenue / emission factors, the emissions generated during the construction period are excluded.

Finnfund requires companies with high emission levels to conduct carbon accounting. If a company is not able to carry out the accounting by themselves, Finnfund will account the carbon footprint with the GHG emission accounting tool from the energy use data provided by the company.

Finnfund continues to account and monitor avoided missions of companies operating in the renewable energy sector and / or contributing to increased energy efficiency.

Finnfund continues to account and monitor carbon removals of 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.

Some forestry companies in Finnfund’s portfolio produce and sell harvested wood products. This wood product stock is accounted by Finnfund as a carbon removal; the question of whether this stock is also part of a third party’s GHG inventory is currently being discussed.

Finnfund closely follows the development of the GHG protocol land sector and removals guidance and is willing to develop further our approach in the future if necessary.

Finnfund also accounts its portfolio’s net climate effects annually and publishes these results in our Annual Review.

Finnfund’s carbon balance is calculated by deducting the annual carbon removals from annual carbon emissions of its portfolio.

Finnfund does not include avoided emissions or carbon credits as part of its carbon balance. The assessment of avoided emissions is based on a scenario analysis and does not represent an absolute effect; hence they are not taken into account in the carbon balance. Carbon credits are not absolute effects either, and therefore these are not taken account on either side of the balance. Both avoided emissions and carbon credits bought / sold are, however, reported to increase transparency, as per international best practice.