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Michael Ridley

Michael Ridley

Executive Director, MSCI Research

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Total Portfolio Footprinting to Transform Green-Bond Emission Accounting

  • One of the key attractions of green bonds is the green projects that they finance. Yet information on these projects is highly qualitative, making it hard to compare green bonds.
  • A new financed-emissions metric, based on methodology from the Partnership for Carbon Accounting Financials, can help fill this void, providing a quantitative basis to compare green and non-green bonds.
  • This financed-emission estimate can be considered alongside yield, duration and credit quality when making relative-value and investment decisions for bond portfolios.

Green bonds have gained a lot of traction because investors face the whole credit quality of the issuing entity, while also knowing that these bonds finance or refinance environmental projects.

The challenge for investors is that while a green bond’s “use of proceeds” is central to its appeal, information about these projects is often highly qualitative and not detailed enough in terms of climate metrics to make fully informed investment decisions. Any second-party opinion that accompanies a new green bond typically states whether the bond aligns with the International Capital Markets Association’s (ICMA) Green Bond Principles, but it often offers only limited insight into the bond's likely environmental impact.1

Financed emissions

Security-level financed emission estimates are likely to change this. The Partnership for Carbon Accounting Financials (PCAF)2 set the ball rolling when it published a greenhouse-gas (GHG) accounting standard for the financial industry in 2020.3 This allows banks and asset managers to estimate the financed emissions associated with the securities they own and use this as a baseline for their portfolios’ carbon emissions. PCAF has also consulted on a separate methodology for calculating green-bond emissions, distinct from the non-green-bond method.4

To dig deeper into this analysis, we used the MSCI Total Portfolio Footprinting (TPF) methodology, which builds on PCAF’s initiative and can be used to calculate security-level financed emissions for nine asset classes.5 Within fixed income, TPF estimates the financed emissions associated with a bond in terms of tonnes of CO2-equivalent emissions per USD 1 million invested (tCO2e/USD million). While TPF uses different methods to estimate the financed emissions of green and non-green bonds,6 a quantitative comparison between the two is now feasible, including for bonds issued by the same firm. In addition, two green bonds will have different financed-emissions estimates if they fund different combinations of green projects. This is because under TPF, the green-bond-financed emissions are calculated at a project level rather than at issuer level.

To illustrate the difference in financed emissions between green and non-green bonds from the same firm, the exhibit below presents estimates of Scope 1 and 2 financed emissions for two green bonds, along with the non-green bonds, issued by European energy firm Engie SA. Engie was chosen as an example because it issues both types of bonds and because its green bonds finance different types of green projects.7

Not surprisingly, the estimated emissions for Engie’s green bonds are significantly less than those of its non-green bonds (434.2 tCO2e/USD million). But even the green bonds have notably different financed-emissions estimates: 16.5 tCO2e/USD million for the 2024 bond compared to 10.2 tCO2e/USD million for the 2032 bond.


Financed-emission estimates for two Engie green bonds and Engie’s non-green bonds

The changing weight of Big Tech in the U.S. equity market.

Different methods are used to estimate the financed emissions of the green and non-green bonds presented in this exhibit. Data as of Nov. 11, 2022. Source: Refinitiv Eikon, MSCI ESG Research.


To show how this metric can be used to distinguish between green bonds from different issuers, we next compared EUR-denominated green bonds issued by four investment-grade energy and industrial firms.8 These firms were chosen as they are frequent bond issuers and they issue both green and non-green bonds. The four green bonds were chosen because they are all of a substantial size (above EUR 400 million). The UPM 2028 and Orsted 2029 bonds have quite similar yields and duration, but there are notable differences in their financed-emissions estimates.


Duration, yield and financed-emission estimates of four investment-grade EUR-denominated green bonds

The changing weight of Big Tech in the U.S. equity market.

The size of each bubble reflects the emissions estimate associated with a USD 1 million holding of each bond. Data as of Nov. 11, 2022. Source: Refinitiv Eikon, MSCI ESG Research.


Identifying bonds’ environmental impact

Widespread availability of security-level financed-emissions estimates may allow investors not just to compare green bonds with conventional issues, but to systematically consider financed emissions alongside yield, duration and credit quality when making relative-value decisions. Another option is to modify this approach to develop an “avoided emissions” estimate.

TPF security-level financed-emissions estimates can provide quantitative insights into the relative “greenness” of bonds. This metric may change how investors think about bond-market relative value, in particular allowing them to better measure bonds’ environmental impact.

Financed-emissions estimates may also encourage green-bond issuers to report on or offer their own estimate of their bonds’ financed emissions, providing further useful inputs for investors’ decision-making.



1“Green Bond Principles: Voluntary Process Guidelines for Issuing Green Bonds.” ICMA, June 2021.

2Created in 2015, PCAF develops open-source ways to measure all asset class GHG emissions.

3“The Global GHG Accounting & Reporting Standard for the Financial Industry.” PCAF, Nov. 18, 2020

4“New methods for public consultation: For financial institutions measuring and reporting scope 3 category 15 emissions.” PCAF, November 2021.

5Green bonds state what type of green project they will fund. MSCI groups these projects into seven categories, estimating distinct emission factors for each, in tCO2e/USD million terms. When a green bond funds more than one project type, MSCI assumes allocation is in line with the Bloomberg MSCI Green Bond Index: alternative energy 33%, climate adaptation 3%, energy efficiency 23%, green buildings 27%, pollution prevention 4%, sustainable water 7% and other green 3%. If a green bond allocates to alternative energy and pollution prevention, TPF assumes (33/33+4) = 89% of bond proceeds go to energy and (4/33+4) = 11% to pollution prevention.

Financed emissions for non-green bonds are a product of a firm’s annual carbon-equivalent emissions and the security’s attribution factor. The attribution factor is the proportion to which the security represents the overall financing of the firm. So, if a firm emits 10 tCO2e/year and a bond’s book value represents one-fifth of the firm’s enterprise value plus cash (EVIC), the bond is responsible for 2 tCO2e/year. Financed emissions = attribution factor x emissions; Attribution factor = outstanding investment amount/(debt + equity). See “Total Portfolio Footprinting Methodology.” MSCI ESG Research, July 2022.

6Please see the section on the financed emissions methodology below for further detail.

7Engie was chosen an illustrative example and is not meant to generally represent green-bond issuers.

8Engie, Orsted A/S, UPM-Kymmene Oyj and Verbund AG were chosen as illustrative examples and are not meant to generally represent green-bond issuers.



Further Reading

MSCI Total Portfolio Footprinting

Measuring Climate Impact with Total-Portfolio Carbon Footprinting