FINANCED EMISSIONS CALCULATION BOUNDARY GAP – LEGAL FRAMEWORK AND JUDICIAL INTERPRETATION IN INDIA

1. INTRODUCTION

Financed Emissions Calculation Boundary Gap refers to inconsistencies, omissions or deficiencies in determining which greenhouse gas emissions must be included when calculating the carbon footprint associated with a financial institution's lending, investment and other financing activities.

Banks, financial institutions, insurance companies and investment managers indirectly contribute to greenhouse gas emissions through their financing relationships with companies, infrastructure projects, industries and other borrowers. These emissions are generally classified as Scope 3, Category 15 (Investments) under the Greenhouse Gas Protocol.

A boundary gap arises when a financial institution excludes certain borrowers, subsidiaries, investment instruments, project-finance exposures or indirect financing relationships without a sufficiently justified methodology.

Such gaps can undermine climate disclosures, create misleading sustainability representations, weaken regulatory compliance and expose financial institutions to potential legal and reputational liability.

In India, financed-emissions calculations are increasingly relevant to environmental, social and governance (ESG) reporting, responsible investment, banking risk management and corporate sustainability disclosures.

2. MEANING AND NATURE OF FINANCED EMISSIONS

Financed emissions represent the greenhouse gas emissions attributable to a financial institution's lending and investment activities.

The principal categories include:

A. CORPORATE LENDING

Emissions associated with loans provided to companies, including their operational Scope 1, Scope 2 and relevant Scope 3 emissions.

B. PROJECT FINANCING

Emissions attributable to financed infrastructure, energy, industrial and transportation projects.

C. EQUITY INVESTMENTS

Emissions attributed to financial institutions through their ownership interests in companies.

D. BOND INVESTMENTS

Emissions associated with corporate bonds and other debt securities held in investment portfolios.

E. INDIRECT FINANCING EXPOSURES

Certain financial products, funds and intermediary arrangements may create additional emissions-accounting considerations depending on the applicable methodology.

3. FINANCED EMISSIONS CALCULATION BOUNDARY GAP

A calculation boundary gap occurs when the institution's reported emissions inventory does not adequately represent the relevant financing activities.

Important gaps include:

Portfolio coverage gap: Certain lending or investment portfolios are excluded without adequate justification.

Subsidiary coverage gap: Emissions of controlled or financed subsidiaries are omitted.

Scope 3 omission: Relevant value-chain emissions of financed companies are excluded.

Project-finance gap: Construction, operation or lifecycle emissions of financed projects are incompletely accounted for.

Data availability gap: Missing borrower information leads to inconsistent estimates or unexplained exclusions.

Asset-class gap: Certain financial instruments are omitted from the calculation.

Temporal boundary gap: Different reporting periods create inconsistencies between financing exposures and emissions data.

Double-counting uncertainty: Emissions are incorrectly duplicated or excluded across financing relationships.

A defensible methodology should disclose the reporting boundary, included asset classes, exclusions, estimation techniques, attribution factors and material data limitations.

4. INTERNATIONAL STANDARDS AND METHODOLOGICAL FRAMEWORK

A. GREENHOUSE GAS PROTOCOL

The GHG Protocol Corporate Value Chain (Scope 3) Standard provides the foundation for reporting value-chain emissions, including Category 15 investments.

B. PCAF STANDARD

The Partnership for Carbon Accounting Financials (PCAF) provides methodologies for measuring and reporting financed emissions across different asset classes.

Its principles address attribution factors, emissions data quality, portfolio coverage and methodological transparency.

C. IFRS S2 CLIMATE-RELATED DISCLOSURES

IFRS S2 establishes climate-related disclosure requirements, including relevant financed-emissions disclosures for applicable financial institutions.

D. TCFD FRAMEWORK

The Task Force on Climate-related Financial Disclosures framework provides guidance on climate governance, strategy, risk management and metrics and targets.

E. BASEL CLIMATE-RISK FRAMEWORK

Basel Committee guidance addresses climate-related financial risks, including governance, risk identification, measurement and management. It does not itself prescribe a universal financed-emissions accounting methodology.

5. INDIAN LEGAL AND REGULATORY FRAMEWORK

A. COMPANIES ACT, 2013

Section 134 requires directors' reports to contain prescribed disclosures and statements.

Section 166 establishes directors' duties, including acting in good faith and promoting the company's objectives.

Section 129 establishes requirements concerning financial statements.

Section 447 addresses punishment for fraud where its statutory elements are established.

Incorrect or misleading sustainability information may create corporate governance and liability concerns depending on the circumstances.

B. SEBI BUSINESS RESPONSIBILITY AND SUSTAINABILITY REPORTING (BRSR)

SEBI's BRSR framework requires applicable listed entities to disclose prescribed environmental, social and governance information.

Relevant disclosure areas include:

Greenhouse gas emissions.

Energy consumption.

Environmental performance.

Climate-related risks.

Sustainability governance.

Reporting methodology and data quality.

C. ENVIRONMENT (PROTECTION) ACT, 1986

Provides the principal statutory framework for environmental protection and pollution control. It may become relevant where financed projects or industrial borrowers violate applicable environmental requirements.

D. NATIONAL GREEN TRIBUNAL ACT, 2010

Provides a specialised mechanism for adjudicating environmental disputes within its statutory jurisdiction and granting environmental relief.

E. RESERVE BANK OF INDIA REGULATORY FRAMEWORK

RBI's climate-risk initiatives and applicable supervisory directions are relevant to how regulated financial institutions identify, assess and manage climate-related financial risks. Financial institutions should distinguish climate-risk management requirements from separate emissions-accounting standards.

6. IMPORTANT JUDICIAL DECISIONS

There is presently no established Indian Supreme Court precedent specifically determining liability for a bank's failure to calculate financed emissions under PCAF or the GHG Protocol. The following decisions provide direct environmental-law principles or analogous corporate governance and disclosure principles.

1. M.K. Ranjitsinh v. Union of India (2024) – Direct Constitutional Climate Authority

The Supreme Court recognised a constitutional right against the adverse effects of climate change, deriving protection from Articles 14 and 21 of the Constitution.

Relevance: Climate-related risks and environmental consequences have constitutional significance. Financial institutions should consider the environmental implications of their financing activities.

2. Vellore Citizens Welfare Forum v. Union of India (1996) – Direct Environmental Authority

The Supreme Court recognised the precautionary principle and polluter-pays principle as essential features of Indian environmental law.

Relevance: Financial institutions financing environmentally harmful projects should incorporate environmental risk assessment into their lending and investment governance.

3. Indian Council for Enviro-Legal Action v. Union of India (1996) – Direct Environmental Authority

The Supreme Court reinforced the polluter-pays principle and the responsibility of polluting industries to bear the costs of environmental damage.

Relevance: Financed-emissions assessments can help financial institutions identify borrowers exposed to substantial environmental liabilities.

4. M.C. Mehta v. Union of India (1987) – Direct Environmental Authority

In the Oleum Gas Leak litigation, the Supreme Court established the principle of absolute liability for enterprises engaged in hazardous or inherently dangerous activities.

Relevance: Financing environmentally hazardous activities requires careful assessment of the underlying environmental and legal risks, although the judgment does not automatically impose absolute liability on lenders.

5. Lafarge Umiam Mining Pvt. Ltd. v. Union of India (2011) – Direct Environmental Authority

The Supreme Court examined environmental governance, sustainable development and the balance between economic activity and environmental protection.

Relevance: Financial institutions should consider environmental approvals, project sustainability and regulatory compliance when assessing project-finance exposure.

6. Alembic Pharmaceuticals Ltd. v. Rohit Prajapati (2020) – Direct Environmental Authority

The Supreme Court examined the environmental consequences of granting post-facto environmental clearance and emphasised the importance of preventive environmental regulation.

Relevance: Banks financing projects should examine environmental clearance requirements rather than relying exclusively on borrower representations.

7. Tata Consultancy Services Ltd. v. Cyrus Investments Pvt. Ltd. (2021) – Analogous Corporate Governance Authority

The Supreme Court considered corporate governance, directors' responsibilities and the limits of judicial intervention in corporate management.

Relevance: The decision provides an analogous framework for understanding corporate accountability and the importance of proper governance in sustainability-related decision-making.

7. LEGAL RISKS ARISING FROM CALCULATION BOUNDARY GAPS

Financed-emissions boundary deficiencies can create several legal and commercial risks.

A. GREENWASHING LIABILITY

A bank claiming to have a net-zero portfolio while excluding significant financed emissions may face allegations of misleading sustainability representations.

B. DISCLOSURE LIABILITY

Incomplete or materially misleading environmental disclosures may attract regulatory scrutiny under applicable SEBI requirements and other relevant disclosure laws.

C. INVESTOR LITIGATION

Investors may challenge misleading statements where statutory requirements for securities-related claims are satisfied.

D. CONTRACTUAL LIABILITY

Financing agreements containing environmental reporting covenants may create contractual consequences where borrowers or financial institutions fail to meet their obligations.

E. DIRECTOR AND MANAGEMENT ACCOUNTABILITY

Failure to establish appropriate climate-risk oversight may raise corporate governance concerns, depending on directors' statutory and contractual responsibilities.

8. PRACTICAL COMPLIANCE AND AUDIT REQUIREMENTS

Financial institutions should establish a comprehensive financed-emissions calculation and verification system.

Define reporting boundaries: Identify relevant lending portfolios, investments, subsidiaries and financial instruments.

Adopt recognised methodologies: Use appropriate GHG Protocol and PCAF methodologies.

Establish attribution rules: Document how emissions are allocated to individual financing exposures.

Collect borrower information: Obtain reliable Scope 1, Scope 2 and relevant Scope 3 emissions data.

Document exclusions: Explain excluded portfolios, unavailable information and methodological limitations.

Maintain data-quality controls: Distinguish verified information from estimates and proxy-based calculations.

Conduct independent verification: Arrange appropriate internal audits and external assurance.

Monitor portfolio changes: Update calculations when financing exposure, ownership or borrower emissions change.

Prevent greenwashing: Ensure that sustainability claims accurately reflect the calculation boundary.

Maintain audit trails: Preserve methodology documents, borrower records, attribution calculations and approval evidence.

9. CONCLUSION

Financed Emissions Calculation Boundary Gap is an important legal, financial and corporate governance issue in modern banking. Incomplete emissions boundaries can distort the environmental impact of lending and investment portfolios, weaken sustainability disclosures and create greenwashing and regulatory risks. Although Indian courts have not yet established a specific precedent imposing liability for PCAF-based calculation failures, constitutional climate jurisprudence, environmental protection principles, corporate governance requirements and SEBI disclosure regulations provide an increasingly relevant legal foundation. Financial institutions should therefore adopt transparent calculation methodologies, comprehensive portfolio coverage, reliable emissions data and independent verification to ensure credible climate accountability.