Science Based Targets for Financial Institutions

By Kevin Boon

Introduction

Safia and Kevin from REAL attended the Science Based Target Initiative (SBTi) webinar launching their financial sector framework on 1 October 2020.

Science Based Target Initiative (SBTi)

The organisation Science Based Target Initiative (SBTi), set up in 2015, works with the corporate and finance sectors to facilitate them setting and meeting emission targets. Partner organisations are CDP, the UN Global Compact, the World Resources Institute (WRI) and World Wildlife Fund (WWF). 

There are now 991 companies committed to set SBTs including 472 with approved targets. The estimated market value covered by committed companies is USD 15.4 trillion (figures correct at time of article).

Finance Sector Framework Launch

The webinar was delivered by members of the SBTi team, representatives from WRI and WWF with opening remarks from Mark Carney (UN Special Envoy for Climate Action and Finance) and Gonzalo Munoz (UN High Level Climate Action Champion for Chile).

In 2018, SBTi launched its project to help financial institutions align their lending and investment portfolios with the ambition of the Paris Agreement. SBTi is now launching the first version of the finance framework.  The webinar presents a high-level overview of this.

Mark talked about the launch in a high-level context. The goal is that by COP 26 every financial decision takes climate change into account. This initiative is an essential part of that framework. One of the objectives in advance of COP 26 is refinement of TCFD (Task Force on Climate-related Financial Disclosures) standards and establishing pathways to make them mandatory. The second priority is for financial institutions to have net-zero transition plans consistent with the SBTi framework. SBTi has shown that best practice for company transition plans is to have scope 1, 2 and 3 emissions, to set out short-term milestones, to have effective board-level governance and to link executive compensation to the milestones. 

Gonzalo stressed the importance of involvement of the financial sector in meeting the goals of the Paris Agreement. He indicated the need for a radical shift of capital flows from high-carbon to zero emissions across all sectors and geographies including emerging economies and developing countries. 

Reshaping the economy requires the support of the finance sector. It is of vital importance for the collective work of climate alignment to be fully integrated between the corporate and financial sectors. The tools developed by SBTi will help ensure a harmonised approach. 

There are currently 58 financial institutions from 22 countries committed to setting SBTs. Institutions include a diverse group of banks, pension funds, asset managers, asset owners and private equity. 



Structure of the finance framework

The finance framework includes methods, criteria, tools and guidance which are all available through the SBTi website.  The framework comprises three methods.  

  • Sectoral decarbonisation approach or SDA – this is a physical intensity-based method and based on a 1.7oC stabilisation pathway. 
  • Portfolio coverage approach – requires companies to engage with their investees to set their own SBTs to have full coverage of portfolio by 2040.
  • Temperature rating approach – developed following the 2018 IPPC special report on 1.5oC and includes scope 3 emissions. 

The finance framework includes four asset classes. Real estate, mortgages and electricity generation project finance use the SDA.  The corporate instruments asset class (equity, bonds and loans) is a broader category and employs all three of the above methods. SBTi have set a total of 22 criteria which need to be met when setting targets. For more information, refer to the SBTi website. 

The guidance document, available on the SBTi website, presents eight case studies. It includes the business case for setting SBTs, guidance on using the criteria, methods and tools to prepare a SBT submission. It also provides recommendations on target communication and on steps for financial institutions to take to achieve their targets. 

The SBTi approach is a five stage process; commit to SBTi, develop targets, submit targets for validation, communicate approved targets and disclose target progress. Financial institutions have two years from now to complete these steps. Submissions from the first 20 institutions will be assessed free of charge. You can contact them on [email protected].

Implementation

Financial institutions are different from other economic sectors in that they provide finance and services to other companies, but they don’t have direct control over the emissions reductions of their borrowers or investees. It is therefore essential that financial institutions provide transparency to stakeholders about the actions they’re taking to achieve their portfolio targets. As such, as part of the criteria, SBTi require financial institutions to submit a brief summary of the actions they plan to take at the time of target submission and explain why they have selected these actions.

Phase 2 strategy

SBTi are also now launching their Phase 2 strategy. This will include publishing updated criteria and guidance across sectors in April 2021, scoping a net-zero framework for financial institutions and exploring additional asset class coverage (eg sovereign debt and underwriting). SBTi are looking to harmonise approaches with other emission reduction initiatives which are ongoing. 

SBTi will be delivering a series of training and webinar events relating to the finance framework details of which can be accessed on their website. 

Click here to view the seminar.

NB this is a Zoom link requiring people to register to watch.