Financial institutions told to encourage stakeholders to focus their financing activities on achieving economy-wide decarbonisation.
The Science-Based Targets Initiative (SBTi) has set out four guiding principles for financial institutions (FIs) to follow to ensure their net zero strategies are consistent with action required to meet “planetary level” emissions targets, in keeping with wider sustainability and societal climate goals.
According to the initiative’s latest report, Foundations for Science-Based Net-Zero Target Setting in the Financial Sector, banks, asset managers, insurers, and pension funds should ensure their operational and financing activities, as well as Scope 1, Scope 2 and Scope 3 greenhouse gas (GHG) emissions, are aligned with global net-zero goals.
It also said that FIs should transition and align all financing activities with net zero pathways that achieve Paris Agreement goals, with “no or low overshoot”, as well as align them with the UN Sustainable Development Goals.
Furthermore, according to the report, these institutions should harness their influence to encourage other stakeholders to focus their financing activities on reaching economy-wide decarbonisation, not just reduce emissions exposure in their portfolios.
Finally, mitigation plans should “promote” the financing of decarbonisation programmes, the SBTi said, alongside sector pathways, and fund climate solutions for a net-zero economy.
SBTi, a partnership between the CDP, the United Nations Global Compact, the World Resources Institute (WRI) and the World Wide Fund for Nature (WWF), notably tightened its emissions reduction frameworks last year, having previously accredited strategies aligned to a 2°C rise in global temperatures.
A week before COP26 in Glasgow, the initiative unveiled the world’s first science-based accreditation of companies’ net-zero targets with the launch of the Corporate Net Zero Standard.
In July, it had already outlined a strategy to increase the minimum ambition for corporate targets to a temperature rise of “well below 2°C” to 1.5°C above pre-industrial levels.
“Financial institutions are critical players in driving real-economy emissions reductions through investments and lending activities,” said SBTi CEO Luiz Fernando do Amaral. “There are signs the sector is embracing this responsibility. Immediate action is already possible for short term science-based targets. However, when it comes to net-zero, there is little understanding of what it means for the finance industry.
According to SBTI’s 2020 progress report, firms that had set science-based targets had so far reduced combined emissions by 25% since 2015, totalling 203 million tonnes of CO2.
A total of 19 financial institutions already have approved science-based targets aligned with 1.5°C, including UK asset manager Schroders, French bank La Banque Postale, South Korea’s KB Financial Group and Swedish private equity firm EQT. According to SBTi, more than 50 financial institutions are committed to setting net-zero targets and more than 140 are committed to setting near-term targets.
FIs, but particularly banks, have a track record of setting targets while still engaging in activities that harm the planet, including funding fossil fuel exploration.
Financial institutions and financial service providers with a combined AUM of US$130 trillion have joined initiatives under the umbrella of the Glasgow Financial Alliance for Net Zero – unveiled by former Bank of England Governor Mark Carney at COP26 – but many have not yet set out comprehensive net zero strategies.
A ShareAction assessment published in September, analysing the European banking sector’s climate and biodiversity practices, revealed not one major player had yet linked its net zero commitments with a strategy and set of policies spanning all critical environmental issues.
Just three – Lloyds, NatWest and Nordea – had committed to cutting their financed emissions in half by 2030. A subsequent analysis by the UK-based responsible investment NGO found that many European banks continued to support a wide range of oil and gas exploration activities.
The latest guidance from the SBTi acknowledges that circumstances whereby FIs might make claims of having “achieved” net zero alignment, is still an area that requires further research.
According to the initiative, such circumstances will also depend on the methods and metrics used to track progress. These will be finalised in the wider net-zero standard development process for the sector, it said.
The STBi explained in the report that buying carbon credits, under the SBTi Corporate Net-Zero Standard, is not a replacement for reducing emissions along value chains, although “investment mitigation outside the corporate value chain” is encouraged to support societal net-zero goals.
“High-quality carbon credits may contribute towards this,” the report said. “In addition, any residual emissions that remain when reaching corporate long-term science-based targets must be neutralized with permanent removals to reach net-zero; these removals may be sourced from carbon credits.”
Institutions under scrutiny
Recently, US investors have been filing resolutions asking major banks, including JP Morgan, Bank of America, and Citi, to scale back fossil fuel financing.
According to UK-based responsible investment NGO ShareAction, investors were “increasingly prioritising” engagement with banks on climate, and banks should prepare for increased scrutiny on climate at AGMs.
With asset managers increasingly toughening their voting policies in line with the preferences of their asset owner clients, there is increasing scope for the proxy votes of bank-owned managers to force AGM defeats at parent companies for their inaction on banking sector relationships with fossil fuel companies.