SBTi Issues Climate Target-Setting Guidance for Private Equity

Public consultation re-emphasises importance of financial institutions transitioning to net zero alongside corporates.

The Science Based Targets initiative (SBTi) has launched a public consultation to help private equity (PE) firms to take a science-based approach to reducing greenhouse gas emissions. The draft guidance outlines best practice in science-based target (SBT) setting and providing methods, criteria, guidance and tools to reduce the barriers to adoption and implementation. The consultation closes on 15 September.

Launched in 2015, the SBTi is a collaboration between CDP, the World Resources Institute (WRI), the World Wide Fund for Nature (WWF) and the United Nations Global Compact (UNGC). The initiative defines and promotes best practice in SBT setting, offering guidance and independently assessing and validating company and financial institution (FI) targets.

With PE currently managing 61% of total private markets AUM (US$7.3 trillion), it’s “critically important” that the sector grows sustainably, prioritising activities that help facilitate the transition of private markets to a net-zero economy by 2050, said SBTi.

“Through their long-term investment strategies and considerable influence over their portfolio companies, [PE firms] are particularly well positioned to support [companies] for a low-carbon transition,” the report noted.

To develop this guidance, SBTi formed an Expert Advisory Group (EAG), consisting of volunteer advisors from the PE industry alongside academia, consultancies, non-profits and multilateral organisations.

PE firms are increasingly recognising the importance of mitigating ESG-related risks within their investments. They are also exercising more caution when investing in assets that could be impaired by the transition to net zero or the impacts of climate change. Instead, PE firms are looking for more sustainable opportunities that will prosper in the long term.

The SBTi first launched a target-setting framework for FIs in October 2020, determining how institutions should be aligning their lending and investment portfolios to best support a global transition to net zero. Recommended criteria and methods set out in the Financial Sector SBT Guidance in April 2021 will be updated over time according to science-led research.

“FIs are a vital link in a global transition to net zero emissions. Through lending and investing, they have the power to redirect capital to the sustainable technologies and solutions of the future and to the companies doing the most to prepare for a net-zero emissions economy,” the draft noted.

This follows success in getting companies to engage and set science-based targets. A 2020 progress report noted that corporates setting SBTi validated targets reduced their combined large-scale emissions by 25% since 2015, which is the equivalent of 302 million tonnes of CO2.

Last month, the SBTi unveiled a new strategy to increase the minimum ambition in corporate target setting to 1.5°C, rather than “well below 2°C”. This will likely filter into FI-specific guidance over time. Currently, the public consultation for PE firms requires alignment with a below 2°C scenario.

As of August 2021, 1,686 companies and 89 FIs have publicly joined the SBTi. FI members include AXA Group, BNP Paribas, Credit Agricole and HSBC.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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