Industry

Science-based Targets Launched for Finance

Carney hints at COP 26 role for SBTi as TCFD pathway for finance sector.

Financial institutions can now align their decarbonisation efforts with the Paris Climate Agreement by adopting science-based greenhouse gas reduction (GHG) targets, following the release of a framework and validation service by the Science Based Targets initiative (SBTi).

A total of 58 financial institutions have committed to setting science-based targets and are expected to now work with SBTi to validate their climate-related action plans. The banks, insurers and asset managers already signed up to SBTi include Amalgamated Bank, AXA Group, BBVA, BNP Paribas, Commerzbank, Credit Agricole, HSBC, ING Group, MetLife, Societe Generale, Standard Chartered, Swiss Re and Zurich.

The new framework is designed to help banks, investors and insurance firms to verify that their plans to decarbonise their loan books, portfolios and operations are aligned with the United Nations Intergovernmental Panel on Climate Change recommendation of keeping global warming to no more than 1.5 degrees above pre-industrial levels. Overall, almost 1,000 companies across 50 sectors, with a combined market cap of US$15.4 trillion, have pledged to align with the Paris Agreement via SBTi’s science-based GHG reduction targets.

Speaking at the launch webinar, Mark Carney, Special Envoy for Climate Action and Finance at the United Nations, and Finance Advisor to the UK Prime Minister for COP 26, said, “We view this type of approach as fundamental to a system for mainstream sustainable finance. Ultimately the providers of capital – banks, asset owners, insurance firms, asset managers – have a responsibility to show where they are position in terms of supporting the transition to net zero and size one of the greatest opportunities of all time.”

Carney said the establishment of pathways to mandatory compliance with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) is an objective of COP 26, due to be held in Glasgow in November 2021. He added that the SBTi framework could be listed in a report due to be published this November as one of the key recommended methodologies for achieving TCFD compliance.

“We see this as a credible framework, it’s ambitious in that it includes scope 3, it’s at the sophisticated end of the spectrum, and we think it could be very valuable,” he said. “Our report on best practice will come out in November, which means we can embed this approach through the finance sector by the time we get to COP 26.”

SBTi Finance is intended to serve as a link between the objective of emissions reductions and the role of financial institutions needed to achieve the objective. Targets set by the framework should inform the extent of mitigation needed to meaningfully drive emissions reductions and shift investment behaviour, according to the SBTi.

Both the finance sector framework and a new target validation service were developed by the SBTi, a collaboration between CDP, the United Nations Global Compact, World Resources Institute, and the World Wide Fund for Nature. The first 20 submissions from financial institutions will be assessed free of charge during a pilot phase of the target validation service. The results of these initial target assessments will inform updates to the framework in April 2021.

Three methods have been identified for setting targets: the sectoral decarbonisation approach; the portfolio coverage approach; and the temperature rating approach. Although asset classes such as real estate and mortgages may only use the sector decarbonisation approach, all three approaches may be used to assess equities, bonds and loans. For example, an investment institution could determine the current temperature rating of a portfolio and then take the necessary actions to align the portfolio with long-term temperature targets through engagement with portfolio companies within a specific timeframe. The SBTi has designed an open source temperature scoring and portfolio coverage tool to assist institutions.

To qualify for validation by the SBTi, the Scope 1 and 2 portions of financial institutions’ emissions (covering their operations and purchased energy) must be in line with an average annual linear reduction rate of 4.2% for a 1.5°C pathway and 2.5% for a well-below 2°C. Scope 3 targets (covering their investments and lending portfolios) must meet specific criteria relevant to each asset class.

The SBTi determined that the finance sector required a separate framework from companies in other sectors due to the unique nature of its role in the economy. The framework will be updated annually. The SBTi framework for financial institutions was developed through an inclusive, multi-stakeholder process, including consultation with an expert advisory group representing financial institutions, consultants, NGOs, and academic institutions.

“These tools give us the next level of information we need to be a stronger fitter bank in a low-carbon economy. We have measured our calorific content so to speak, we can now get a doctor’s opinion via the SBTi on the metrics we need for a healthy future, and can set about the work of business planning to get there,” said Ivan Frishberg, Director of Impact Policy ant Amalgamated Bank.

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