The Science Based Targets initiative has recently released a framework for the finance sector. In this article, we uncover the new SBT guidance for banks and financial institutions and how to develop a net-zero transition strategy. Contact us to find out how we can help you build this framework.
The latest science tells us that global net emissions must fall by about 45% by 2030 and reach “net zero” by around 2050 to stand a chance of keeping warming to within 1.5 degrees above pre-industrial levels and avoid the most severe impacts of climate change.
Across the private sector, more than 900 businesses have committed to align their corporate ambitions to the goals of the Paris Agreement by setting science-based targets to reduce their greenhouse gas emissions. Science-based means that the targets are aligned with the level of reduction required to help us stay well-below 2 degrees of global temperature increase, with an ideal of 1.5 degrees globally.
Carbon Intelligence has supported 43% of UK companies with a 1.5 degree approved science-based target. We work with leading corporates and major brands to develop practical strategies and solutions to enable companies to reduce emissions across their value chain and meet their net zero objectives.
The Science-based Target initiative (SBTi), a collaboration between WWF, the UN, World Resources Institute and CDP, develops the tools, methodologies and guidelines to enable businesses to set robust science-based emission reduction targets.
Since 2018, SBTi has been developing financial sector specific guidance in recognition of the key role the sector will play in financing the solutions we need to transition to a net zero economy. The guidance, due to be released in September 2020, will enable financial institutions to align their investment portfolios with the ambition of the Paris Agreement, and set science-based emission reduction targets at the asset-class level. So far over 50 financial institutions such as HSBC, AXA Group, Société Générale and ING Group, have committed to use the new guidance to set their corporate emission reduction targets.
The launch of the SBTi guidance for the financial sector aligns with CDP’s first sector specific questionnaire aimed at this group of organisations. This year, for the first time, financial institutions that respond to CDP will be asked to publicly disclose the climate risks and emissions impact of their investment portfolios and how they’re being managed.
The new science-based target methodologies for the financial sector will enable firms to respond to increasing pressure from investors for climate transparency, reduce climate risk exposure and encourage investment in low-carbon assets and companies that will support the transition to a net-zero economy.
The SBTi has outlined a framework to support financial institutions to develop a net-zero transition strategy. The key steps are:
Establish your emissions baseline
The SBTi requires companies to set targets not only for their direct emissions (known as Scope 1 and 2), but also for significant emissions across their value chain (known as Scope 3). For financial institutions, Scope 3 emissions from investment and lending portfolios will be a material source of emissions. The approach for quantifying the emissions impact will vary by asset class. See our blog on portfolio carbon footprinting or speak to one of our experts for more details.
Develop science-based targets
Using the SBTi tools and guidance, financial institutions will be able to set science-based targets at the asset-class level. A number of methodology options are available, as shown below. We recommend a materiality approach to focus on the most important areas first by identifying which asset classes have significant financial and emissions impacts. More detail on the application of these methods will be available in September 2020.
Source: SBTi, May 2020 Update
Build a reduction strategy
Setting science-based emission reduction targets for investment and lending portfolios is one element of a financial institution’s wider net zero transition strategy. Firms should use SBTs to develop internal and external engagement strategies that drive absolute emission reductions within the ‘real economy’. Feedback from the SBTi’s consultation process highlighted that extensive engagement with companies to encourage absolute emissions reductions should be prioritised, with divestment used as a last resort.
Track and report progress
To encourage ongoing transparency and near-term action, the SBTi is considering integrating specific disclosure commitments within the target validation process. We recommend considering disclosure at the outset of the target setting and strategy build, to ensure that you have the right data systems and processes in place to produce robust reporting outputs that reduce reputational risk.
The release of the financial sector SBT guidance is an opportunity for financial institutions to differentiate themselves from peers, and show leadership with investors.
To take advantage of this opportunity, firms should start now by engaging senior management teams and gathering portfolio baseline data. If you want to speak to one of our experts and get started, email [email protected]
“The launch of this new guidance is an exciting opportunity for financial sector firms to show they are serious about doing their fair share to tackle climate change and support the transition to a zero carbon economy”. Annabell James, Senior Consultant