Finance sector: New guidance on science-based targets and TCFD reporting

18th Jan 2023

The guidance provides financial institutions with a framework for assessing, disclosing and managing the climate risks to which they are exposed, and maximizing opportunities for portfolio companies to cut emissions and reduce their climate impact.

The US Federal Reserve’s publication of its first ever climate risk exercise earlier this month highlights the ongoing urgency for financial institutions to understand and respond to climate challenges. They have a responsibility and an opportunity to eliminate barriers to emissions reductions by aligning their investment and lending activities with the Paris Agreement.

To promote credible, rigorous and holistic climate strategies, the SBTi has released the SBTi Finance Sector and TCFD Reporting Guidance. The new guidance provides banks, private equity firms, asset managers, owners and mortgage real estate investment trusts with actionable ways to harmonize science-based target setting with the preparation of robust climate-related risk and opportunity disclosures in line with institutions’ transition plans.

This guidance, developed in collaboration with Carbon Intelligence, part of Accenture, has taken into account the experiences of financial institutions in South Korea, the UK, China and Sweden to understand the key challenges and opportunities with adopting the SBTi Financial Institutions framework alongside TCFD disclosures.

The benefits of aligning climate metrics to enhance climate action

The guidance sets a path for the financial sector to effectively collect and manage a variety of data points and address data gaps, while creating internal structures that enable the implementation of science-based targets.

For successful implementation, collaboration between departments within financial institutions is crucial. However, this collaboration should be taken beyond organizational boundaries and include external, third-party support where possible. Experience from early adopters shows that these efforts have improved their credibility, especially in conversations with investee companies.

Caroline Löfgren, Chief Sustainability Officer at Hg said: “Adopting the SBTi and TCFD frameworks has helped us in investor conversations relating to climate change risks, carbon footprints, and net-zero ambitions. Our commitment to the SBTi has helped build confidence in our strategy.”

Jack Bowles, Associate Investment Director, Sustainability at Schroders, agreed: “SBTi and TCFD have forced us to look at our data and drive consistency across the business. Sustainability cuts across the investment desks, so you must make sure that everything is joined up.”

Other insights described in the guidance show that recognition from the SBTi and TCFD can provide a common reference point during conversations with key stakeholders and governments, improving those discussions and the credibility.

Hyesook Moon, Chief Sustainability Officer at KB Financial Group said: “It was great to have international recognition that the SBTi comes with, it is like an international certification and was the first time in Korea and even in an Asian country ... It is very useful and helpful to communicate with our government and many stakeholders, policy makers and investors.”

What’s more, financial institutions that are incorporating climate action metrics and targets into the decision-making processes around lending and investing are opening themselves up to maximize opportunities for portfolio companies to cut emissions, strengthen investors’ confidence and improve long-term profitability.

The solution is clear: financial institutions must set science-based targets and align with TCFD recommendations. This new guidance will support enhanced coordination between financial institutions science-based target setting and climate-related financial disclosures.

Join the more than 200 financial institutions taking action and become part of the climate leaders committing to set a science-based target today.