Finance sector: Time to evolve from change takers to change makers

FIs are the key to unlocking the system-wide change needed to decarbonize our global economy and reach net-zero. A recent CDP report found portfolio emissions of global FIs on average are over 700 times greater than direct emissions. The ripple effects of this sector could cause tidal waves of change.

In just 16 months, 19 FIs — banks, asset managers, and more — have answered the SBTi’s call to action, setting targets to align their lending and investment activities with the 2015 Paris Agreement. This first group of financial institutions with science-based targets are leading the way for others to follow in aligning their operations and portfolios with the Paris Agreement.

The 19 validated targets represent five types of FIs across ten countries. From banks to private equity firms, SBTi Finance is quickly increasing its impact across institutions and asset coverage. Not only have targets increased, but commitments have more than doubled.

(Please note: Companies and financial institutions must publicly announce their approved science-based targets within six months of validation. Therefore, as of February 2022, some of the 19 validated financial institution targets are not yet published in the SBTi's target dashboard. These targets will be published in the coming months.)

The new business case for FIs to set targets for their investment and lending portfolios is based on a four-part rationale: resilience, policy, demand, and innovation:

• Adoption of targets can help FIs augment their resilience and competitiveness in the face of climate-related risks, such as extreme weather events
• By becoming change makers rather than change takers, FIs can effectively anticipate climate policy and regulatory shifts
• Clients are increasingly demanding climate action from their FIs, and targets help to provide transparent credibility
• Finally, they help direct innovation toward potentially higher-margin products that support emissions reductions in the real economy

What’s more, as we’ve learned with the development of the SBTi's Corporate Net-Zero Standard, near-term emissions reductions in the next five to ten years are critical to halving global emissions, achieving net-zero and maintaining a habitable planet for us and future generations.

The institutions that have joined the SBTi, through target-setting or commitments, are emphasizing their role in redirecting capital to green solutions and technologies and embracing their responsibility in creating a more sustainable future.

Financial science-based targets: progress so far

The SBTi is focused on transparency and robustness through a subset of asset classes and methods that link financial portfolios with emissions reductions in the real economy. Residential mortgages, commercial real estate, electricity generation project finance and corporate debt and equity are linked with the initiative’s physical intensity and engagement-focused methods. The first 19 targets include a range of asset classes covered and types of investments:

• Asset management targets currently cover $490 billion in assets under management (AUM)
• Residential mortgages are now covered by $70 billion worth of EU and US mortgages by Paris-aligned goals
• Targets covering $39 billion worth of banks’ corporate lending books highlight that both emissions and engagement-based approaches can align lending portfolios with climate science
• Private equity (PE) investors have also demonstrated their ambition by covering $206 billion in AUM, a first step to drive engagement through the world's private markets. Even in private markets, target adoption by portfolio companies is a feasible and ambitious approach that PE firms can use to reallocate capital.

This new wave of financial sector targets pave the way for others to take action on decarbonizing the economy. Insights from the validations are improving resources to ensure that financial institutions have clear guidance on all aspects of the target development process.

What to expect in 2022

The end of the pilot phase of the SBTi’s guidance for financial institutions in February 2022 brings a range of opportunities to scale science-based targets in the sector:

• Financial institutions transition into the SBTi’s formal target-setting process. To support this work, the SBTi Finance team has an updated submission form and FIs will be charged a fee for target validation when using the booking system.

• This year, the SBTi Finance team will update the financial framework, establish a metacriteria, develop a securities underwriting target setting method and target validation criteria, release a Net-Zero Foundations paper, and more. This work will engage more financial institutions and provide additional resources and guidance for the target-setting journey.

More than 1,000 companies are already proving the effectiveness of science-based targets and building momentum for private sector climate action. The successful validation of the first 19 science-based targets for financial institutions and completion of the pilot phase demonstrates the finance sector is set for further progress, redirecting capital to halve global emissions in line with science this decade.

Visit the financial institutions page to learn more about how to join our group of climate leaders, commit to the SBTi and set a target.