Net-zero finance: developing the Financial Institution Net-Zero Standard

Financial institutions (FIs) are focusing on net-zero as the guiding concept for their climate mitigation ambition. As of November 2021, almost 90% of global emissions and GDP are covered by net-zero commitments, including 450 financial institutions across 45 countries. However, the new focus on net-zero has also revealed a vast and varied landscape of approaches for setting and achieving these net-zero goals in the financial sector.

This lack of consistent principles, definitions, metrics, and evidence of effective strategies is a problem. Without a common understanding, today’s varied net-zero target-setting landscape makes it difficult for stakeholders to compare goals and evaluate whether the actions being taken by FIs are sufficient to achieve a global net-zero economy by 2050 in line with limiting global warming to 1.5ºC this century.

And as António Guterres, United Nations Secretary General, emphasized at the recent launch of the High-Level Expert Group on the Net-Zero Emissions Commitments of Non-State Entities:

“To avert a climate catastrophe, we need bold pledges matched by concrete action. Tougher net-zero standards and strengthened accountability around the implementation of these commitments can deliver real and immediate emissions cuts.”

The newly published Foundations of Net-Zero targets for Financial Institutions paper navigates this landscape, providing a set of guiding principles for the formulation of net-zero targets within the finance sector. Developed through an open consultation process which received over 130 public responses, the paper also addresses important aspects of net-zero target setting of particular interest to the sector and those holding it to account, including the role of carbon credits and fossil fuel financing.

The paper emphasises that FI net-zero targets should align financing activities with 1.5C pathways to support the global goal of reaching net-zero emissions at the planetary level. Targets should therefore focus on engaging portfolio companies, rather than reducing exposure to greenhouse gas emissions to achieve a state of net-zero within a certain portfolio. Being consistent with the global net-zero goal should therefore be considered a state where all of an FI’s financing activities are aligned with reaching this goal.

The launch of the paper also marks the beginning of the formal process for developing the Financial Institution Net-Zero Standard. The standard will use many of the concepts developed in the foundations paper to create actionable criteria, detailed guidance, and technical resources to support financial institutions with the formulation and implementation of science-based net-zero targets.

What to expect from the development process

To ensure the standard is robust and responds to the needs of all relevant stakeholders, we will conduct a transparent, open process that emphasises independent expertise. This includes:

• Proactively engaging a range of stakeholders including financial institutions, NGOs, and government officials. A new Expert Advisory Group (EAG) will ensure this is at the heart of the process, and regular public consultations will provide opportunities for wider input
• Incorporating the latest climate science and methodologies to drive change in the real economy and deliver solutions
  Trialling new methods through road testing and pilots
• Regularly sharing updates through the SBTi website, social media, newsletter, events and community forum
  
  

We encourage anyone interested to get involved by applying to join the new EAG [link], getting involved in the discussion on our community forum, and signing up to our newsletter for updates on the project.